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Executives

Lou Anne J. Nabhan - Vice President of Corporate Communications

George L. Mahoney - Chief Executive Officer, President and Director

James F. Woodward - Chief Financial Officer and Vice President of Finance

Analysts

Barry L. Lucas - Gabelli & Company, Inc.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Shagun Singh Chadha

Christopher Paciello - PENN Capital Management Company, Inc.

Aaron Watts - Deutsche Bank AG, Research Division

Randy Baron

Media General (MEG) Merger Agreement with New Young Broadcasting Conference June 6, 2013 10:00 AM ET

Operator

Good morning, and welcome to the Media General Investor Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that the conference is being recorded. And now, I'll turn the call over to Lou Anne Nabhan. You may begin, Lou Anne.

Lou Anne J. Nabhan

Thank You, John. Good morning, everyone. Welcome to Media General's Conference Call and Webcast. Earlier today, we announced an agreement for Media General and New Young Broadcasting to merge. The press release is on our website. A transcript of the comment from today's call will be posted immediately after the call and a replay will also be available today. Our speakers are George Mahoney, Media General's President and Chief Executive Officer; and Jim Woodward, Media General's Vice President, Finance and Chief Financial Officer.

Today's presentation contains forward-looking statements, which are subject to various risks and uncertainties. They should be understood in the context of the company's

[Audio Gap]

report filed with the SEC, including the section on Risk Factors, Media General's future performance could differ materially from its current expectations. Let me now turn the presentation over to George.

George L. Mahoney

Thank you, Lou Anne, and good morning, everyone. This is a very exciting day for Media General. We're delighted to announce plans to merge with Young Broadcasting, a local broadcast television company that shares our values for providing excellent local content across stations and its digital and mobile platforms. The business combination of Media General and Young is a truly transformational event that will benefit our shareholders, employees, customers and the communities we serve. We're thrilled to joined forces with the Young team and add its great collection of stations and digital assets to ours. This merger will provide immediate accretion to free cash flow, a strong balance sheet, the opportunity to refinance debt at a much lower cost and operating and financing synergies of between $25 million and $30 million. 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. The new scale will enhance Media General's ability to participate in retransmission revenue growth, share growth of national and digital advertising and syndicated programming purchasing. The merger adds important new political markets and increases our opportunities in key battleground states. The new company will have an enhanced ability to participate in ongoing industry consolidation, especially the creation of duopolies. Given the attractive debt markets, 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. We believe the pro forma interest expense, following the refinancing would be approximately $50 million a year. The company will operate under the name Media General and remain headquartered in Richmond, Virginia. Media General will be led by its existing management team and will be joined by Deb McDermott and Bob Peterson from Young's.

Here are some of the merger transaction details. This is 100% stock merger transaction. Media General's class A and class B dual class structure will be unwound as part of the merger transaction. Media General will issue 60.2 million shares to Young shareholders. On a pro forma basis, Young shareholders will hold 67.5% of the Media General shares. There are no financing contingencies tied to this transaction. Commitment to amend the Berkshire term loan and an amendment to the Young credit facility were secured prior to the transaction's announcement. The transaction, including receipt of regulatory and Media General shareholder approval, is expected to close in late of the third quarter or early fourth quarter 2013, and this transaction has been approved by Young shareholders. We will own or operate 30 full powered TV stations across 27 markets, reaching 16.5 million U.S. TV households. The new company will be more geographically diverse. The balance of network affiliations will include 11 CBS stations, 9 NBC stations, 7 ABC stations, 1 Fox, 1 CW and 1 My TV. 16 of the 30 stations are located in the country's top 75 DMAs. 2/3 of the stations are ranked #1 or #2 in their markets and several of those stations are clear #1 stations in their markets.

This slide, which shows the Media General and Young stations in table form is being provided for your reference.

I'll now ask Jim Woodward, our CFO, to provide an overview of the existing and pro forma Media General.

