Triple Crown Media: A Complicated Spin-Off With Motivated Management

In a somewhat complicated transaction, Triple Crown Media (TCMI) separated from its parent company Gray Television (GTN), last December, and shortly thereafter merged with Bull Run Corporation. The company operates a disparate collection of businesses: newspapers, collegiate marketing, collegiate production services, a management services company and a wireless provider. I really don't do it justice but there is a fairly exhaustive summary here for those interested.

Usually the purpose of a spinoff is to allow the parent or the child company to receive a "purer" valuation (that means higher) due to the simplicity of valuation. In this case, only Gray Television would have received the benefit. Personally, I don't consider this an issue; this company is still less complicated than say General Electric (GE), which still garners a very healthy valuation.

TCMI is interesting from a special situations perspective for a number of reasons:

1) It has a massive debt load for its size. To put it into numbers, at current prices, TCMI has a market cap of $38 million, and long-term debt of $118 million. In total, TCMI, as of March 30, listed $168 Million in assets and $158 million in liabilities. Much of the assets are in the form of goodwill or intangibles. As such, the company has tangible assets of $93 million. So the company is highly leveraged but this is counterbalanced by a very depressed stock price. Obviously not something you want to sink your whole portfolio into but that same reaction is probably keeping many fund managers away.

2) TCMI is small. Again, it has a market cap of $38 million. Most mutual funds cannot gain a meaningful piece of it, I doubt most would even look at it.

3) The whole TCMI situation is somewhat complicated. Long-term financials are not readily available, it was a complicated spinoff and there are several different types of businesses bundled as TCMI.

4) The company has incredible price appreciation potential. In the last quarterly results, the company listed $34 million in revenue ($136 million annualized) and $4.6 million operating income ($18.4 million annualized). To put this into perspective, Gannet Company, a large newspaper publisher and admittedly not a perfect comparison, is doing about $8 billion in revenue per year and has a market cap of $13 billion. To be fair though, Gannet does make a healthy profit.

5) The shares were originally tendered at ~$15 / share last December. Currently the company is sitting around $7.50. Management clearly thinks higher of the company than the market does.

6) Management has considerable interests in stock price appreciation. In a series of SEC filings on April 27, 3 senior executives received rights to large stock option blocks:

Cornwell Steven, Exec. VP Operations, 20000 shares, expire 2016, exercisable at $5.43 / share
Meikle Mark, Exec. V.P. & CFO, 25000 shares, exercisable at $5.43 / share
Tom Stultz, CEO, 100000 shares, expire 2016, exercisable at $5.43 / share

Company Outlook

This is all fairly meaningless, of course, if the company does not survive. There is tremendous risk with the high debt the company carries. There appears to be little synergy between the businesses it manages (that is more speculation on my part than analysis). In spite of this, I think TCMI will survive. My reasons include the following:

1) In spite of its huge debt load, recently merging Bull Run, and just recently spinning off as an independent company, Bull Run made a small profit of $464K in the quarter ended March 31, 2006. If you remove amortization of intangibles (this is a paper expense only), the profit would have been closer to $1 million.

2) I anticipate that the company will be able to cut costs over the next couple years as recently merged companies tend to have at least some overlap.

3) I am repeating myself, but management has a strong interest in the company NOT going under.

Do your own research, and it would be very helpful if I could get some comments on the idea.

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Comments

[James Marsh]

I would be very careful with this management team. Do a bit of research on how Gray merged their newspapers into Bull Run to create TCMI. The only reason Gray's management team contributed the newspaper assets to TCMI (rather than selling them to the highest bidder and benefitting all shareholders) was to allow Bull Run to sufficiently deleverage, allowing Bull Run to refinance and eliminate J. Mack Robinson’s personal guarantee of debt approaching $59.1 million. Truly a scumbag move, imo. The more you scratch around, the more this thing smells. I would have 0 confidence in management to do the right thing.