HBS Cases: What Warren Buffett Saw in Newspapers
When Warren Buffett made a bid for troubled Media General's newspapers, analysts wondered whether the legendary investor had lost his fastball. Hardly, as Benjamin Esty's case reveals.
In 2012, legendary investor Warren Buffett made a bid to buy a troubled Southeastern US newspaper business just three years after declaring that his influential holding company, Berkshire Hathaway, would no longer invest in newspapers "at any price."
"Very smart people looked at Buffett's offer and wondered what he saw in the declining industry that others did not," notes Roy and Elizabeth Simmons Professor Benjamin C. Esty, the author, with senior case researcher Aldo Sesia, of Buffett's Bid for Media General's Newspapers, a new case study for Esty's first-year Finance course.
Buffett's motivation is only one of the many factors that Media General's president and CEO, Marshall Morton, has to weigh in the case. Eight days from a deadline to repay a $225 million loan or trigger a crippling default on an amended loan agreement, Morton has to take a hard look at the numbers, industry trends, strategy considerations, shareholder interests, and several other financing options and come up with a plan to save his company.
With Amazon.com's Jeff Bezos's recent acquisition of the Washington Post and sports mogul John Henry's purchase of the Boston Globe, there has been much speculation lately about the trend of well-heeled investors making bets on the future of print media. Yet Esty says the power of this case rests more in its richness as a teaching tool than in its topical appeal.
"When asset values are declining as fast as they have been in the newspaper industry," he explains, "you have to make a bet on the future: Do you have a viable business strategy, and if so, is it one of growth, of maintenance, or of decline? Given your beliefs about the future, you then need to design a financial strategy that supports your business strategy. Media General is a real-life example of topics that we cover in our finance curriculum such as valuation, financing, and risk management, and it brings together financial strategy and business strategy, a confluence that has long been a focus of my own research."
The case outlines the events that led to Morton's consideration of Buffett's offer to buy 63 newspapers from his highly leveraged company, which had experienced a 31 percent decline in revenues over the previous four years and a 90 percent plunge in stock price. Included is a summary of US newspapers' diminished circulation and advertising revenues over the past decade, as readers turned from print to more immediate sources of news. Coupled with rising printing, paper, and labor costs, the decreasing revenues created falling margins and increased leverage throughout the industry.
By the end of 2011, Media General, which also owned interests in TV broadcasting and digital media, was carrying high levels of debt despite deep workforce and capital expenditure cuts. It was a situation that led its CFO to express doubt that Media General could remain in compliance with its loan covenants. The decision to sell its newspapers-a move that would help raise the cash necessary to comply with a time-sensitive refinancing agreement-was announced in February 2012.
"The company's difficult circumstances brought to mind one of my favorite Buffett quotes," Esty shares. "He once said: 'With few exceptions, when a manager with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.' That sentiment made his Media General bid even more intriguing as a case study topic."
Buffett's offer consisted of an asset agreement to pay Media General $142 million for its weekly and daily newspapers and real-estate holdings, and a credit agreement that included a $400 million term loan. Speculating about Buffett's apparent change of heart regarding newspaper ownership, Esty points to the investor's exclusion of the Tampa Tribune, Media General's largest newspaper, from his bid: "In retrospect, his targeting just the smaller papers is a big clue about his forecast for the industry. Unlike regionals or big-city papers, small-town newspapers don't have a lot of competition or good substitutes."
As Buffett himself quipped around the time the Media General deal (which did transpire) was announced, "In Grand Island, Nebraska, everyone is interested in how the football team does. They're interested in who got married. They're maybe even more interested in who got divorced."