description of possible leveraged buy out of the new york times

1. 1/20/2012
The Leveraged Buy Out:
How to Make Some Real
Money
By Raoul A. Villegas
Plan of Analysis
a. Explore criteria for an LBO.
b. What are NYT’s characteristics that allow it to be
subject to LBO speculation?
c. What are the current issues facing the NYT?
d. How do these issues affect the valuation?
e. If we were to do an LBO, what would it look like?
f. Does it make sense to do the LBO?
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2. 1/20/2012
Criteria for Leveraged Buy Out:
a. Strong cash flow.
b. Healthy balance sheet – additional debt capacity.
c. Margin expansion through efficiency and cost
cutting.
d. Predictable capital expenditures.
e. Special sauce: competitive strength.
What is the SPECIAL SAUCE?
It can be strong brand or a stable of strong brands.
It could be a proprietary process or technology
unavailable to competitors.
It could be management’s ability and commitment to
the firm.
It could be a pipeline of contracts with a predictable
customer.
ANYTHING THAT TILTS THE FIELD OF BATTLE IN
FAVOR OF THE FIRM.
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3. 1/20/2012
RETURN CRITERIA FOR LBO
Annual returns in the neighborhood of 20% and up.
Returns take into account equity capital put at risk.
Returns also take into account time of investment and
exit strategy.
In the case of LBO funds, there are also management
fees to take into consideration.
Illustration of LBO Return
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4. 1/20/2012
Illustration of LBO Return: Pt. 2
Illustration of LBO Return: Pt. 3
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5. 1/20/2012
Exit Strategies for LBO’s:
1. Sell in an IPO.
2. Sell to another private equity fund.
3. Sell to another private company.
4. Sell to a public company.
5. No exit: keep it and harvest the dividends.
Why Speculate on an LBO for the New York Times?
1. Strong brands:
• New York Times.
• Boston Globe.
• International Herald Tribune.
• Impregnable journalism credibility.
2. Brands on other platforms:
• New York Times.com.
• Boston.com.
• About.com.
• 11th most-visited website in the world.
• Strong internet ad growth.
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6. 1/20/2012
Why Speculate on an LBO for the New York Times?
3. Opportunities for finer reach of audience:
• Well-received magazines: Play, Key, Design
New England.
• Print product introductions.
4. Experience in cost reduction and productivity
increases.
• $120 million in savings from 2005-2006.
• Improvement of P&L margin by 2% per year.
• Each 1% in margin = +$33.7 million.
Why Speculate on an LBO for the New York Times?
5. Strong cash flows:
Free cash flow is controllable.
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7. 1/20/2012
Why Speculate on an LBO for the New York Times?
6. Debt capacity available:
Why Speculate on an LBO for the New York Times?
7. Dual share structure target of criticism.
Sulzberger family owns 20% of equity but
control voting.
Put in place to protect “journalistic integrity”
of the NYT.
Family might want to take NYT private to stem
the flow of criticism.
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8. 1/20/2012
Current Issues Facing NYT (and other
newspaper companies)
• Audiences are becoming narrower.
• Audience itself is limiting how it could be reached.
• Tighter hold by advertisers on entertainment ad
spending.
• Classified ad revenues have hit a wall.
Autos.
Help wanted.
Real estate.
Strategies to Cope with Trends in
Newspaper Industry
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9. 1/20/2012
NYT Stock Price Performance
Newspaper/Print Media Industry Values
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10. 1/20/2012
Derive NYT’s Perpetual Growth Rate
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Given stated margin improvement goals
of NYT, we can assume that it will cost
about $33 per share to take it private.
What will be the total cost with debt on
top?
It will depend on the return goals of the
principals.
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13. 1/20/2012
Forecast Assumptions
Pro Forma Income Statement
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Pro Forma LBO Cash Flows
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15. 1/20/2012
Assumptions on Exit Strategy
1. Use current comparable market multiples.
2. Floor price for NYT is current “best market
multiple” on itself.
3. High price of range is lowest of “best peer
market multiple.”
4. Group takes it public after seven years.
Price Range on Exit Strategy
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16. 1/20/2012
Returns on LBO
But What Does IRR Really Mean?
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