Christopher Sanderson, Jennifer Clemente, Andres Delgado
FIN6590
PMBA

New York Times Bail Out Analysis In January 2009, Carlos Slim Hula decided to offer what he believed to be a generous deal to a cash strapped New York Times. With a $400M debt facility looming in May, the New York Times has been exploring various positions to increase or bolster its cash reserves to either restructure or refinance the debt facility. The offer from Carlos Slim was for $250M in cash, repayable at 14% annual interest rate coupon, and an attached warrant that would allow him to exercise a buyout of 16 million shares of stock. The question comes down to whether this was a calculated, debt based investment of Carlos Slim’s money, or whether he has other motives for providing the media company the money, which is part of an industry currently struggling. The first thing that must be stated is that Carlos Slim already has an investment of 6.9% in NYT stock, a deal that had lost 50% of its value already. If he exercised his warrants for class “A” shares of New York Times stock, it would give him nearly 17% of currently available stock. This stock would be different than the class “B” stock, which has a majority share by the current New York Times owners, the Sulzberger family. (Kafka, 2009) However, he would still be the second largest shareholder in the company. This puts a spin on the “bailout” Carlos is offering. He could be attempting to boost his own shares for a selloff. He could be attempting to lower the value of NYT to buy more ownership of the company. He could also be attempting to profit from a debt investment opportunity with a steep interest rate. Could there be other reasons Carlos wants ownership in a media company such as the New York Times? According to an article, “Slim’s Pickings,” a debt investment by a US business tycoon would never happen for a media company [ed. at least not openly like this] because the company would have to constantly explain how they would keep impartiality and conflicts of interest. (Slate +, 2009) This is an interesting point, but could open the idea as to why Carlos Slim is interested in bailout out a dying business, discounting his current stock investment or potential interest revenue stream. By owning a piece of the New York Times, he has an open media outlet to help generate his views and messages. Not only this, but he has a major media corporation that he can bring heavily into the Mexican market, creating even more energy for his brands and products. However much money he currently has, which at the time was $60B, he didn’t get to be that rich by gambling. Carlos Slim has a play, but he must have understood something about this deal that we don’t see on the surface. It is important at this point to determine whether NYT should take this deal based on its valuation, analysis, and futures. The New York Times had $1.1B in long terms debt, with $400M coming due very soon. They had recently taken a $57.8M loss on the previous fiscal year. They had $2.9B in revenue and $3.4B in assets. However, all of this was shadowing the fact that the company was still trying to adapt to the digital age, the loss of subscribers, advertisers, and media share. Add this to the fact that a few business boosting strategies had failed and, if they took Carlos Slim’s deal, they would now also owe credit card interest rates, the New York Times had quite a problem on its hands. Credit ratings are a great way to determine if a financing deal is in your best interest or not. Moody’s, on January 23, 2009, gave the New York Times a Ba3 rating, which was promptly lowered to a B1 rating in April due to “probability of default.” (Moody's, 2015) Both of these are considered speculative grade investments or not prime. In January 2009, the T-Bill was at 0.806%. Comparatively, Teck Reources Ltd. Put out a $4.2B bond offering with coupons ranging from 9.75-10.75%. PT Perusahaan Listrik Negara offered a 10 year, $1.2B bond at a 7.875% coupon. Both of these put Carlos Slim’s offer of 14.053% for a $250M, 6 year bond a bit out of place. If we look at the average of these two options, average their interest rates, and assume 9.46% as the going interest rate for a Ba3 rated company, the present value of the debt issue valued at $250M can be determined.
FV= PV*〖(1+r)〗^n
FV=250,000,000*〖(1+9.46%)〗^6
FV = $430,004,174
Now compare this to the rate that Carlos Slim is offering:
FV=250,000,000*〖(1+14.053%)〗^6
FV = $550,275,640
As already determined by Moody’s, a Ba3 company is considered a junk bond, though at the higher end of junk bonds. Carlos sees this lending investment could lead to a potential loss of money, due to amount of debt NYT holds, their business model, and losses in the previous year due to failed leadership. Carlos Slim is attempting to hedge this potential loss by earning a larger share each year back to make up for the initial investment. There is another angle to this deal, which is the warrant. The warrant allows Carlos Slim to exercise stock options of 15.9 million shares, amounting to nearly 10% of available stock and enough to put him as the second highest owner of NYT shares. According to Matt Comyn, a call warrant is “in-the-money” when the exercise price is lower than the current market price of the same shares. (Comyn, 2015) He goes on to explain that a call warrant is “out-of-the-money” if the exercise price is higher than the current market rate. He also states that a call warrant is “at-the-money” if the exercise price and market price are the same. For the Carlos Slim call warrants, he was offered a strike price of $6.357 a share, while the open market was trading at $6.12 a share on January 20, 2009. Currently, Carlos Slim’s warrants are “out-of-the-money,” meaning he would initially lose money on the purchase of these shares. To determine the price of the warrant, the Black-Scholes pricing formula is used:
C=SN(d_1 )-N(d_2 )Ke^(-rt) d_1=(ln⁡(s/k)+(r+s^2/2)t )/(s* √t) d_2=d_1- s* √t

