By
Amit
Chokshi
:
Media General (
MEG
) stock has experienced significant volatility in recent months.
The stock was demolished in October when Moody's (
MCO
) and S&P lowered the company's credit rating and Media General
reported the disappointing results investors have come to expect
from the current management team. Since October, the stock has
increased five fold only to once again suffer from the results of
an incompetent management team which warned of potential covenant
compliance issues, despite what could be a record year for
political ad dollars funneling into Media General's geographically
attractive regions.Media General was able to secure a short-term
bridge amendment but MCO has returned to threaten a credit
downgrade. These issues have led the stock to experience a great
deal of push and pull between longs and shorts. However,Media
General's most recent announcement could be a major game changer
favoring longs.
Yesterday,Media General announced that it was going to explore a
sale of its Newspaper division. The company has hired its bankers
to solicit interest from buyers and more importantly have received
inquiries from several third parties in recent months. Regional
newspaper transactions have been heating up and this is great news
forMedia General investors, possibly representing a real game
changer in terms ofMedia General's valuation. Before addressing
that, let's first cover the recent "story" behindMedia General.
From late 2010 through June 2011,Media General had a massively
wide window that it could have taken advantage of to refinance its
$363MM of bank debt due in 2013. Instead, management floundered and
showed no sense of urgency.Media General's $363MM bank debt carries
a rate of L+450 which equates to an annual interest cost of ~$17MM,
extremely attractive for a company withMedia General's credit
profile. This is why if one looks back to the conference calls in
those periods, investors were constantly mentioning going to market
to refinance that debt and secure something similar to those terms
to avoid a potentially troubling credit crunch. Given thatMedia
General management is worst in class, no progress was made on
refinancing and the world got caught in the Euro-zone crisis
resulting in credit spreads blowing out.
Since October, credit spreads have come in significantly but
lenders are still nowhere near where they were in late 2010 and H1
2011. As a result, even under the attractive current credit
market,Media General's new term loan will likely carry an interest
rate around 10-11% meaning there will be about $20MM of additional
cash interest when the new debt is rolled over. This is what I have
discussed in a number of previous posts -
highlighting that management has without question cost
investors $20MM due to its bumbling
. This has not been news to investors however, and the $5 stock
price more than reflects the additional expected interest
burden.Media General's management team has also felt it deserves to
be rewarded for this "achievement" as highlighted by
CEO Marshall Morton's recent option award
.
Media General's ability to obtain a short-term bridge amendment
and no extension left longs somewhat concerned and short sellers
thrilled. Further, the 8-K discussing the amendment mentioned
Capstone Advisory, which is a well known restructuring shop, adding
further ammo for short sellers to suggestMedia General would be
facing imminent bankruptcy. While Capstone is known for
restructuring, it seems the short sellers were getting a bit
desperate.
It is not uncommon to involve a firm like Capstone for valuation
assistance as well as to strong arm the borrower on the behalf of
the lender to rationalize costs as well as consider asset sales.
In my
previous post
I also covered why Bank of America (
BAC
) would favor only an amendment rather than an extension. Bank of
America's main goal is to avoid taking a hit on the bank debt. With
the Term Loan B ((
TLB
)) market on fire, there's a good possibility that Bank of
Americacan now rollMedia General off its Term Loan A into the TLB
market whereby Bank of America has no credit exposure toMedia
General going forward. As counter intuitive as it sounds, if credit
markets were worse, there would be a higher likelihood in my
cynical view that Bank of America would have taken the "delay and
pray" approach and have extendedMedia General's loan. But with
credit markets much more robust, Bank of America can squeezeMedia
General out into TLB and things work out for everyone where Bank of
America secures some arranger/syndication fees, takes no hit on its
credit, and walks away with no future credit exposure toMedia
General.
