(Reprint) RICHMOND, Va., June 6, 2013 /PRNewswire/ — Media General, Inc. (NYSE: MEG) and privately held New Young Broadcasting Holding Co., Inc., both local broadcast television and digital media companies, today announced a definitive agreement to combine the two companies in an all-stock merger transaction. The new company will retain the Media General name and will remain headquartered in Richmond, VA.
Media General owns 18 network-affiliated stations, and Young owns or operates 12 network-affiliated stations. The combination will create a company with 30 stations operating in 27 markets, reaching 16.5 million, or 14%, of U.S. TV households. On a pro forma basis, 2012 revenues were $605 million, including approximately $115 million of political revenues.
The new company will have a strong balance sheet, including significant tax carryover net operating losses that will survive the merger, and an enhanced credit profile, creating opportunities to refinance existing debt at a significantly lower cost of capital. The merger will be accretive to free cash flow in the first full year. The companies have identified $25-30 million of operating and financing synergies.
The balance of network affiliations will include CBS (11), NBC (9), ABC (7) Fox (1), CW (1) and MNT (1). Sixteen of the 30 stations are located in the Top 75 DMAs. The new company will be more geographically diverse and will have a presence in more markets that generate strong political revenues. Its increased size will enhance its ability to participate in retransmission revenue growth, share growth of national and digital advertising, and syndicated programming purchasing.
J. Stewart Bryan III, chairman of Media General, said, “The business combination of Media General and Young is a transformational event that will benefit shareholders, employees and the communities we serve. The combination provides immediate accretion to free cash flow, a strong balance sheet, the opportunity to refinance debt at a much lower cost and attractive synergies. Young’s management and its owners share Media General’s commitment to quality local journalism and to operating top-rated TV stations, making this merger a unique and compelling combination with significant growth potential. I have agreed to vote all of my shares to unwind Media General’s dual-class stock structure and to approve the transaction. I look forward to benefiting as a continuing long-term shareholder in the new Media General.”
Thomas J. Sullivan, executive chairman of New Young Broadcasting, said, “This merger is compelling on many levels and will create a company with valuable strategic assets, significant financial resources and a deep team of talented and experienced personnel. Together, these two great companies will be even better positioned to prosper in today’s competitive media environment. I look forward to joining the Media General Board of Directors and working with my new colleagues.”
George L. Mahoney, president and chief executive officer of Media General, who will retain that role following the merger, said, “We are thrilled to join forces with the Young team and add its great collection of stations and digital assets to ours. I’m very excited about the wonderful opportunities that lie ahead for the new Media General. Our stations and Young’s have earned excellent reputations as leading local content providers. In working with the Young management and owners over the past several months, it’s clear that we share strong values for customer focus and innovation and a commitment to harnessing the future in an age of rapid change. The new Media General will have a highly competitive broadcasting platform and a strong digital focus, particularly for mobile platforms. We see opportunities for organic growth and other expansion. We expect to take advantage of attractive debt markets and refinance our total debt outstanding at a much lower interest rate. We anticipate a seamless integration of operations and the ability to take advantage quickly of our new operating and financing synergies, to realize the benefits inherent in our combination. We believe the new Media General has outstanding prospects for increasing shareholder value.”
Deborah McDermott, chief executive officer of New Young Broadcasting, said, “This is an exciting day for Young Broadcasting. We’re delighted to find an outstanding strategic business partner in Media General, with its strong stations and digital platforms in attractive markets. Our companies share a commitment to quality broadcasting. Combining our two companies creates opportunities for profitable growth that neither company would be capable of achieving on its own. We look forward to working with the Media General team and to realizing the tremendous potential of this merger, including attractive near-term growth opportunities.”
Under the merger agreement, Media General will reclassify each outstanding share of its Class A and Class B common stock into one share of a newly created class of Media General common stock, which will be entitled to elect all of Media General’s directors. No additional consideration will be paid to the Class B shareholders for giving up their right to directly elect 70% of Media General’s directors. Media General will issue approximately 60.2 million shares of the new Media General common stock to Young’s shareholders. The estimated total shares outstanding after closing is 89.1 million. Media General’s pro forma ownership split will be approximately 32.5% Media General shareholders and 67.5% Young shareholders. The new Media General common stock will be listed on the NYSE and trade under the symbol MEG, subject to NYSE approval of the listing of the new shares.
Media General’s 2011/2012 average revenues were $320 million and Young’s were $219 million. Media General’s 2011/2012 average adjusted EBITDA was $90 million and Young’s was $77 million. These adjusted EBITDA amounts have been normalized for acquisitions, dispositions and certain non-recurring, one-time and other items agreed upon by both parties. Broadcast financial results in even-numbered years include political revenues and Olympics advertising, and odd-numbered years mostly reflect the absence of those revenues. The broadcast industry, therefore, typically assesses a company’s performance based on a two-year average of its financial results, which takes into account this biennial effect of political and Olympics revenues.