James F. Woodward

Thank you, George. And I'm on the Slide 7. The new company has a strong financial profile, and I'll refer first to the 3 pie charts down the left, 2012 pro forma revenues of $605 million and adjusted EBITDA of $237 million. The 2012 adjusted EBITDA includes -- including the synergies was at $237 million. The 2012 pro forma free cash flow, including in synergies, was $175 million.

Turning to the tables on the right and in the first column, show Media General as it exists today. And in the second column, we show pro forma Media General. We use 2011, 2012 blended averages in both columns. Broadcast cash flow and EBITDA margins increased significantly under the pro forma. Free cash flow generation increases from approximately $10 million to nearly $105 million.

Mergers credit enhancing. We improve from 6.5x net leverage today to a projected 2013 year-end net leverage of 4.3x. And as George said, we expect to take advantage of the attractive debt markets and refinance our total debt outstanding at a much lower interest rate. This is a unique and compelling transaction, which transforms both Media General and Young and provides us with the opportunity to reach new levels of performance that would have not been possible for either company alone. For all of those reasons, we are very excited to have the opportunity to merge with New Young Broadcasting.

And now, I turn it back to George.

George L. Mahoney

Thanks, Jim. In closing, I'd like to underscore our strong belief that the new Media General has outstanding prospects for increasing shareholder value. In working with the Young management and owners, over the past several months, it's been clear that we share strong values for customer focus and innovation and a commitment of harnessing the future in an age of rapid change. The new Media General will have a highly competitive broadcast platform and a strong digital focus, particularly for mobile platforms. We see opportunities for organic growth and other expansions. We expect to take advantage of attractive debt markets, refinance our total debt outstanding at a much lower interest rate. We anticipate a seamless integration of our operations and the ability to take advantage quickly of our new operating and financing synergies to realize the benefits inherent in our combination.

And now, we'll be pleased to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Barry Lucas from Gabelli & Company.

Barry L. Lucas - Gabelli & Company, Inc.

George, this is not quite the outcome we may have expected, but really quite brilliant. So -- but I think a couple of details, and the Young stations have been on the market or purported to be on the market for quite a while. So maybe you could provide just a tad of color on how this came about?

George L. Mahoney

Well, I will tell you that we've been working on this for more than a quarter. I will tell you that it came about as something that as we began to talk, it looked even more compelling with every day that we did talk. So it has been something that as we've gotten further into it, we have gotten much more excited as I think you probably recognized this morning. It is a terrific transaction for Media General.

Barry L. Lucas - Gabelli & Company, Inc.

Okay. And just in terms of the synergies, when you described $25 million to $30 million, I'm not sure that you can break it down quite so finally. But how much of that is from operations or overhead savings? And because you threw in financing there, how much of that is finance -- so how much is in sort of above the line and how much wind up below the line?

George L. Mahoney

I think it's fair to look at is about a 50/50 split on that energy -- on that synergy spread that we gave you, Barry.

Barry L. Lucas - Gabelli & Company, Inc.

Okay. And I'll jump at the queue after this, so one last question. You have to be thinking about the KRON in San Francisco, which was the old, old Young's bete noire. What do you do -- how are you -- not what you do necessarily, but how do you think about operating that sort of weaker network affiliate in such a large market?

George L. Mahoney

Right. And I don't want to get too far out in front of myself, but I will tell you that Young has done a terrific job taking that station from something that was in a cash flow deficit position and turning it into a cash flow positive. They run 55 hours a week of news, which is remarkable for any station. And they managed to do it and keep themselves as sort of a news leader in that market. And so we're very impressed with what they've managed to accomplish. I think there are lessons there for Media General, maybe even for the industry. So it's a really nice turnaround story in San Francisco, and we've really grown to appreciate that.

Operator

The next question is from Ed Atorino from Benchmark.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Retrans has become a good story for the broadcast business. Could you discuss the retrans opportunities for the combined company going forward?

George L. Mahoney

Sure, Ed. We've done some preliminary work on retrans, and so we put some modest numbers on retrans in the synergy numbers that we've provided. The story is yet to be fully told. As you know, Media General has a lot of retransmission itself coming up, and we'll explore even some more of what we might be able to do on the Young side. So I don't want to get -- I don't want to put too sharp a point on it, but there are retrans synergies there and we want like them a lot.

