NEW YORK (Reuters Breakingviews) - The Buffett effect is mounting a comeback. The Sage of Omaha’s Berkshire Hathaway is helping local U.S. TV network operator E.W. Scripps finance its $2.7 billion takeover of a rival. As soon as the deal was unveiled on Thursday, Scripps stock soared as much as 40% before dropping back some. It’s a stark contrast to the drubbing Occidental Petroleum took after he enabled it to pounce on an oil competitor.
Scripps and its target, ION Media, are small by Berkshire standards: The tie-up will increase the buyer’s broadcast footprint to more than 100 TV stations in the United States once the deal is complete.
With a market value of just $853 million when stock markets closed on Wednesday, Scripps had to think creatively to scrape together enough money for its privately owned prize. It’s using cash of $300 million and is taking on $1.9 billion of debt. That’ll take Scripps’ net debt to a little over 5 times EBITDA. That’s high as it is; any more, especially during the current economic uncertainty, would have pushed the limits.
Enter Warren Buffett. Berkshire is stumping up $600 million in preferred shares that pay an annual dividend of 8%. The terms for its help also prevent Scripps from issuing regular dividends or repurchasing shares as long as the preferred stock exists. Scripps can buy them back after five years.
The stretch looks like it will pay off for Scripps. Adding ION’s stations will more than double Scripps’ EBITDA – this year analysts are forecasting more than $300 million – and the cost savings are substantial. Assume ION’s earnings before interest and taxes are around $300 million. Add the $120 million in estimated synergies and tax the sum, and Scripps looks set for a 12% return on investment – not bad for a business that lost money last year.
Buffett’s oft-heralded halo effect appears to have paid off this time. His involvement with Occidental, though, using a similar structure was a flop. The shares tanked on the day Chief Executive Vicki Hollub announced its hostile offer for Anadarko Petroleum almost 18 months ago, and never recovered. His return to media deals, a sector he knows well, can be his path to atoning for his Oxy sins.
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