As of March 31, 2013, Media General’s outstanding debt was $601 million, and Young’s was $164 million. The new Media General intends to pursue a total debt refinancing of approximately $900 million, reflecting the total debt outstanding of both companies, call premiums on various debt issuances, a $50 million cash contribution to Media General’s qualified pension plan, and transaction fees and expenses. If it is able to complete the refinancing, which is subject to debt market conditions at the time of refinancing, Media General believes that its pro forma interest expense following the refinancing would be approximately $50 million per year.
Following closing, the initial Board of Directors will consist of 14 directors, including Media General’s current nine directors and Young’s current five directors. Mr. Bryan will serve as the initial chairman. At the 2014 Annual Shareholders’ Meeting, the size of the Board will be reduced to 11 directors and consist of five of the current Media General directors (to include the current chairman, vice chairman and president/CEO plus two others as designated by the Nominating Committee), the five former Young directors, and one additional director selected by the Nominating Committee. The Nominating Committee will consist of five directors, including three former Young directors and two current Media General directors.
The transaction has been unanimously approved by the Media General Board of Directors and the Young Board of Directors. It also has received the necessary approval of Young’s shareholders. The transaction is subject to the approval of Media General Class A shareholders and Class B shareholders, the Federal Communications Commission, clearance under the Hart-Scott-Rodino antitrust act, and customary third-party consents. The D. Tennant Bryan Media Trust, which holds 85% of the company’s Class B shares, has agreed to vote in favor of the transaction. Media General will convene a special shareholders’ meeting to vote on the transaction. The time, location and other details regarding this meeting will be communicated to shareholders at a later date. Media General will file a proxy statement with the SEC regarding the transaction. The proxy statement will include detailed financial and other information about Young and its business. The transaction is expected to close in the late third or early fourth quarter of this year.
The merger agreement will be included in a Form 8-K to be filed shortly with the SEC. The 8-K filing will be available on Media General’s Website www.mediageneral.com in the Investor Relations section.
RBC Capital Markets, LLC and Fried, Frank, Harris, Shriver & Jacobson LLP are advising Media General. Stephens Inc. and Gibson, Dunn & Crutcher LLP are advising the independent members of the Board of Directors of Media General, and Stephens delivered a fairness opinion to the full Media General Board of Directors. Wells Fargo Securities, LLC and Debevoise & Plimpton LLP are advising Young Broadcasting.
Investor Conference Call
Media General management will hold a conference call with investors to discuss this announcement today at 10 a.m. To dial in to the call, listeners may call 800-447-0521 about 10 minutes prior to the 10:00 a.m. start. The participant passcode is “Media General.” Listeners may also access a live webcast, including a slide presentation, by logging on to www.mediageneral.com and clicking on the live webcast link.
A replay of the webcast will be available online at www.mediageneral.com beginning at 1:00 p.m. today. A telephone replay will also be available, beginning at 12:30 p.m. on June 6, 2013, and ending at 11:59 p.m. on July 14, 2013, by dialing 888-843-7419 or 630-652-3042 and using the passcode 35050084.
CLICK HERE to download Cove Street Capital’s May 2013 Strategy Letter, Number 12, “Harleys and Leather Jackets”
The Efficient Market Paradox
by Eugene Robin | Research Analyst, Cove Street Capital
I’d like to share with you a great book on the basic mathematics of the stock market written by John Allen Paulos that has a section on the efficient market. Briefly, if investors believe in the Efficient Market Hypothesis (EMT) then they believe that the market efficiently incorporates all old and new pieces of information and thus the quest to beat the market is a losing proposition and thus everyone should just buy index funds. But, if enough people believe that the market is efficient then no one will engage in active management, thereby decreasing the overall efficacy of the now not-so-efficient market by slowing the diffusion of information into market prices. Therefore, if enough people actually believe that the market is efficient then that belief actually ensures the falsity of the theory itself, ergo, a paradox forms.
