An Open Letter To Media General's Board
April 4, 2012
CC: 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 company faced.
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 Officer>: 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 Excerpts:
<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 Excerpts:
<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 time. 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 Excerpts:
<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 to those?
<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 I mean, 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 fine. 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 DIVISION
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 COMPS
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 division. 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 1 highlighted the need for scale for maximizing retransmission revenues:
"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 fees."
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.
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1 ) http://www.reuters.com/article/2012/03/26/dealtalk-tv-idUSL2E8EN4WJ20120326
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