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9% interest! Buffet thinks the industry is toast, Lee is making a huge gamble (betting against someone who is known to make good predictions) and Buffet might n

9% interest! Buffet thinks the industry is toast, Lee is making a huge gamble (betting against someone who is known to make good predictions) and Buffet might never see that money again if the business goes bankrupt. Pretty odd transaction, maybe someone can explain how it is mutually beneficial.

danvoell 7y ago
9% interest! Are you saying that is good or bad? If Buffet is getting interest, at least he is getting money off the table sooner than later. It's less risky than taking an equity stake. The loan is for a lot more than the sale. The loan is probably cheaper money than Lee can get elseware while the sale price for Buffet is probably a better sale price than if he just tried to fire sale the assets. Buffett is an infamous "one last puff" investor. While newspapers are heading down a continual decline, there is still some money to be made for a while.
- yes_man 7y ago
  I think the original comment meant that a 9% interest for a loan is quite steep and might be signaling Buffett's lack of confidence in media as an industry and its ability to generate value in the long term. However in a deal like this 9% might not be unusually high since the article mentions it is mostly being used to "refinance existing debts" so the high interest is probably a premium on that part
nroets 7y ago
Perhaps Buffett sees that bold action is needed to optimize profits e.g. cutting jobs or asset stripping. He definitely doesn't have have time to be make these bold decisions. And he may not want to cloud his reputation by being in control while the jobs are cut. A third possibility is that Lee has synergies that Berkshire doesn't have e.g. Lee can give it scale.
- duxup 7y ago
  Arguably being a big investor type probabbly has a lot to do with knowing ... when you're not in a position / maybe not good at the thing that needs to be done.
- sjg007 7y ago
  Lee is already the manager of the company. He worked for Buffet.
- is_true 7y ago
  This is spot on. Lee is gonna do things Buffet wouldn't
- soperj 7y ago
  All of Buffett's companies are pretty lean. They actually let go of a lot of people, he just doesn't wear it because he doesn't run the companies directly.
optimiz3 7y ago
Buffet might also want to acquire the business via loan foreclosure. The 9% discounts the eventual acquisition.
- sjg007 7y ago
  He already owns the business... he is selling and financing the sale.
  - beerandt 7y ago
    A common (sometimes predatory) tactic is to make a bad loan at a high rate, as part of a self-financed sale to someone you suspect will have short term success but long term failure, knowing you'll get payments for a certain amount of time, then have the asset returned. It's used car tactics at the next level.
    - sjg007 7y ago
      Ok but that really doesn't work in this situation. Buffet would foreclose on the loan, retake ownership and then sell it again?
      - beerandt 7y ago
        That's one option, but maybe less likely for a business than for a car, because of valuation. If he already thinks the business's days are numbered, options are limited. Instead of taking a loss by holding it until bankruptcy, or selling it cheap to someone who also sees limited value, he sells it to someone who's (overly) optimistic, and and is willing to pay a higher value. Since the risk (at that higher value) is high, lenders will either refuse to finance, or offer a rate higher than what Buffet is offering. Buffet needs to offer the financing to make the sale possible, or at least more attractive. So at worst, he's turned a dead-end investment into positive cash flow for a few months, where he previously was getting zero. If he forecloses and there's something of value left, he might try to sell again, but the foreclosure makes that less likely, given future buyers will consider it in determining it's value. Regardless, he's still better off than before. Or the business does ok, and he gets a better price for selling than he otherwise would have. And 9% interest on it, which is something, but I suspect extremely low for Buffet. But he's locked in a minimum value and getting a positive rate, mitigating what he perceived to otherwise be a bigger loss.
H8crilA 7y ago
Berkshire moves up in the capital structure: from equity to pretty seriously junk debt (which is still above equity).

danvoell 7y ago

9% interest! Are you saying that is good or bad? If Buffet is getting interest, at least he is getting money off the table sooner than later. It's less risky than taking an equity stake. The loan is for a lot more than the sale. The loan is probably cheaper money than Lee can get elseware while the sale price for Buffet is probably a better sale price than if he just tried to fire sale the assets. Buffett is an infamous "one last puff" investor. While newspapers are heading down a continual decline, there is still some money to be made for a while.

yes_man 7y ago
I think the original comment meant that a 9% interest for a loan is quite steep and might be signaling Buffett's lack of confidence in media as an industry and its ability to generate value in the long term. However in a deal like this 9% might not be unusually high since the article mentions it is mostly being used to "refinance existing debts" so the high interest is probably a premium on that part

nroets 7y ago

Perhaps Buffett sees that bold action is needed to optimize profits e.g. cutting jobs or asset stripping. He definitely doesn't have have time to be make these bold decisions. And he may not want to cloud his reputation by being in control while the jobs are cut. A third possibility is that Lee has synergies that Berkshire doesn't have e.g. Lee can give it scale.

duxup 7y ago
Arguably being a big investor type probabbly has a lot to do with knowing ... when you're not in a position / maybe not good at the thing that needs to be done.
sjg007 7y ago
Lee is already the manager of the company. He worked for Buffet.
is_true 7y ago
This is spot on. Lee is gonna do things Buffet wouldn't
soperj 7y ago
All of Buffett's companies are pretty lean. They actually let go of a lot of people, he just doesn't wear it because he doesn't run the companies directly.

optimiz3 7y ago

Buffet might also want to acquire the business via loan foreclosure. The 9% discounts the eventual acquisition.

sjg007 7y ago
He already owns the business... he is selling and financing the sale.
- beerandt 7y ago
  A common (sometimes predatory) tactic is to make a bad loan at a high rate, as part of a self-financed sale to someone you suspect will have short term success but long term failure, knowing you'll get payments for a certain amount of time, then have the asset returned. It's used car tactics at the next level.
  - sjg007 7y ago
    Ok but that really doesn't work in this situation. Buffet would foreclose on the loan, retake ownership and then sell it again?
    - beerandt 7y ago
      That's one option, but maybe less likely for a business than for a car, because of valuation. If he already thinks the business's days are numbered, options are limited. Instead of taking a loss by holding it until bankruptcy, or selling it cheap to someone who also sees limited value, he sells it to someone who's (overly) optimistic, and and is willing to pay a higher value. Since the risk (at that higher value) is high, lenders will either refuse to finance, or offer a rate higher than what Buffet is offering. Buffet needs to offer the financing to make the sale possible, or at least more attractive. So at worst, he's turned a dead-end investment into positive cash flow for a few months, where he previously was getting zero. If he forecloses and there's something of value left, he might try to sell again, but the foreclosure makes that less likely, given future buyers will consider it in determining it's value. Regardless, he's still better off than before. Or the business does ok, and he gets a better price for selling than he otherwise would have. And 9% interest on it, which is something, but I suspect extremely low for Buffet. But he's locked in a minimum value and getting a positive rate, mitigating what he perceived to otherwise be a bigger loss.

H8crilA 7y ago

Berkshire moves up in the capital structure: from equity to pretty seriously junk debt (which is still above equity).