Case Notes/Answers
MediMedia International, Ltd, By Robert Bruner
Discussion Questions:
The instructor might consider dividing the class into teams charged with evaluating the
transaction from the standpoint of one of three groups: bankers, mezzanine investors, and
equity investors. Dividing the class this way usually generates a deeper level of analysis
and may create opportunities for role playing. The alternate approach is to assign all
students the problem of valuing the firm using the forecasts in the case. The following
questions support the first approach.
1. (To the bankers) What are the credit risks inherent in this loan, and what, if anything,
mitigates those risks? The debt financing for an LBO is often secured by charges over the
assets of the business. What approach would you take to secure the borrowings of a
publishing company with very few tangible assets? Including fees, and assuming a 200-
basis-point spread between cost of funds and the London interbank offering rate
(LIBOR), what would be your return on assets for participating in the revolver and term
loan? As a banker, would you recommend that your bank participate in this deal?
2. (To the mezzanine investors) What is mezzanine financing? What advantages does it
provide over conventional forms of finance? What is the prospective return to investors
who buy the mezzanine debt? (Remember to take into account the warrants.) Is the rate of
return sufficiently attractive to justify your participation? Will Dun & Bradstreet (D&B)
be compensated fairly for its investment in the subordinated vendor note? What could
explain the unusual interest rates on the vendor note?
3. (To the equity investors) Based on the projections, what is the economic value of the
equity in MediMedia as of the date of the case? Is the return on equity fair? In this deal,
all the equity is provided by the managers rather than a financial institution. Please
identify some of the problems that might arise from that feature of the transaction.
4. (To all students) Management proposes to invest about $46 million in goodwill. What
could justify that? What might create value in the deal? How is this value distributed
among the various participants in the deal?
5. (To all students) Why does the deal include ECU financing? Could the benefits of ECU
financing be obtained in other ways?
6. (To all students) Why is the structure of the financing so complicated? For instance,
why is the transaction not financed with equal amounts of bank credit and equity? Is the
mezzanine financing really necessary?
, UV0248
MEDIMEDIA INTERNATIONAL, LTD.
Teaching Note
Synopsis and Objectives
In February 1991, the managers of this multinational Suggestions for
specialty publishing company propose taking the company complementary cases on
private in a leveraged buyout (LBO). In addition to bearing the leveraged acquisitions:
“Introduction to Debt Policy
typically interesting features of an LBO, this transaction is the and Value” (UVA-F-0811);
first LBO to be denominated in European Currency Units (ECU) “Mirth Press, Inc.” (UVA-F-
and one of the few in which the managers provided all of the 1196); “Calaveras
equity financing. In this case, the tasks for the student are to Vineyards” (UVA-F-1094).
value the company and evaluate the attractiveness of the
transaction from the standpoints of various participants.
The case has three objectives: (1) to exercise students’ valuation skills; (2) to illustrate
how deal structuring can mitigate potential agency problems; and (3) to explore the problems
(and possible solutions) associated with financing a global firm.
Suggested Questions for Advance Assignment to Students
The instructor might consider dividing the class into teams charged with evaluating the
transaction from the standpoint of one of three groups: bankers, mezzanine investors, and equity
investors. Dividing the class this way usually generates a deeper level of analysis and may create
opportunities for role playing. The alternate approach is to assign all students the problem of
valuing the firm using the forecasts in the case. The following questions support the first
approach.
1. (To the bankers) What are the credit risks inherent in this loan, and what, if anything,
mitigates those risks? The debt financing for an LBO is often secured by charges over the
assets of the business. What approach would you take to secure the borrowings of a
publishing company with very few tangible assets? Including fees, and assuming a 200-
, -2- UV0248
basis-point spread between cost of funds and the London interbank offering rate
(LIBOR), what would be your return on assets for participating in the revolver and term
loan? As a banker, would you recommend that your bank participate in this deal?
2. (To the mezzanine investors) What is mezzanine financing? What advantages does it
provide over conventional forms of finance? What is the prospective return to investors
who buy the mezzanine debt? (Remember to take into account the warrants.) Is the rate of
return sufficiently attractive to justify your participation? Will Dun & Bradstreet (D&B)
be compensated fairly for its investment in the subordinated vendor note? What could
explain the unusual interest rates on the vendor note?
3. (To the equity investors) Based on the projections, what is the economic value of the
equity in MediMedia as of the date of the case? Is the return on equity fair? In this deal,
all the equity is provided by the managers rather than a financial institution. Please
identify some of the problems that might arise from that feature of the transaction.
4. (To all students) Management proposes to invest about $46 million in goodwill. What
could justify that? What might create value in the deal? How is this value distributed
among the various participants in the deal?
5. (To all students) Why does the deal include ECU financing? Could the benefits of ECU
financing be obtained in other ways?
6. (To all students) Why is the structure of the financing so complicated? For instance, why
is the transaction not financed with equal amounts of bank credit and equity? Is the
mezzanine financing really necessary?
Spreadsheet Files
Student preparation of this case is supported by the spreadsheet file, MEDIMED.XLS,
which contains case Exhibits 7, 8, and 9. Making this file available to students is strongly
encouraged. Instructor preparation is supported by MEDITN.XLS, which contains the
calculations for the quantitative exhibits in this teaching note. Please do not share the instructor
file with students.
Hypothetical Teaching Plan
What follows is a series of questions and comments designed to motivate and direct the
discussion. This plan starts with a quick survey of the students that focuses on various players’
assessment of the deal (if the instructor takes the segmented approach discussed in the
assignment questions) or of the value of the company (if the instructor takes the consolidated
approach). Beginning the class this way provides time to deal with skills and computations
before the class wrestles with decisional questions.