This is why the idea of bankruptcy does not make sense despite
what short sellers may have been hoping for. Going in court would
make no sense if the debt is trading in the mid to high $90s
because the lenders would now be hit with various ongoing fees and
just the overall hassle and time sorting out the various creditor
claims. There's no near-term issue that would really prod lenders
to pursue bankruptcy, particularly whenMedia General's bank debt is
not due until March 2013. As demonstrated by a number of recent
deals such as Spanish Broadcasting Systems (
SBSA
) which had a significant amount of debt due in the coming months,
lenders are not that excited about taking a company into bankruptcy
if they can avoid it.
Another reasonMedia General would fight aggressively to avoid
bankruptcy is because management has a major incentive to avoid
bankruptcy. This may seem like an obvious statement but the reality
is some management teams inherit bad situations. These management
teams might come in too late to save the company so when the
company does get into Chapter 11, the lenders and a firm like
Capstone would probably be fine keeping management as the firm
restructures.Media General's management team is pathetic and
created all of its current problems from poor acquisitions to
missed financing opportunities. Due to the voting structure ofMedia
General, this management team has been able to remain in place
while others - whether it's employees, shareholders, or creditors -
suffer for management's failures. It would not be unreasonable
thatMedia General's creditors, ifMedia General did restructure,
would force CEO Morton and his team out the door. Finding a new
team would be another headache Bank of America would not want to
deal with and Morton and his team likely realizes that they are
finished if they ever leaveMedia General.
This chain of events and various incentives have ledMedia
General to take steps that may finally enable the company to
achieve a much higher valuation than it currently carries. As those
familiar withMedia General are aware, prior conference calls
yielded numerous questions asking whetherMedia General was
exploring asset sales.Media General management would always provide
a response that ledMedia General investors to believe that there
was little enthusiasm on management's part to pursue a sale. This
makes sense as most management teams like to manage large companies
and can therefore justify higher compensation.Media General
management would also claim a certain synergy existed between its
regional papers and television stations. However, everyone involved
withMedia General knows this team has no credibility and its
competence from execution of strategy, acquisitions, and financing
are all laughable.
This is probably where Capstone came in during the current
refinancing process and quickly demonstrated that a healthy market
for all ofMedia General's properties - broadcast or print - exists,
and that pursuing a sale could help defrayMedia General's financing
issues. So in spite ofMedia General management avoiding any sale
opportunities in the past,Media General equity holders are getting
lucky between healthier financing markets and now what is likely a
forced effort by Bank of America and Capstone to dispose of its
Newspaper division.Media General's bank debt also has a special
asset carve out provision which gives it seniority over the bonds
so the proceeds of the Newspaper segment would immediately benefit
Bank of America and the rest of the bank group. IfMedia General can
get a decent valuation for its Newspaper segment,Media General's
valuation could improve markedly from current levels.
TABLE I:Media General 2011 SUMMARY FINANCIAL DATA ($MM)
(SOURCE:
Media General Q4 2011 EARNINGS RELEASE
)
Table I highlights basic information regardingMedia General's
various divisions. What is clear is that its Digital division,
whichMedia General's management team embarked on several years ago,
has been a total failure and value destroyer, and the Newspaper
division generates margins on a platform basis that detract
fromMedia General's key Television segment. Nonetheless, the
Newspaper segment is cash flow positive on a platform basis and a
number of buyers could improve upon whatMedia General management
has achieved. The question is what price does the Newspaper segment
command? A September 2011 conference by the Jordan Edminston Group
((JEGI)) illustrates what typical Newspaper multiples have been. As
JEGI notes, the lack of transaction data leads to a composite of
publicly traded data for valuation support. This data along with
current public comps of regional pure play newspaper companies
suggest there could be significant value forMedia General's
Newspaper division.
EXHIBIT I: MEDIA TRANSACTION MULTIPLES (SOURCE JORDAN
EDMISTON GROUP 2011 PRIVATE EQUITY FORUM - SEPTEMBER 22
2011)
TABLE II: PUBLIC NEWSPAPER COMPARABLES
Table II demonstrates the difficulty in comparing pure play
regional newspaper comps due to varying capital structures and as a
result includes both Enterprise Value and Market Capitalization
metrics based on sales and EBITDA. Even with the extreme
discrepancies between the companies' capital structures ([[AHC]]
and [[DJCO]] have no debt while [[LEE]] and [[MNI]] are extremely
levered), Table II can still help establish a floor for the value
ofMedia General's Newspaper division.
