Synergies and Areas of Operation
Media General’s management team is confident that this merger will produce at least $25 million in annual cost savings and synergies. This could be enough to swing the combined company to profitability, and it’s likely to make it far easier for it to restructure its debt load in the coming years. The merger will also substantially increase Media General’s geographic reach. In fact, the addition of Nashville-based Young’s assets will create a company that controls broadcast programming for about 14 percent of all U.S. households. Needless to say, this will enable Media Group to compete with national broadcast networks and cable operators.
Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.B) currently owns a 17 percent stake in Media General. Although it is likely that Berkshire’s stake will soon shrink as a result of merger-related dilution, the company is likely to remain an active shareholder. It should also be noted that Berkshire Hathaway Inc. (NYSE:BRK.B) recently acquired the bulk of Media General’s legacy newspaper holdings at a steep discount. Investors who find print-media assets attractive may wish to investigate these holdings more closely and determine whether they warrant action.
It must also be noted that Media General received a significant loan tranche from Berkshire in the course of the newspaper sale. As such, Buffett’s firm will necessarily be involved in the coming debt restructuring process. This situation bears watching.
Long-Term Outlook and Ways to Play
After news of the merger broke, Media General’s shares soared by nearly 25 percent. Shares of competing broadcasters rose significantly as well. Investors clearly like the idea of this deal, and the fact that Warren Buffett is so deeply involved will only make things more attractive to rank-and-file investors.
However, this merger is not without its risks. Broadcast media is a tricky business that is increasingly vulnerable to digital disruption. While Media Group and Young have taken steps to bolster their digital presences, it remains to be seen whether this will be enough to ensure their long-term success. Investors who believe in this sector should have no problem with a long position in Media Group. At the same time, due diligence and careful hedging mechanisms are essential.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway.
The article Why Should You Invest In This Media Company Like Warren Buffett? originally appeared on Fool.com and is written by Mike Thiessen.
Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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