April 4, 2012
Marshall N. Morton, James F. Woodward, John A. Schauss, George L.
Mahoney, Stephen Y. Dickinson, Robert E. MacPherson, O. Reid
Ashe, Jr., Scott D. Anthony, Diana F. Cantor, Dennis J.
FitzSimons, Thompson L. Rankin, Rodney A. Smolia, Carl S.
Thigpen, Coleman Wortham III
Mr. J Stewart Bryan III
Chairman of the Board
333 E. Franklin Street
Richmond, VA 23219
Dear Mr. Bryan,
Kinnaras Capital Management LLC ("Kinnaras") is adviser to a
number of entities and affiliates which own shares in Media
General ("[[MEG]]" or the "Company"). After numerous failures by
management, I am urging the Board to take advantage of the robust
M&A market for both newspaper and broadcast television and to
sell all operating units of MEG in order to retire existing
corporate and pension debt and achieve a share price shareholders
have rarely seen in recent years.
MEG management is solely responsible for the current situation
the company finds itself in. The team ignored a number of
suggestions from shareholders since Q4 2010 to pursue a
comprehensive refinancing of its debt - primarily the $363MM Term
Loan due in March 2013. Rather than take advantage of an
extremely attractive refinancing window from Q4 2010 - Q2 2011,
management remained complacent, ultimately leading to the
incurrence of significant current and future financing costs that
shareholders must bear.
I have presented excerpts from transcript calls from as far
back as Q4 2010 to illustrate that shareholders and analysts
continued to encourage management to capitalize on robust
financing markets and to refinance its debt and pursue asset
sales to defray the cost of financing. The comments by management
during these periods combined with the lack of action
demonstrates that management was merely paying lip service to
these suggestions. The absence of action on the refinancing front
and inability to divest of even non-core assets during this
period also demonstrates management's glaring lack of urgency and
ignorance of the overall leverage and debt sensitivities the
Q4 2010 MEG Conference Call Excerpts:
<Q - Stephen Weiss>: Okay. Fair enough. And then my
second question I guess really relates to the capital
structure. I know you've done a very good job since you did the
refinancing last year in terms of improving your leverage
profile on paying down debt. But I guess that bank maturity is
still about two years away now. I was wondering if you could
just discuss what options and/or how aggressively you might be
considering refinancing options for that at this point, what
that might look like?
<A - Marshall N. Morton, President and Chief Executive
Well, Stephen, we are constantly thinking about how
to restructure our debt. We are engaged continuously with our
financial advisors and with our lead banks as well to find an
appropriate time to enter the marketplace. We don't think it
is now; we are evaluating all of our options as investors
would expect us to do and we don't have to do anything today,
but we'll watch the market carefully.
Q1 2011 MEG Conference Call Transcript
<Q - Barry L. Lucas>: Okay. Last topic, really for
John, when you think about the debt placement last year and the
interest cost and I believe the first call was 2013, is that
<A - John A. Schauss>: That's correct.
<Q - Barry L. Lucas>: John, any thoughts you can
share about how you can potentially defease that? Is there any
providers you talk to, bankers in terms of potentially trying
to reduce those interest costs?
<A - John A. Schauss>: Well, we're working right now
with our investment advisor PJ Solomon and our three lead
bankers, Barry, Bank of America, SunTrust and Scotia to look at
strategies how we can deal with our debt portfolio. And again,
the goal we would have is to lengthen maturities, improve
covenants and just watch, as you mentioned, that interest
expense. Now the public notes - the senior notes are ones that
we have a likely call period.
However, the opportunity for the bank debt
restructuring is in front of us, and we're positioned
ourselves to enter the market should it be to our advantage
to do so. So we're actively looking at that.
<Q - Barry L. Lucas>: Terrific. Thanks very much for
the color, John.
Q2 2011 MEG Conference Call Transcript
<Q - Barry L. Lucas>: If I look at my numbers for
year-end you go through that covenant of 7.75, assuming that's
a trailing 12, so
how aggressive can you be in here and trying to get
something put to bed on a refinancing and would you consider
other options such as selling assets at this time?
<A - Marshall N. Morton>: Well I think I will let
John go into the details on that.
We are looking at all options all the time. We have
used the same financial advisor for many, many years, he is
very familiar with the company and we continue talking to
him. At this point, our main interest is in refinancing the
debt we've got, the bank debt piece, that's the 2013 money,
so our focus is there. But I think any answer is always
driven by where our shareholder value comes first and comes
best, so we'd look at all opportunities all the
John, do have anything?
<A - John A. Schauss>: Yes, just to add, Barry,
obviously we like all of the markets that we actually are
operating in and the properties within those markets, but we
look at monetizing all non-core assets, and
we don't have any plans to monetize any operating
properties at this time. That's not to say that's off the
table for the future
, but at this time.