LEE and MNI may be the most appropriate comps given their scale
and leverage. The Price/Sales multiples they both carry can be
instructive for establishing a worst case valuation forMedia
General and I believe MNI's P/S multiple of 0.2x is a good lower
bound forMedia General's Newspaper division. This would translate
into a valuation of $60MM or about 2.0xMedia General's LTM EBITDA.
As I have mentioned in prior write ups, I believe this division can
be sold for a conservative 2.0x-4.0x+ EBITDA so this is actually
consistent with the lower bound of my cautious estimate.
While the public comps establish a very conservative floor, I
think there is one very recent transaction that is near ideal
forMedia General's Newspaper division to comp to, providing a lot
of potentially positive and relevant information regarding the
potential value ofMedia General's Newspaper division. On January 6,
2012, The New York Times Company (NYT) sold its Regional Media
Group (RMG) which consists of 16 regional newspapers for about
$150MM. Exhibit II provides RMG's segment data for recent fiscal
years and compares it toMedia General's Newspaper division.
EXHIBIT II: RMG 2011 FINANCIAL DATA
As recently as 2010,Media General's Newspaper division compared
very favorably to RMG, with lower operating costs and higher EBITDA
margins. In 2011,Media General's segment took a hard turn downwards
with a nearly 9% decline in revenues in the Newspaper segment.
However, a competent acquirer could be very willing to pay a
similar valuation relative to what RMG was sold for. The sizes of
both RMG andMedia General's Newspaper division are comparable and
it was not long ago whenMedia General's Newspaper division
performed better than RMG. Better overall strategy relative toMedia
General's management could probably yield a turnaround that has
eludedMedia General's management team.
RMG owns properties in Florida, North Carolina, Alabama, as well
as California. Halifax Media, with its own operations in Florida
and other southern states, was the buyer of RMG and could very well
be a suitable buyer forMedia General's Newspaper division. Matching
geographies would allow significant cost savings for the combined
company, provided there were limited antitrust issues. One
favorable sign is that the FCC has been relaxing rules related to
newspaper-broadcast overlap so perhaps combining newspapers in
similar regions, primarily when a case can be made for poor chance
of survival on their own, would allow these deals to breeze by. In
either case, RMG and the valuation of public comparables suggest
thatMedia General's Newspaper division can fetch a pretty
attractive price. If a valuation can be realized close to what RMG
sold for, thenMedia General's aggregate valuation stands to
significantly improve.
TABLE III:Media General NEWSPAPER VALUATION SENSITIVITY
ANALYSIS
Table III helps illustrate how an attractive sale for the
Newspaper segment can helpMedia General with the yellow highlighted
range as where I think a deal could shake out. IfMedia General's
Newspaper Platform EBITDA figures are the "real" segment figures,
then it is very possible forMedia General to sell the division for
a valuation similar to RMG. If the company can realize $100+MM for
the division, those proceeds would go towards reducing its bank
debt, per the carve out provision that the bank debt has over the
high yield bonds. This is reflected in the Post Newspaper
Transaction Capital Structure segment of Table III where the pro
forma (PF) bank debt is reduced by the sale proceeds.
GivenMedia General's credit rating, state of the credit markets,
and cash flow profile, it is very likely thatMedia General's
refinancing would yield interest rates in the 10-11% range or about
$38MM related to the $363MM in existing bank debt. I believe this
has been more than priced into shares in the $5 range. The current
interest rate yields about $17MM in interest expense on that same
piece. By reducing the bank debt by $100MM,Media General's overall
credit profile could improve, resulting in both cheaper rates
forMedia General to refinance along with a lower aggregate debt
burden.
