In my last blog post on Media General (MEG), I discussed how the stock was undervalued on a sum of the parts basis, particularly given recent transactions in the broadcast television space. At the time, there was one significant comparable transaction whereby E.W. Scripps (SSP) paid $212MM to acquire McGraw-Hill’s (MHP) television division. However, Sinclair Broadcasting Group ("SBG”) recently announced another deal in addition to its Four Points acquisition that should lend further support for a much higher valuation for MEG based solely on its broadcast television division.
SBGI provided investors information on its pending $385MM acquisition of Freedom Communications' (“FC”) eight television stations on its Q3 conference call. FC’s television stations include five CBS affiliates, two ABC affiliates, and one CW affiliate. The stations operate in Florida, New York, Michigan, Oregon, Tennessee, and Texas. The key data point is that the $385MM purchase price translates into a sale multiple of 9.0x EV/EBITDA, close to the reported 10.0x EV/EBITDA SSP/MHP deal.
Another crucial point I mentioned in my last blog post was that a high seller valuation multiple could still yield a low purchase price multiple for the buyer. This could be through tax strategies where potential strategic buyers could treat an acquisition of MEG’s broadcast division as an asset purchase for tax purposes. This can allow the acquirer to realize tax deductions that can reduce its effective acquisition price. Simply stated, while the valuation sellers obtain could be 9-10x EBITDA, the buyer could be paying much less when factoring in the tax considerations, which could make striking a deal at these valuation levels more amenable to a prospective buyer.
Another reason a buyer’s purchase price multiple would be lower is due to the considerable synergies available in the broadcast television segment. Broadcasting is highly modular, and SBGI’s existing infrastructure can handle additional television stations with little incremental cost. Consequently, while FC is selling for 9.0x EV/LTM EBITDA, the post acquisition cost savings for SBGI imply a purchase price multiple of 6.6x EV/EBITDA multiple according to Moody’s.
In either case, as a MEG shareholder, all I care about is the multiple a seller can achieve, and SBGI’s acquisition of FC adds further support to a higher valuation for MEG. As a reminder, MEG has 18 broadcast stations, the vast majority being full-powered stations with most ranked #1 or #2 in key geographic areas in the U.S. There is little doubt that MEG’s broadcast division should command a valuation multiple of 10.0x two year EBITDA average based on current multiples. My analysis was conservative, assuming a two year average EBITDA of $88MM for 2011-2012. However, some analysts have projected average EBITDA of $100MM for the broadcast division of MEG. The higher estimate by some analysts is likely due to the unprecedented political spending that should occur in 2012 along with the Summer Olympics (MEG has many NBC affiliates).
Using a 10.0x EV/EBITDA multiple for the $88MM-$100MM EBITDA range leads to a net share price range of $2.60 – $7.83 for the broadcast division alone. For total clarity, this is net of not only the $655MM in net debt MEG carries but also the $165MM in pension debt carried by MEG. Despite the incompetence of MEG management, it appears that the company’s assets still carry significant value, which on an absolute free and clear basis can still support a share price 125% above current prices.
Disclosure: Author manages a hedge fund and managed accounts Long MEG.