Why am I mentioning this? After recently watching a PBS documentary where Vanguard’s John Bogle espoused the glories of the ETF revolution, I began to think about the actual effects of ETFs on active managers. It’s hard to argue that Bogle is entirely wrong in his assault against the traditional active management industry. read more…
The Annual Pilgrimage to Omaha
Berkshire
This past weekend’s trek to Omaha for the Berkshire Hathaway annual meeting represented the fifth consecutive time I have ventured to see the Oracle of Omaha and the man they call Charlie share their wisdom. Sorry folks, I didn’t take notes from the meeting this year. I have decided to pass that torch along to the next generation of note takers. However, the upshot of not taking notes is that I was able to absorb more of what was said in real time. I am sure that a comprehensive set of notes will show up on the internet in no time but in the meantime I wanted to share a few of my takeaways:
- While the idea of having a short seller ask questions was certainly compelling, the execution was lackluster. Unfortunately, it felt as though Doug Kass was far more concerned with promoting his own firm than asking tough questions. At one point Munger even joked that he could make a certain short point better than Kass was. Accordingly, my personal preference for subsequent years would be to have someone who knew the company really well and who owned the stock play the devil’s advocate. read more…
Tessera: Our Vote is In
Our premise is simple: we bought Tessera because the stock was cheap and we received nearly free optionality on either the development of a new technology or improvement in the managing of the core business.
In a very short period of time, the management team members proved themselves to be some combination of incompetent, careless or clueless. We have been BLESSED with the entrance of what appears to be a competent group of investors—Starboard Value—who have experience in real activism and have in short order produced the departure of the CEO and most of the Board, a nearly complete makeover of the Board (proposed) and the announcement of a restructuring plan that should radically cut costs and shift capital allocation to enhance profitability and returns. read more…
Ben Claremon and the Great White North
Under normal circumstances, the prospect of leaving sunny Southern California to travel to a place where the day-time temperature encourages the wearing of fur is not particularly appealing. But I decided this year to make the slog to attend Fairfax Financial’s annual meeting in Toronto. Prem Watsa, the Chairman and CEO of Fairfax, has the reputation of being the Warren Buffett of Canada as he has modeled Fairfax to be similar to Buffett’s Berkshire Hathaway in terms of structure and investment approach. Like Buffett, Watsa measures success by comparing the yearly percentage increase in book value to the return of the S&P 500. Like Berkshire Hathaway, Fairfax has a decentralized structure whereby the insurance company presidents and the leaders of the non-insurance operating businesses have a lot of autonomy. This approach has helped Watsa and Fairfax generate substantial wealth for its long-term shareholders, as book value per share has increased from less than $2 twenty-seven years ago to close to $400 today.
CLICK HERE to download Cove Street Capital’s March 2013 Strategy Letter, Number 11, “Call Him Ishmael”
We own Tessera at a cost of approximately $16 per share. Our thought process was simple: a conservative analysis of their IP portfolio’s current cash stream plus cash on the balance sheet suggested a valuation of $15 per share, leaving $1 of implied value for the venture portfolio of their Digital Optics (DOC) business, in addition to any potential unseen value trapped in the IP portfolio. Subsequent events, legal settlements, and client renewals have added an additional $4-$5 in value. The initial analysis of the DOC business indicated that by the end of 2015, the segment could have been a real stand-alone business with $200 million in revenues operating with a 10-12% margin and worth another $7-$10 per share. Downside boredom—upside large.
Hello Ruby Tuesday
A few weeks ago, Cove Street was asked to present a small cap stock idea for the 2013 Small-Cap Investing Summit. Our analyst Ben Claremon chose to discuss the investment thesis for Ruby Tuesday (RT) and created the attached presentation. Despite the fact that Ben was unfortunately not allotted the standard Bill Ackman 3 hour time window, these slides provide an in-depth analysis of why we think RT is undervalued. CLICK HERE to download the slides.
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The opinions expressed herein are those of Cove Street Capital, LLC and are subject to change without notice. Past performance is not a guarantee or indicator of future results. Consider the investment objectives, risks and expenses before investing.
The information in this presentation should not be considered as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that the security discussed in this report is or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of the security discussed in this presentation. The report is based on data obtained from sources believed to be reliable but is not guaranteed as being accurate and does not purport to be a complete summary of the available data.
Recommendations for the past twelve months are available upon request. In addition to clients, partners and employees or their family members may have a position in security mentioned herein.
Cove Street Capital, LLC is a registered investment advisor. More information about us is located in our ADV Part 2, which is available upon request.
The Worst Piece of Corporate BS
The proposed management buyout of Dell is an abomination of corporate governance and decency on an extraordinarily large scale. While we have been too busy losing money in Hewlett-Packard to own Dell shares, I will take the liberty of being incensed for its shareholders. To wit:
- ANY management-led buyout of a public company is a complete violation of the most elemental sense of corporate governance, if not de facto insider trading. There is only ONE reason why management teams offer to buy out public shareholders—they think the stock is worth more than the price they are paying. While it is inaccurate to always infer greed as opposed to a distinct possibility of mere idiocy or incompetence (Tribune buyout?), in the case of a management-led buyout, I think we can default to the former. read more…