Q3 2011 MEG Conference Call Transcript
<Q - Mario J. Gabelli>: Well, whatever. Everybody has
different sources of information, including some that have
signed NDAs on the deal. Let's go to the - like you've got, the
stock is $1.30, there's 25 million shares out, your debt is
selling at $0.75 at a dollar. And if you guide ten multiple,
well, one of the analysts that I'm looking at says your TV
stations can do close to $100 million of EBITDA on an average
over three years, that is taking 2010, '11 and '12.
Now you have financial advisors, they tell you banks
take good assets, bad assets and they split them up. Where
are you in your thinking about taking your bad assets and
your good assets and dividing the company and assigning debt
<A - Marshall N. Morton>: Are you thinking about
something like [indiscernible] (35:58) where it put broadcast
in one business and...
<Q - Mario J. Gabelli>: I'm just thinking
generically. I don't - unlike somebody filling in a model that
the earliest first speaker did, I'm trying to figure out how to
make money in the stock.
<A - Marshall N. Morton>: I understand that. We have
not looked at breaking the company into pieces. We look at how
we can get more out of each of the markets we're serving. And
so it's in my thinking right now the best way to get value for
the company is through [ph] assessing (36:28) the market
potential, particularly in the side that has the most growth at
the moment, which is digital and mobile.
<Q - Mario J. Gabelli>: Yes. I understand that your
process of putting convergence together seems to - still in
work in progress.
Is that model still valid? I mean, after trying it
for 6 years, does it work?
<A - Marshall N. Morton>: It is working.
<Q - Mario J. Gabelli>:
Will the shareholders be better off having the
company split into different parts or perhaps taking some of
your assets and monetizing them?
<A - Marshall N. Morton>: I see.
I don't believe so. I think we're getting more out of
our markets by being able to sell all three platforms to all
of the markets.
<Q - Mario J. Gabelli>: I got you. Interesting.
And then somebody pointed out to me that you had some
towers for sale, have you sold anything?
<A - Marshall N. Morton>:
No, we have not, but that is correct.
Like everything these days, assets are less important than
the cash flow generated from the market itself. So we don't
really need to own towers anymore, just like we don't need to
own printing presses, we just need access to them.
<Q - Amit G. Chokshi>: Okay. I'm just curious because
why if they've been your advisor for this long last -
this past summer your notes for example, they were trading at
over 100. And I just like to get a sense of what kind of held
you guys back from doing a refinancing, because back then you
could have qualified for an A loan, now - I mean, now it's
pretty, you guys are in the B loan market, that's
But I don't understand what they are doing from an advisory
perspective, because there is really only at this point five or
six banks you should be talking to that are going to handle
your deals. So I'm kind of just trying to get a sense of what
held up the refinancing last summer and basically what's going
on as far as the advisory right now?
<A - Marshall N. Morton>: John, you want to talk
about that. I mean, we're not - we're just - we're not going to
have a discussion about how we're dealing with our financial
advisers on a matter like this over the phone. We're handling
the negotiations privately.
Management's failure to secure attractive financing or asset
sales while also ineffectively managing MEG in an off-political
year has led to a number of additional costs that shareholders
must endure. I estimate that total fees related to amending and
extending MEG's Term Loan and new capital structure will total
$18MM. Had MEG pursued a refinancing from Q4 2010 - Q2 2011, it
would be very possible that its refinanced debt would have priced
at L+500 with no LIBOR floor, effectively costing <$25MM of
interest a year for the Term Loan component.
Now a "good" scenario would be one that costs $35-$40MM on
just the refinanced Term Loan given that Bank of America is
altering the Term Loan A into a mangled Term Loan B structure
with a small, expensive revolver and reduced Term Loan, and
forcing the balance of the existing Term Loan into either a
senior or senior subordinated notes structure. In just one year,
management has cost shareholders nearly $30-60MM of
additional financing costs
yet the Board has been completely silent while shareholders and
employees take the brunt of this through lower earnings,
valuations, furloughs, and layoffs.
The lenders have recognized management's ineptness and have
recruited two consultants - Capstone Advisory and AlixPartners -
at shareholders' expense to provide guidance to management on how
to run the company. This is in addition to the retainer and
engagement fees MEG pays to advisory firm Peter J. Solomon
("PJS"), despite PJS providing no advice during robust debt
financing or M&A conditions for MEG to capitalize on. This is
also in addition to the consultants management hired to help
turnaround their failed acquisitions of DealTaker and Blackdot.
MEG shareholders are footing the bill for four advisors to
compensate for hapless management.
The current situation has also led management to break away
from prior statements regarding the company's strategy. When
asked about breaking up the company in the Q3 conference call,
CEO Marshall Morton indicated that the company benefits through
its ability to operate three distinct platforms. This stance has
obviously changed at the behest of MEG's lenders.
Management has been reluctant to capitalize on the healthy
valuations traditional media assets have commanded in the past
year, but the lenders and consultants appear quite adamant that
MEG pursue asset sales, particularly MEG's Newspaper division.