Operator

Our next question is from Shagun Singh from CRT Capital Group.

Shagun Singh Chadha

I just have a quick one. What was the cash balance at Young as of the closing currently this quarter?

James F. Woodward

I don't really have that information available.

Operator

And we have another question from Ed Atorino.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

I'm looking at the programming of the stations. Is there any sort of automatic saving opportunities from syndication or combining shows or doing stuff like that, particularly in the prime time and news?

George L. Mahoney

Yes, Ed, there are. You know that scale is very important here. And so we are looking forward to working with programming. The Young stations have got a good programming lineup. As you know, we do as well. But we're beginning to explore what the opportunities might be there. So as we get farther into the year -- remember, this is going to close Q3, Q4. As we get farther into the year, we'll be able to put a sharp point maybe on some of that and where we see it going forward.

Operator

And we have another question from Barry Lucas from Gabelli & Company.

Barry L. Lucas - Gabelli & Company, Inc.

Okay, let's see if we can dig down a little bit. It looks like by my numbers, you were -- net debt at Media General at 3/31 was about $535 million and $160 million of debt at Young puts you sort of around $700 million. You're going to up the debt level to around $900 million. So $200 million, $50 million from the pension, call premium on the 11.75% looks like that should be, from the bonds trading around 1 10 today, you're going to have come in with about $30 million there. So that's $80 million. I'm going to guess that the Berkshire premium that you're going to have to pay is a little less than that. But it looks like there's another $100 million of debt there, George. So if you or Jim could maybe -- unless the fees are way off the charts there, what are some of the other dollar amounts that might go into that incremental debt?

George L. Mahoney

I thought that these -- so let me ask Jim to give you what the full valuations are on the debt.

James F. Woodward

The principal amount of Media General debt -- Media General's debt is $601 million, okay? That a principal amount. If you take that -- yes, and that's the bulk of it, I think. And you were describing, Barry, I think that was the balance sheet, that is the -- includes the unamortized OID and those types of things. So that's the bulk of the -- that is the difference, Barry. And the premium on the Berkshire notes is $44 million and the premium -- the first call premium on the bonds is $18 million. And you saw that the number in the press release for the Young debt is $164 million.

Barry L. Lucas - Gabelli & Company, Inc.

Right, okay. And just to go into the pension a bit, $50 million, I guess, at 12/31, you were $160 million -- is $180 million or so on, I believe, on the unfunded liability. Is there any carryover from Young that would increase that? And maybe you can just talk about the pension obligation a bit.

George L. Mahoney

Be happy to. Jim is all over those numbers. Jim?

James F. Woodward

Yes, pension. So Young does have a very small pension plan related to some of the KRON employees. But it is -- I think the underfunded number there is a couple of million dollars. So the bulk of that is Media General's pension plan. So yes, we're going to make that $50 million contribution to the pension plan, provided the financing markets are there, and that goes to helping address the underfunded nature of it. Currently, as you know, that fluctuates. And just to give you a quick example of that, we don't measure this on a quarterly basis, but if we were to measure -- have measured it at the end of March, our unfunded pension liability would have been about $26 million less than it is now because of the investment returns and there was a slight move in the discount rate. I just make that advertisement for those of you that like to think about the pension plan. So yes, the $50 million will put us into the funding status and more -- a better funding status. We're well funded right now, quite frankly. But what it will also do is it will impact the current or short-term and longer-term required pension plan contributions.

Barry L. Lucas - Gabelli & Company, Inc.

Great, that was -- yes, that was actually the next question, Jim, if $50 million in and given the performance this year, how far do you think that would carry you in terms of the mandatory contributions or voluntary contributions over the next couple of years?

James F. Woodward

Yes, we're at a point now where we're making the required minimum contributions. We're not making any voluntary contributions. And if we put $50 million in the plan in -- I think it's safe for an assumption purposes that you would have several years going at, where Media General would have no or some very insignificant contributions to the pension plan.

Barry L. Lucas - Gabelli & Company, Inc.

