Weds Mar 6, 2013 Financial Times Lex Column page 12
Think of the transaction in terms of how much he is paying Media General and how much it is paying him. At first, the numbers do not appear to match. Last year, Media General put its newspapers on the block to focus on TV and a looming $360m debt maturity. In comes Mr Buffett with cash to buy the papers, and a loan. The $140m purchase price equates to a cash flow multiple of under 5 times - consistent with the "very low" multiples he says he will only pay for print.
But the loan terms to Media General are paying him are not so very low. A $300m term loan was issued at a discount - Media General received $250m - so while the nominal rate is 10.5%, the return to Mr Buffett is 13. An Additional $45m revolver loan is unlikely to be drawn, but charges 2 per cent fee anyway. The deal increased Media General's interest expense, despite its total debt dropping by $100m. But wait: Mr Buffett was also given 17 percent of Media General's equity for free. That stake is worth $25m. Add all that up, and Media General has in effect gifted the newspaper to Berkshire Hathaway - the interest, fees and equity gains willl recoup the $140m purchase in about four years.
I suppose if you're highly intelligent you may be envious of the deals that Warren Buffett can make and you can't, but I've never had that problem to contend with. Making deals that involve debt is something that Buffett can readily do, but since I'm totally adverse to debt, if I was offered the same deal, I would run the other way. I've learned over many years of trying this and trying that, to not only stay focused now on what I'm doing, but to only invest within my own circle of competence.
Buffett is good at deal-making, that's true. He also, for all of his warnings about bonds, is hugely liquid. It isn't necessarily the best poker player that will win. It could be a merely good one with enough chips to out endure the others.
PJW
Remember the scene from 'It's a Wonderful Life' where Mr. Potter tells George Bailey roughly 'you saved the Building and Loan, and I saved everything else'. Most of us don't have the assets to 'save everything else', we just make the best deal we can with the limited assets we have available at the time.
Remember, Warren Buffett doesn't invest in Index funds, but he recommends them for most of us who won't or aren't able to do the amount of research into investing the he does. I for one have another job.
So just buy some Berkshire Hathaway stock and get in on the sweetheart deals.
"While some mutual fund founders chose to make billions, he chose to make a difference." - Dedication to Jack Bogle in 'The Bogleheads' Guide to Investing'.