## Explaining Carlos Slim’s \$175 million NYT profit

October 4, 2010
Jay Rosen asks for an English translation of my calculation regarding the profit that Carlos Slim made on his NYT investment. It does get a bit complicated, but I'll do my best.

Jay Rosen asks for an English translation of my calculation regarding the profit that Carlos Slim made on his NYT investment. It does get a bit complicated, but I’ll do my best.

In January 2009, the NYT borrowed \$250 million from Carlos Slim. The idea was that he would be repaid in two ways. First, he would get interest on the loan. And second, he would get the right to buy lots of NYT stock at \$6.3572 per share in 2015.

Now, the NYT is paying Slim back, three years early. But Slim isn’t just getting that \$250 million back. He’s also getting three other things:

1. All the interest payments that the NYT has to make for three years.
2. The right to buy that NYT stock — he doesn’t lose the right just because the loan’s been repaid.
3. An extra payment on top which the NYT agreed to pay if it repaid the loan early.

How much does that all add up to?

Well, the interest payments were set at 14.053% per year. 11.03% of that was in cash, with the other 3% in kind. Let’s assume that the NYT makes the final year’s interest payment fully in cash, but took advantage of the payment-in-kind option for the first two years. So the NYT paid 11.03% of \$250 million two years running. That’s \$55,150,000. And then in the third year it’s paying 14.03% of \$250 million. That’s another \$35,075,000.

Next we have the right to buy NYT stock at \$6.3572 per share. That’s a valuable option — and in fact you can put a number on the value of that option quite easily, by using something known as an option calculator. You can quibble about the exact value of the option, but the option calculator gives you a good ballpark figure. And in this case, the option calculator spits out a value of \$57,176,400 for the right to buy 15.9 million shares of NYT at \$6.3572 per share in January 2015. This right is in the form of what’s known as “detachable warrants”, which means that Slim could go out and sell those options on the open market tomorrow if he wanted. It’s not just paper value he has here: it’s real value.

Finally, the NYT agreed that if it repaid the loan early, it would pay the money back at a rate of 105 cents on the dollar. So for every dollar that the NYT borrowed from Slim, it has to pay back \$1.05 as a final principal repayment.

How much did the NYT borrow from Slim, altogether? Well, there was \$250 million up front. And then, we’re assuming, in each of the first two years, the NYT borrowed another 3% of that sum, or \$7.5 million a year. That’s \$15 million over two years, on top of the original loan, for a total borrowing of \$265 million. In order to pay that money back early, the NYT then needs to make a principal repayment of 1.05 times \$265 million — that’s \$278,250,000.

Add it all up, and the total amount of value flowing back to Carlos Slim from the NYT over the course of three years comes to \$425,651,400. Subtract his initial \$250 million investment, and you’re left with \$175,651,400 in profit.

(Why did I originally say \$150 million rather than \$175 million? Mainly because of that options calculation. Options on volatile stocks are more valuable than options on less-volatile stocks, and I didn’t have a number for the volatility of NYT stock, so I used the number for the stock market as a whole. But now I do have a number for the volatility of NYT stock, which turns out to be much more volatile than the stock market as a whole. And so the value of Slim’s warrants is higher than I originally calculated.)

Of course, all of this assumes that the NYT is going to be able to find its \$35 million coupon payment, on top of its \$278 million principal payment, in January. That’s \$313 million in cash which the company needs to raise somewhere. It doesn’t have that kind of money just lying around, so it’ll have to borrow it from somebody. Who’s the new lender? That’s very unclear.