MediMedia International, Ltd, By Robert Bruner
Discussion Questions:
The instructor might consider dividing the class into teams charged with evaluating the
transaction from the standpoint of one of three groups: bankers, mezzanine investors, and
equity investors. Dividing the class this way usually generates a deeper level of analysis
and may create opportunities for role playing. The alternate approach is to assign all
students the problem of valuing the firm using the forecasts in the case. The following
questions support the first approach.
1. (To the bankers) What are the credit risks inherent in this loan, and what, if anything,
mitigates those risks? The debt financing for an LBO is often secured by charges over the
assets of the business. What approach would you take to secure the borrowings of a
publishing company with very few tangible assets? Including fees, and assuming a 200-
basis-point spread between cost of funds and the London interbank offering rate
(LIBOR), what would be your return on assets for participating in the revolver and term
loan? As a banker, would you recommend that your bank participate in this deal?
2. (To the mezzanine investors) What is mezzanine financing? What advantages does it
provide over conventional forms of finance? What is the prospective return to investors
who buy the mezzanine debt? (Remember to take into account the warrants.) Is the rate of
return sufficiently attractive to justify your participation? Will Dun & Bradstreet (D&B)
be compensated fairly for its investment in the subordinated vendor note? What could
explain the unusual interest rates on the vendor note?
3. (To the equity investors) Based on the projections, what is the economic value of the
equity in MediMedia as of the date of the case? Is the return on equity fair? In this deal,
all the equity is provided by the managers rather than a financial institution. Please
identify some of the problems that might arise from that feature of the transaction.
4. (To all students) Management proposes to invest about $46 million in goodwill. What
could justify that? What might create value in the deal? How is this value distributed
among the various participants in the deal?
5. (To all students) Why does the deal include ECU financing? Could the benefits of ECU
financing be obtained in other ways?
6. (To all students) Why is the structure of the financing so complicated? For instance,
why is the transaction not financed with equal amounts of bank credit and equity? Is the
mezzanine financing really necessary?
, UV0248
MEDIMEDIA INTERNATIONAL, LTD.
Teaching Note
Synopsis and Objectives
In February 1991, the managers of this multinational Suggestions for
specialty publishing company propose taking the company complementary cases on
private in a leveraged buyout (LBO). In addition to bearing the leveraged acquisitions:
“Introduction to Debt Policy
typically interesting features of an LBO, this transaction is the and Value” (UVA-F-0811);
first LBO to be denominated in European Currency Units (ECU) “Mirth Press, Inc.” (UVA-F-
and one of the few in which the managers provided all of the 1196); “Calaveras
equity financing. In this case, the tasks for the student are to Vineyards” (UVA-F-1094).
value the company and evaluate the attractiveness of the
transaction from the standpoints of various participants.
The case has three objectives: (1) to exercise students’ valuation skills; (2) to illustrate
how deal structuring can mitigate potential agency problems; and (3) to explore the problems
(and possible solutions) associated with financing a global firm.
Suggested Questions for Advance Assignment to Students
The instructor might consider dividing the class into teams charged with evaluating the
transaction from the standpoint of one of three groups: bankers, mezzanine investors, and equity
investors. Dividing the class this way usually generates a deeper level of analysis and may create
opportunities for role playing. The alternate approach is to assign all students the problem of
valuing the firm using the forecasts in the case. The following questions support the first
approach.
1. (To the bankers) What are the credit risks inherent in this loan, and what, if anything,
mitigates those risks? The debt financing for an LBO is often secured by charges over the
assets of the business. What approach would you take to secure the borrowings of a
publishing company with very few tangible assets? Including fees, and assuming a 200-
, -2- UV0248
basis-point spread between cost of funds and the London interbank offering rate
(LIBOR), what would be your return on assets for participating in the revolver and term
loan? As a banker, would you recommend that your bank participate in this deal?
2. (To the mezzanine investors) What is mezzanine financing? What advantages does it
provide over conventional forms of finance? What is the prospective return to investors
who buy the mezzanine debt? (Remember to take into account the warrants.) Is the rate of
return sufficiently attractive to justify your participation? Will Dun & Bradstreet (D&B)
be compensated fairly for its investment in the subordinated vendor note? What could
explain the unusual interest rates on the vendor note?
3. (To the equity investors) Based on the projections, what is the economic value of the
equity in MediMedia as of the date of the case? Is the return on equity fair? In this deal,
all the equity is provided by the managers rather than a financial institution. Please
identify some of the problems that might arise from that feature of the transaction.
4. (To all students) Management proposes to invest about $46 million in goodwill. What
could justify that? What might create value in the deal? How is this value distributed
among the various participants in the deal?
5. (To all students) Why does the deal include ECU financing? Could the benefits of ECU
financing be obtained in other ways?
6. (To all students) Why is the structure of the financing so complicated? For instance, why
is the transaction not financed with equal amounts of bank credit and equity? Is the
mezzanine financing really necessary?
Spreadsheet Files
Student preparation of this case is supported by the spreadsheet file, MEDIMED.XLS,
which contains case Exhibits 7, 8, and 9. Making this file available to students is strongly
encouraged. Instructor preparation is supported by MEDITN.XLS, which contains the
calculations for the quantitative exhibits in this teaching note. Please do not share the instructor
file with students.
Hypothetical Teaching Plan
What follows is a series of questions and comments designed to motivate and direct the
discussion. This plan starts with a quick survey of the students that focuses on various players’
assessment of the deal (if the instructor takes the segmented approach discussed in the
assignment questions) or of the value of the company (if the instructor takes the consolidated
approach). Beginning the class this way provides time to deal with skills and computations
before the class wrestles with decisional questions.