Okay. And last item on cap spending, you were looking at, what, $15-ish million this year, maybe next year for Media General stand-alone. Looking at my old numbers from Young from way back, they had been as high as $20 million, and I suspect in the financial struggle they were kind of mid-single digit. Combined company, where do you think cap spending is going to wind up?

James F. Woodward

Let me answer the question. The cap spending for the combined company, we expect that to be, at this point, in the $22 million, $23 million to $25 million range. Now there is a reason for that. Because you're right, when Young Broadcasting was going through their struggles, capital spending was something they cut back on. But once they came out of bankruptcy, they pushed their capital spending up and they made significant improvements to those assets to help them go to HD, to just do the upgrades and whatnot that they had not done while they were in bankruptcy. So those assets, based on our due diligence of them, we didn't find a tremendous need for capital spending to make up for the past because the new owners had made that commitment to those stations.

Barry L. Lucas - Gabelli & Company, Inc.

That's great, Jim. So ballpark number within $15 million, $10 million, gets you to the $25 million for the 2 companies?

James F. Woodward

Yes, exactly. Exactly.

Operator

And our next question is from Chris Paciello from PENN Capital.

Christopher Paciello - PENN Capital Management Company, Inc.

Quick question, you reference a slide, what were those pro formas number -- those pro forma numbers again for EBITDA and free cash flow for -- was it 2012?

James F. Woodward

Yes. The -- it's Slide #7 in the deck that was made available to you. The pro forma revenue 2012 was $605 million. The pro forma 2012 adjusted EBITDA was $237 million. And then let me just, say, give you the other one, you didn't ask, but the 2012 pro forma free cash flow was $175 million. That's why you should have that deck. If you don't, it will be on the homepage of...

Christopher Paciello - PENN Capital Management Company, Inc.

Okay. Yes, I'm trying to find it, I still can't find it. But...

George L. Mahoney

Yes, we'll have it up there later today.

Christopher Paciello - PENN Capital Management Company, Inc.

Okay. And is that free cash flow number, is that pro forma with the $50 million of interest?

George L. Mahoney

Yes, that includes the operating and synergies and the financing synergies.

Christopher Paciello - PENN Capital Management Company, Inc.

Okay. And did Young have any -- where do you guys stand on your NOLs? Did Young have any NOLs that you're able to bring over?

James F. Woodward

Yes, Young does have NOLs, as does Media General. And they went through -- I think it's gosh, it would be dangerous here and quote a tax code, I think it's called 382 event, which does limit their NOLs but it doesn't eliminate their NOLs. So yes, we'll be able to bring over their NOLs as well as our NOLs in this transaction.

Christopher Paciello - PENN Capital Management Company, Inc.

And do you have what pro forma that is? What that amount is going to be?

James F. Woodward

No, I don't. That's a study and a pretty complicated analysis. So -- but no, we do not.

Christopher Paciello - PENN Capital Management Company, Inc.

Okay, and where were you guys at, at the end of the quarter?

James F. Woodward

On what?

Christopher Paciello - PENN Capital Management Company, Inc.

On your NOLs?

James F. Woodward

It was about $300 million.

George L. Mahoney

$320 million [indiscernible] of that.

James F. Woodward

Just let me follow up on one thing. The deck, the link to the slide is on the Media General homepage, on our Internet site -- on our website.

George L. Mahoney

Chris, let me just follow-up one thing on the NOLs. We will taxes shielded for full 20 years. So we will -- as we come through this, we will have more NOLs that we can use but it's a very healthy financial position for us.

James F. Woodward

Yes, we will be able to -- there will be some shielding there for earnings.

Christopher Paciello - PENN Capital Management Company, Inc.

Yes. And then, going forward, your balance sheet will be in excellent shape, you'll be generating a ton of free cash. Any thought about initiating a dividend or returning capital to shareholders? And now getting a little bit ahead of ourselves, the transaction hasn't closed, but what's kind of your initial thoughts around that?

George L. Mahoney

And Chris, I think you'd summarized it. We don't want to get too far out in front of ourselves. But you're right, the free cash generated here is very significant over a period of 5 years or so. It would pay down our -- the debt that we've got right now. So it's a big number.