The major benefit is thatMedia General gets rid of an asset that
would be a perpetual drag on its operations. After 2012,Media
General would face a challenging 2013 without the aid of a strong
political year, the Summer Olympics, and NBC broadcast Superbowl.
This is the concern most lenders have as the Broadcast division
would have a reduction in revenue. However, ifMedia General keeps
the Newspaper segment it is likely that this segment continues to
wither away in 2013, becoming an increasing operational drag.
EXHIBIT III:Media General POST NEWSPAPER SEGMENT SALE
ANALYSIS (KINNARAS ESTIMATES)
EXHIBIT III is a crude presentation as the closing of a sale is
not assured and terms of the refinancing would vary based on the
sale process but it nonetheless helps illustrate the benefit of
selling the Newspaper segment. Exhibit III assumesMedia General's
Newspaper division is sold for 4.0x 2011 platform EBITDA generating
$113MM which is used to pay down $363MM of existing bank debt. I
also take a leap of faith and assumeMedia General's credit rating
would be improved through divesting its Newspaper segment and
paying down debt. With an improved rating,Media General's reduced
size $250MM TLB could be priced at L+700 with a 1% floor or
effectively 8%. For 2012, I assume the Television segment increases
revenues by 23% over 2011 segment revenues while the Digital
(Dealtaker) segment declines by 4%. I assume Digital generates a
$1MM EBITDA loss while Television generates 35% platform EBITDA
margins. When television ad demand is robust, broadcasters
experience significant margin expansion. In 2010,Media General's
Television segment generated platform EBITDA margins of 34%. I also
assume that ifMedia General is able to sell off its Newspaper
segment, it's corporate overhead will be reduced by roughly 50% or
$13MM. This could be over or understated, it's a guess primarily in
that I assume a number of corporate functions in Richmond dedicated
to the significant size of the Newspaper segment could
dissolve.
I also assume capex tracks at $15MM with the Newspaper segment
sold. Public pure play broadcasters have capex that runs anywhere
from 3-6% of sales and I assumeMedia General will run capex at
roughly 4.5% of sales. Public pure play regional newspapers run
capex at <3% of sales so, which highlights the fact thatMedia
General has run capex at much higher levels than peers. I am
guessing that the higher historical capex byMedia General could be
related to the maintenance of printing assets related to third
party print jobs. In either case, one can see thatMedia General
should be able to deleverage on a steadier basis once the Newspaper
segment is sold, potentially generating $22MM in free cash flow in
2012 and remaining cash flow positive in 2013.
IfMedia General keeps its Newspaper segment its overall EBITDA
levels for 2012 should still be fairly strong. The problem is 2013,
and if the Newspaper segment continues its recent history of annual
sales declines of ~8%, it could become a major drag. The No
Newspaper Sale scenario projects thatMedia General's Newspaper
segment will decline by 7% in 2012, improving against the 9%
decline in 2011, and then decline by 8% in 2013 along with an
estimated 15% decline in Television from 2012 figures. The problem
is thatMedia General appears to have reduced expenses per its
corporate cost structure by as much as it can. In 2011, it reduced
its operating costs by about 4% by aggressive headcount reductions
and furloughs. I assumeMedia General will maintain 2012 expenses in
line relative to 2011 and then assume it can miraculously find 5%
in cost savings in 2013.
2012 will not be an issue at all in either scenario but 2013 is
whereMedia General would face some challenges. By keeping the
Newspaper segment,Media General will have no chance for an
improvement in credit rating and will be in line to refinance in
the 10-11% range given current market conditions. In addition,
CapEx will be whereMedia General announced in its earnings release.
As a result,Media General could potentially be cash flow negative
in 2013. This may not be the end of the world asMedia General would
try to incorporate covenants structured to allow some breathing
room in off political years, something the current 2013 maturity
does not have, during the refinancing process.
