2. Is MEG's newspaper division worth $142 million? a. Start by valuing the newspaper division, assuming the cash flow forecast in Exhibit 10 is reasonable. For the purposes of this analysis, assume a market risk premium o f6%, a debt beta of 0.20, a closing date for the transaction of January 1, 2012 (you can ignore half-year discounting), and a reduction of $30 million in your valuation of the entire newspaper division to reflect the fact that the The Tampa Tribune is excluded from the purchase agreement. b. Are the cash flow forecasts reasonable? What are the critical assumptions you need to make for the newspaper division (again, less The Tampa Tribune) to be worth $142 million? To be worth more than $142 million? Exhibit 10 Cash Flow Forecasts for Media General's Entire Newspaper Division (including the Tampa Tribune) Actual Results for the Year Ending 12/31 2007A 2008A 2009A 2010A 2011A Forecast Results for the Year Ending 12/31 2012 2013 2014 2015F 2016F item $524.8 Newspaper Revenues Revenue Growth Rate Operating Profit (EBIT) Operating Margin $436.9 -16.7% $30.2 6.9% $357.5 -18.2% $40.1 11.2% $328.4 8.1% $26.5 8.1% $299.5 8.8% $6.3 2.1% $287.1 -4.1% $14.2 4.9% $282.5 -1.6% $13.7 4.8% $288.1 2.0% $21.3 7,4% $293.9 2.0% $28.1 9.6% $299.8 2.0% $30.0 10.0% Cash Flow Items: Deprec./Amortization Capital Expenditures Balance Sheet Item: Net Working Capital $27.7 $16.3 $24.9 $6.2 $22.8 $5.5 $22.1 $3.5 $20.0 $5.0 $16.0 $5.5 $12.0 $5.9 $9.0 $6.0 $6.0 $6.0 $26.2 $21.8 $17.9 $16.4 $15.0 $14.4 $14.1 $14.4 $14.7 $15.0 Sources Media General Inc., Form 8-K, April 9, 2012 Gabelli & Company, Inc., Media General Inc. Research Report April 12, 2012 and casewriter estimates. As of March 31, 2012, Gabelli & Company and its affiliates owned 35.2% of Media General's Class A stock. Note: As of Dec. 31, 2011 (book values in millions) Revenue Assets Debt Equity Average Leverage D/V (a) Equity Beta (b) Company Media General $616.2 $1,086.0 $658.0 $34.0 84% 2.29 0% 60% 11% A.H. Belo Corp. Beasley Broadcast Group Courier Corp. (c) Gannett Co., Inc. Journal Comm. Inc. Saga Communications $461.5 $97.7 $259.4 $5,240.0 $356.8 $125.3 $345.1 $255.0 $213.0 $6,616.5 $417.7 $190.3 $0.0 $126.7 $21.5 $1,760.4 $41.7 $69.1 $121.5 $73.6 $154.3 $2,327.9 $205.0 $93.0 1.49 1.11 1.21 2.11 2.24 1.05 41% 31% 52% Sources: Value Line, Bloomberg Google finance, and casewriter estimates. Notes: (a) Two-year average Debt/Value ratio; value equals the book value of debt plus the market value of equity. (b) The equity beta was measured over two years against the S&P 500 Index using daily returns. (c) Financial data for Courier Corp. is from September 2011. 2. Is MEG's newspaper division worth $142 million? a. Start by valuing the newspaper division, assuming the cash flow forecast in Exhibit 10 is reasonable. For the purposes of this analysis, assume a market risk premium o f6%, a debt beta of 0.20, a closing date for the transaction of January 1, 2012 (you can ignore half-year discounting), and a reduction of $30 million in your valuation of the entire newspaper division to reflect the fact that the The Tampa Tribune is excluded from the purchase agreement. b. Are the cash flow forecasts reasonable? What are the critical assumptions you need to make for the newspaper division (again, less The Tampa Tribune) to be worth $142 million? To be worth more than $142 million? Exhibit 10 Cash Flow Forecasts for Media General's Entire Newspaper Division (including the Tampa Tribune) Actual Results for the Year Ending 12/31 2007A 2008A 2009A 2010A 2011A Forecast Results for the Year Ending 12/31 2012 2013 2014 2015F 2016F item $524.8 Newspaper Revenues Revenue Growth Rate Operating Profit (EBIT) Operating Margin $436.9 -16.7% $30.2 6.9% $357.5 -18.2% $40.1 11.2% $328.4 8.1% $26.5 8.1% $299.5 8.8% $6.3 2.1% $287.1 -4.1% $14.2 4.9% $282.5 -1.6% $13.7 4.8% $288.1 2.0% $21.3 7,4% $293.9 2.0% $28.1 9.6% $299.8 2.0% $30.0 10.0% Cash Flow Items: Deprec./Amortization Capital Expenditures Balance Sheet Item: Net Working Capital $27.7 $16.3 $24.9 $6.2 $22.8 $5.5 $22.1 $3.5 $20.0 $5.0 $16.0 $5.5 $12.0 $5.9 $9.0 $6.0 $6.0 $6.0 $26.2 $21.8 $17.9 $16.4 $15.0 $14.4 $14.1 $14.4 $14.7 $15.0 Sources Media General Inc., Form 8-K, April 9, 2012 Gabelli & Company, Inc., Media General Inc. Research Report April 12, 2012 and casewriter estimates. As of March 31, 2012, Gabelli & Company and its affiliates owned 35.2% of Media General's Class A stock. Note: As of Dec. 31, 2011 (book values in millions) Revenue Assets Debt Equity Average Leverage D/V (a) Equity Beta (b) Company Media General $616.2 $1,086.0 $658.0 $34.0 84% 2.29 0% 60% 11% A.H. Belo Corp. Beasley Broadcast Group Courier Corp. (c) Gannett Co., Inc. Journal Comm. Inc. Saga Communications $461.5 $97.7 $259.4 $5,240.0 $356.8 $125.3 $345.1 $255.0 $213.0 $6,616.5 $417.7 $190.3 $0.0 $126.7 $21.5 $1,760.4 $41.7 $69.1 $121.5 $73.6 $154.3 $2,327.9 $205.0 $93.0 1.49 1.11 1.21 2.11 2.24 1.05 41% 31% 52% Sources: Value Line, Bloomberg Google finance, and casewriter estimates. Notes: (a) Two-year average Debt/Value ratio; value equals the book value of debt plus the market value of equity. (b) The equity beta was measured over two years against the S&P 500 Index using daily returns. (c) Financial data for Courier Corp. is from September 2011