This could be a boon to shareholders as The New York Times sale
of its Regional Media Group ("RMG") to Halifax Media provides a
relevant valuation metric, suggesting MEG's Newspaper division
could be worth $100MM+. The recent sale of the Philadelphia
Inquirer adds further support to MEG achieving an acceptable sale
of its Newspaper segment.
EXHIBIT I: RMG COMP VS MEDIA GENERAL NEWSPAPER
click all images to enlarge
Management will present any scenario that allows them to
maintain their undeserved compensation and jobs as a "success"
but the asset with the most value is MEG's Broadcasting segment.
Television broadcast assets have fetched extremely attractive
valuation multiples in recent months and MEG's Broadcasting unit
could be worth $800MM - $1B. In fact, it is painfully obvious
that MEG carries a steep discount solely due to the management
team attached to the company. Exhibit II provides a quick
overview of publicly traded television broadcast comparables
which clearly demonstrate that MEG's Broadcast division could
support an enterprise value of $1B.
EXHIBIT II: PUBLICLY TRADED BROADCAST TELEVISION
Current tax law also encourages transactions and savvy owners
have been quick to recognize the healthy broadcast television
market. In July 2011, Nextstar Broadcasting Group ("[[NXST]]")
announced it was up for sale. Analysts believe that NXST could be
sold for $1B including the assumption of debt. NXST revenues and
EBITDA are 20% higher than MEG's Broadcast division but overall
margins and NXST's debt load are comparable to MEG's Broadcast
Despite these similarities, NXST's market capitalization is
twice that of MEG
- supporting the notion that MEG suffers a severe discount due to
its management team.
Another sharp investor - Providence Equity Partners - recently
announced its interest to sell Newport Television. Smart money
that is focused on delivering value to its investor base such as
NXST and Providence Equity Partners are looking to sell valuable
assets yet sadly - and somewhat unsurprisingly - MEG has not
discussed selling the Broadcast unit. It is clear that the reason
behind this is because it would be a conflict for management,
effectively putting them out of a job. The best option for
management would be to divest the Newspaper division and secure
any refinancing option, irrespective of financing costs, simply
to gorge on MEG's near lifeless husk for a few more years.
However, the best option for MEG investors, creditors, and
even employees would be to sell off both the newspaper and
broadcast division. MEG investors have had no ability to address
the slew of management failures given the company's voting
structure, Bank of America's actions demonstrate it has little
appetite to be a lender for MEG, and how good can employee morale
be when furloughs and layoffs occur primarily to offset
management's costly mistakes?
MEG's Broadcast division is also relatively small, with just
18 stations. This would make it an attractive acquisition target
for a larger company. A recent article by Reuters
highlighted the need for scale for maximizing retransmission
"Size is key when negotiating with cable operators who
pay broadcasters to transmit their signals, a significant
revenue stream in addition to advertising. It's simple math:
more stations equals more leverage to negotiate higher
Even without the Newspaper division, MEG would carry
significant debt. MEG would have little capacity to acquire other
stations yet at its current size would potentially leave
significant money on the table when negotiating retransmission
revenues. Selling off the Newspaper segment and keeping the
Broadcast division serves just one stakeholder - management - at
the expense of all others.
The Board has a very special opportunity to prove that it is
looking out for shareholders as opposed to being feeble pawns of
management. Exhibit III presents a potential valuation range
based on MEG selling both its Newspaper and Broadcast divisions
and the implication is clear - MEG shareholders could obtain a
value that the stock has rarely achieved in recent years - free
and clear of all corporate and pension debt.
EXHIBIT III: MEG SUM OF PARTS VALUATION
MEG shareholders are tired of sailing into stormy waters with
what are effectively drunk captains. Astute investors are
capitalizing on the attractive valuation window to divest of
richly valued assets in the newspaper and broadcast segment and
MEG should follow what the smart money is doing. With an
extension for MEG's Term Loan set for just 2015, management's
track record suggests that it will likely be coming hat in hand
to lenders well before the deal matures. With a potential break
up value between $7-11 per share, I would expect nearly all
shareholders would support pursuing this strategy and I encourage
you to hire legitimate advisors in the media sector to fulfill
your obligation to shareholders.
Any views expressed herein are provided for information purposes
only and should not be construed in any way as an offer, an
endorsement, or inducement to invest with any fund, manager, or
program mentioned here or elsewhere. Neither Kinnaras Capital
Management LLC nor any persons or entities associated with the
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including consulting your own legal and tax advisers, and that
any information provided by Kinnaras Capital Management LLC and
this document shall not form the primary basis of your investment
decision. This material is based upon information Kinnaras
Capital Management LLC believes to be reliable. However, Kinnaras
Capital Management LLC does not represent that it is accurate,
complete, and/or up-to-date and, if applicable, time indicated.
Kinnaras Capital Management LLC does not accept any
responsibility to update any opinion, analyses, or other
information contained in the material.
See author's follow-up (April 9) letter to the
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