While there are a number of wide ranging assumptions to
consider, Exhibit III still explains howMedia General can benefit
by shedding the Newspaper division. Keep in mind, even ifMedia
General's credit rating is unchanged after selling its Newspaper
division and its $250MM TLB is priced at ~10.5%, it would still
generate about $17MM in free cash flow in 2012 and still be cash
flow positive in 2013. Another benefit toMedia General investors if
the Newspaper segment is sold is thatMedia General could benefit
from valuation expansion due to an improved credit standpoint as
well as becoming a pure play broadcaster.
TABLE IV: PURE PLAY REGIONAL BROADCAST COMPS
With just the Broadcasting and Digital divisions,Media General
could start trading closer to broadcasting peers. BLC, GTN, and
SBGI are the most appropriate comps as TVL owns a number of
MyNetworkTV and CW affiliates relative to the major affiliatesMedia
General and the other three comps maintain. A satisfactory sale
ofMedia General's Newspaper segment would almost assuredly yield a
post transaction capital structure forMedia General that is
superior to GTN but it's a stretch (but not impossible) to assume
it would be as good as the other peers. As a result, one simple way
of valuingMedia General would be to use a composite of its peers
EV/2012 Revenue metrics. With valuation pointing to a 2.2-2.7x
range forMedia General's relevant peers,Media General could be
valued at $830MM-$1020MM before excluding debt when using the 2012
revenue estimates in Exhibit III. Assuming a reasonable sale price
of 4.0xMedia General's Newspaper platform division,Media General's
shares could be valued between $7-$15 when accounting forMedia
General's pension and its reduced debt.
The Net Debt/EBITDA figures in Table IV do not include pension
liabilities which in some cases are significant. For example, if
net debt included BLC's pension liabilities, it's Net Debt/EBITDA
would be 5.1x. So theMedia General share price estimate I have
provided is more conservative in that it is netting out all debt -
corporate and pension - fromMedia General's share price. The
reality is that equity prices don't seem to incorporate those
pension liabilities. IfMedia General's valuation were to exclude
those pension liabilities, as the comps in Table IV do, shares
could be worth $13-$21.
These valuation figures may sound as though they have
materialized from an insane asylum but they can be supported by
hard, actual trailing figures as well. Referring back to Table
I,Media General's earnings release reported a combined Broadcast
and Digital revenue of $317MM in FY 2011. The public comparables in
Table IV provide EV/LTM Sales metrics and the range for the
relevant comps is 2.3x-2.8x EV/LTM Sales. Using these metrics
forMedia General's reported 2011 non Newspaper revenue of $317MM
and assumingMedia General's debt would be reduced by a sale of its
Newspaper division for 4.0x its platform EBITDA would suggest a
share price between $8-$16. The big question is whether a sale
close to $100MM+ can be realized forMedia General's Newspaper
division.
To some extent, it does not matter given whereMedia General's
share price currently is. With the Newspaper division now being up
for sale, market participants have had a couple of days to
determine whereMedia General should trade based on the expected
valueMedia General's Newspaper division will fetch. At about $5.50
per share,Media General's EV is about $770MM, meaning market
participants think there will be no sale of the Newspaper segment
or the value will be essentially $0. Referring back to Table II,
one could make the case that the floor valuation forMedia General's
Newspaper division is about $60MM or 0.2x the Newspaper segment's
2011 sales. IfMedia General were to execute a sale at this
level,Media General's stock, using the pure play relevant broadcast
metrics, would still be reasonably valued at $6+.
A share price near $10 is further supported by recent
transaction multiples in the broadcast sector and the disposal of
the Newspaper segment could make a future sale of the broadcast
segment a possibility. As discussed onMedia General's Q3 2011
conference call and various industry reports, broadcast television
companies have exchanged hands at 8-10x cash flow. Analysts have
suggestedMedia General can generate about $100MM in average three
year broadcast platform cash flow and in one of my prior pieces, I
suggested a four year average including two off political years,
one Congressional year, and one Presidential year, could yield
average cash flow of $95MM. IfMedia General could sell the
Newspaper division for a little over $100MM, a valuation of 8-10x
$95MM could support a double digit share price.