Operator

Our next question is from Aaron Watts from Deutsche Bank.

Aaron Watts - Deutsche Bank AG, Research Division

And I just had 2 questions for you've covered a lot of ground. One follow-up on the tax question. So is it fair for me to assume that over the next several years, as I think about free cash flow, federal cash taxes are not going to be a material part of that?

George L. Mahoney

Jim can take that.

James F. Woodward

A material part of it, I think, it's fair to say that the taxable income that the business generates significant portion, if not -- I don't want to -- I just don't want to get too deep into that. But some of that or a significant portion of that will be shielded from income taxes by the combined NOLs.

Aaron Watts - Deutsche Bank AG, Research Division

Okay, okay. And then secondly, maybe you can just give us some color on where the affiliation agreement stand for the Young stations that you're bringing on board, how far out they go, and maybe if there's reverse retrans already baked into those affiliation agreements.

George L. Mahoney

Jim -- we may have a little bit on that, Aaron. Let me see how far Jim can go on that.

James F. Woodward

Yes, the -- I don't have it in front of me, when those network affiliation agreements expire, although they're not in the near term. As far as the reverse comp, they are paying reverse comp now, so that's not something that will be an additional expense going forward.

Operator

Our next question is from Randy Baron from Pinnacle Associates.

Randy Baron

I have 2 questions. You've talked about the pro forma 2012 number on that Slide 7. Do you also have the pro forma 2011 numbers broken out? I'm curious to get the average there. And then second question is I just -- I haven't been able to find the slides on the website here. So I wonder if you can just elaborate on the duopoly opportunities and how many markets specifically that could be it.

George L. Mahoney

All right. While Jim is looking at the numbers, let me tell you a little bit, so we've got duopoly up -- we've got duopolies that have come in now with the Young transaction in Albany and in Lansing, Michigan. And Media General has 2 stations that it is operating in Augusta, Georgia. So with the footprint that we've got, one of the first things that we'll be looking for going forward is additional duopoly opportunities because of the efficiencies they provide. So we're now in a position to do some of -- to do some searching for those kinds of things, and we shall. Jim, do you want to look at the numbers?

James F. Woodward

And I believe the question is do we have pro forma '11, is that what you were looking for?

Randy Baron

Yes. I mean, your web -- your -- the press release talks about an average '11, '12 for the 2 companies. And so what I'm trying to go at is what's the average pro forma because it seems to me that the $240 million, whatever that number is, is inflated, so -- and given that it's an even year.

James F. Woodward

We're not -- I don't have that detail at this time, and we'll probably be providing more detail as the process moves forward.

Randy Baron

Well, let me ask it in a different way. What multiple of EBITDA and/or BCF did you pay for Young?

James F. Woodward

Well, you can do the math, I think. But if you look at the shares that we're paying over and you look at there's $77 million worth of EBITDA and you look at the synergies that we've got, you can do the math and you'll like the numbers that you come up with.

Randy Baron

Do you expect to release those pro forma numbers for '11 at some point in the future?

George L. Mahoney

Randy, you'll see a lot of numbers come out. Remember that we've got a proxy statement we got to provide here, and it's going to have a ton of numbers in it. And we're beginning to crank those through right now. So you're going to see a lot of detail looking back and looking up.

Operator

[Operator Instructions]

George L. Mahoney

All right. Well, if there's no one out there. Let me say, we very much appreciate your tuning in. We had enjoyed talking about this, this morning, and we're going to continue to enjoy talking about it for a long time. This is a truly transformational event for Media General, and we look at it as a perfect marriage between 2 like-minded broadcasters. It is a huge deleveraging event for Media General and one that gives us a really solid platform to move forward on going forward. And the next step for us is to begin to work on the debt, and Jim and I are going to be on a plane tomorrow to do that very same thing. So we will -- we look forward to talking with you some more about this, and appreciate your attention today. Thank you.

Operator

Thank you, ladies and gentlemen. That does conclude today's call. Thank you for participating. You may now disconnect.

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