At 1.35/share, the Enterprise Value of Lee is about 1,000,000,000. Of this 925 million is in the form of debt while only about 75 million is in the form of equity.
If Mr. Buffett was interested in buying the company outright, he would be foolish to telegraph this by buying the stock in small portions. Why? Once the street realizes Buffett is high on LEE, the debt will likely increase in value to par and the take-out value of LEE increases.
The best strategy for Mr. Buffett is to lay low on the common while continuing to accumulate the debt at 70 to 80 cents on the dollar. Once Warren has taken most of the debt, he can play one of two hands:
1. If he feels the newspapers are worth about $800 a subscriber (about double what he has been paying on the open market). He can probably close the deal at about $2.75/share.
2. If Warren does not value newspapers as such, he will just wait for LEE to collapse under it debt and take us for free in bankruptcy.
Obviously, being long, I am in the latter camp....I think there is a 75% chance we get bought out....this puts my present value of the stock at about $2.00.
Finally, of paramount importance is the anchoring effect. If Warren were to buy15% of the company (where the poison pill would take effect), LEE would be selling at close to $2.00/share. And we would expect the buyout in the $3.50 - $4.00 range..... But when the stock trades at 1.35 (ex the Warren factor), I would be giddy (and vote "yes") if Warren were to offer $2.50 per share.
If Buffet really wanted Lee he would just buy it. All of it. The man is worth 50 billion. Do you really think he is going to play cat and mouse games with a company that even at $3 a share is worth less than 200 million??
That's not accurate. It's "worth" the enterprise value....which is debt plus equity. If there's equity value for the common, then the company is worth about a billion bucks. That's not huge for Buffett.....but it's not exactly chump change either. Besides, he is price conscious on EVERYTHING he buys. I think joe_omaha offers some intriguing insights.
I guess if he was able to keep the stock buying quiet he might have kept buying. It seems like he changed his strategy when that was disallowed. If he can buy a big chunk of the debt at 70 to 80 cents (are you sure that is what it trades at? I can't see trades for it on bloomberg) then what you are saying makes sense. He can also refi the debt at way lower rates. He should be able to make at least a 10% cash return per annum if he is doing all that. As long as interest rates don't rise significantly LEE should be okay even when the 1st lien comes due. They are making really good progress reducing debt. Debt was reduced by like another $12M since quarter end according to the 10-Q. I'd love to see BRK buy this for $2/share +. I don't think it would be much higher than $2.75. I have owned for about 1.5 year now with a VWAP of $0.92.