This is what the notion of game changer means in the context
ofMedia General if it can sell off its Newspaper division. IfMedia
General can get a decent price for its Newspaper division, the
credit profile improves, the ongoing operational drag disappears,
the valuation becomes simplified, and other transaction
opportunities emerge. The overall range ofMedia General's share
price could shift as well, from flirting with $1 due to concerns
about solvency in Q3 2011 and on going concerns regarding the
Newspaper division, to now having a potential bottom valuation in
off-political years of about $4 and a potential high in the $10-12
area in strong political years.
For example, pure play broadcast companies are currently valued
at 7.2x-8.0x EV/LTM EBITDA with the LTM essentially being 2011 - an
off political year. Excluding the Newspaper segment,Media General
generated $87MM in platform EBITDA in 2011. If my assumption of
corporate overhead allocations is correct and thus pro forma
overhead can be reduced by half,Media General's off-political year
EBITDA could be $75MM-$80MM, potentially higher if the Digital
segment can stop losing money. At the top end of the EV/LTM EBITDA
metrics and assuming a $100MM+ sale for the Newspaper
division,Media General's off political year share price could be
around $5…basically whereMedia General is currently trading at the
start of what will be a strong performance on-political year.
Also, with the Newspaper segment shed fromMedia General, it
could be possible for the company to now be sold off to another
broadcast company. I have a healthy level of cynicism when its
comes toMedia General management and I would not be surprised
ifMedia General has been approached about both its broadcast and
newspaper divisions in recent years. However,Media General
management probably scoffed at any sale of either division in the
past because they would be stuck managing a struggling Newspaper
segment and may actually have to be paid far less for a
Newspaper-onlyMedia General to survive. Conversely, they probably
passed on selling the Newspaper division because even though it
struggled in 2011, overall, as illustrated in Table I, it served to
essentially subsidize a very very fat corporate overhead cost
structure. Of the $26MM in total corporate overhead, it appears
based on
Media General's proxy
(page 13 and 27) that 14% of total corporate overhead goes to just
the salaries ofMedia General's top five executives along with cash
fees to directors.
Due to the voting structure ofMedia General's equity, the
management team has been able to remain unaccountable for any of
its actions. I suspect during this refinancing process, Capstone
was able to strong arm management by prodding them to dispose of
the Newspaper segment and if this was the case, I also expect that
Capstone and BAC will play an active role in evaluating offers. In
the press releaseMedia General revealed that it has been approached
by third parties for the Newspaper division so I would not be
surprised if it was approached regularly over the past year as
valuations for the segment heated up, yet management avoided
selling primarily because it enabled them to maintain exorbitant
compensation. If the Newspaper division received expressions of
interest, it is very likely that crown jewel ofMedia General -
Broadcasting - has received inquiries for a potential sale. IfMedia
General sells the Newspaper division it may be easier for a
potential acquirer to more publicly approachMedia General
shareholders about acquiring it in the future.
Media General has had a very interesting past twelve months as
reflected by the stock price performance and in spite of abysmal
performance by management at nearly every level (strategy,
execution, financing),Media General shareholders may get very
lucky. Credit markets have improved significantly, allowing
management to be bailed out with what should be attractive pricing
of its new debt. While credit markets have improved, I believeMedia
General's lenders have also gotten tougher onMedia General
management through possibly taking an active role in the
exploration of selling the Newspaper division. Recent transaction
comps such as the RMG sale to Halifax Media suggest the Newspaper
division can lock in quite an attractive sale price which would
improveMedia General's overall credit profile and future outlook.
If these things can occur in what's expected to be a phenomenal
year for broadcast television, particularly in the regions
whereMedia General operates, the stock could be poised to
experience a dramatic shift upwards.
Disclosure:
Author manages a hedge fund and managed accounts long Media
General.
See also
Exxon Mobil: What Big Upside?
on seekingalpha.com