Opinion

Felix Salmon

How Carlos Slim made $150 million from the NYT

By Felix Salmon
October 3, 2010

The New York Times is going to pay back the $250 million loan from Carlos Slim three years ahead of schedule. It’s very expensive debt, so it makes sense that it should be the first debt to be paid down. But this also turns out to have been a great deal for the Mexican billionaire, if you look at the terms of the deal.

For one thing, he’s getting a 14.053% coupon for three years. That’s $105,397,500 right there. And then on top of that, the call option which allows the NYT to repay the bonds three years early is exercisable at 105 cents on the dollar. So Slim’s principal repayment is going to be $262.50 million, not $250 million. There’s another $12.5 million for Slim.

Finally, Slim gets warrants for 15.9 million shares at a strike price of $6.3572. Plugging the relevant numbers into a basic options calculator, I get an option value of $2.179 per share. (I don’t have easily-available volatility numbers for NYT shares, so I’m using the 22.5% level of the VIX, a share price of $7.85, and an option expiry date of January 2015, or 4.25 years from now.)*

So add on another $34,646,100 for the value of the options, and you get a total return on Slim’s $250 million investment of $152,543,600 over three years.

In fact, that number is something of a lower bound. The NYT had an option to pay 3 percent of the coupon in kind, rather than in cash; if it did that, then Slim would have ended up with even more bonds, which are now going to be paid off at 105 cents on the dollar.

And that doesn’t even include the strategic value of becoming the single-largest non-family shareholder of the New York Times Company.

All of which only serves to underline the dire straits in which the NYT found itself at the beginning of 2009. If the company had been able to spend $150 million on the newspaper, rather than on Carlos Slim, then it probably wouldn’t today be sprinting towards implementing its financially-dubious paywall. The NYT is now making new investments, most visibly in Andrew Ross Sorkin’s Dealbook franchise. But the paywall won’t help Dealbook one bit. Maybe Sorkin should borrow some money from Carlos Slim to buy off the NYT’s executives and keep Dealbook free.

*Update: Thanks to Mark, in the comments, who says that current implied volatility for NYT stock is just over 50. Which would put the value of Slim’s options at $3.596 apiece, or $57,176,400 in total. Which means that Slim’s total return on his investment reaches $175 million, not $150 million.

Comments
3 comments so far | RSS Comments RSS

Felix,

Current NYT implied volatility is just over 50.

The historical volatility for the stock – over the past few months is 57.

Mark
http://blog.mdwoptions.com

Posted by MarkWolfinger | Report as abusive
 

Felix: I wish I understood a word of this. Just a note to say that the entire post assumes a level of knowledge that may not be there in interested readers. I have a PhD but I don’t know what a coupon is, in this context, or a strike price. How about a version of the post for non-specialists? Or maybe a glossary? Or an explainer, Planet Money style?

Jay Rosen
http://pressthink.org

Posted by jayrosen | Report as abusive
 

Jay,

I agree it was a little bit in finance-ese. Here you go:

The “coupon” is the interest rate.

An stock warrant is a contract where you can force the company to sell you stock at a specified price. That price is the “strike price.”

So Slim loaned the Times $250M at a 14% interest rate. He made $105M in interest. In addition, the Times had to pay a 5% prepayment penalty of $12.5M. Finally, Slim gets stock warrants worth $35 million. This is a lower limit of how much money Slim made, because part of the interest could have been paid in bonds – if that happened, the Times would now have had to pay a prepayment penalty on it, too.

Those warrants are valuable because he can buy them for $1.50 cheaper than the current public share price, and because the volatility of the Times’ stock (if the Times’ share prices jump around a lot, they’re more valuable, because there is no limit on how high they can go, but they can’t go lower than zero.)

Posted by AnonymousChef | Report as abusive
 

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