Using these formulas and this set of 30 day stock prices from 12/4/08 to 01/20/09, the January 2009 10 year T-Note rate of 2.40%, and 365*6 for days until expiration:

d_1=(ln⁡(6.12/6.357)+(.0240+〖.008613〗^2/2)2190 )/(.008613* √2190) =130.5077 d_2=130.5077- .008613* √2190=130.1046
C=6.12N(d_1 )-N(d_2 )6.357e^(-(.0240)2190)
This determines the cost of the warrant to be $101,712,000, but the value is $97,920,000, leaving the purchased “out-of-the-money” at $3,792,000. Lastly, we need to determine if the investor, Carlos Slim, or the New York Times is getting a good investment here. For Carlos Slim, he is putting up $250M of his own dollars to a high risk company which has been given a junk bond rating. However, he is putting up that money at higher than market interest rate. If they pay back entirely after 6 years, he will have doubled his money and then some. This is a great investment in terms of return, but carries quite a bit of risk with it. The money being offered will only partially help repay the looming $400M credit facility. The New York Times states that it would like to refinance the terms of this, which means they will offer a partial repayment and restructure the rest. However, that would still leave them with over $1B in long term debt, including the additional high interest loan being offered by Carlos Slim. Although the debt covenant would put Carlos Slim higher on the list of people getting paid should the New York Times fold, he would just be one of many in a long list of people in a similar position. On top of this, Carlos Slim will have a warrant to exercise a call on stock options. The current strike price is higher than the market price, but if that changes, he has an opportunity to create another asset to his vast fortune. However, there are some other ideas to consider here from Carlos Slim’s perspective. This deal would give him 2nd position for a controlling interest in the New York Times, a major media company. Connecting this to his current industries, including Telmex (telephone company), America Movil (mobile phones), grocery stores, and construction, and it suddenly becomes clear that Carlos Slim has a diverse, but networked group of business. Jesse Emspak brings up a good point in his article, “How Carlos Slim Built His Fortune,” stating that it isn’t even necessarily what the business itself does, but rather the asset it creates. (Emspak, 2014) Carlos Slim sees the value in a company in terms of what it can do to generate wealth through better management and setting goals. This is why he invests in something like the New York Times, as it has the potential to deliver later due to its history of previous success. For the New York Time, this deal is a mixed bag. They aren’t getting the best interest rate for the loan, but it may be the best they can get considering their financial position. Although they didn’t know it at the time, 3 months after this deal, they were downgraded by Moody’s to a B1. They need some cash and this inflow could help provide that direction. The leadership of Carlos Slim may also help them capitalize on opportunity that they are missing. Carlos Slim is known as a turnaround executive. (Emspak, 2014) Carlos Slim also has a keen interest in making sure that the New York Times can meet their obligations to repay debt, but also create value in their stock price. While it could do better, the New York Times may not have another option. Overall, I believe that the NYT and Carlos Slim should enter this deal. While the term “too big to fail” should not exist in free market capitalism, for the US’s capital markets, the New York Times is a monster that has a lot of value still. Carlos Slim has shown he can turn around companies through his management style, as well as having partnership opportunities for the New York Times to capitalize on. Putting aside the ethical implications of this deal, the business end of this deal would be a boon to both parties.