I was recently quoted in Style Weekly regarding Media General (MEG) where I mentioned that ”Media General’s management team is pathetic and created all of its current problems from poor acquisitions to missed opportunities”…hardly news to those familiar with the company. Since that article, Media General management has affirmed that statement, with news that the company would delay issuing its 10K due to the heavy workload tied to its refinancing process. Investors have had time to slowly digest the news and given Media General management’s track record of failure, unsurprisingly have fled the stock. Media General’s management team can lead to investor anxiety whenever questionable news is released and the recent stock price action reflects that apprehension with Media General – knowing a company has value and positive fundamentals to drive valuation improvement while also being run by buffoons – and trying to figure out if the former can overcome the latter.
I believe that the lenders’ potential involvement in forcing the exploration of a sale of Media General’s newspaper division along with improving credit markets may ultimately result in the company overcoming its “worst in class” management team. I also think the delay in the 10K along with the accompanying 8K covering the ongoing refinancing discussion may have resulted in investor overreaction whereby investors are rushing to the exits while overlooking some potentially good news that can be inferred from the 8K. The 8K states the following (emphasis mine):
The Company continues to negotiate with its lenders to reset certain covenants under its credit agreement, to amend certain other terms of the agreement and with respect to the Company’s proposal to extend for a period of two years the March 2013 current maturity, with any such extension being conditioned on raising a set amount of new secured financing, a significant portion of which would be applied towards the repayment of the term loan under the credit agreement. It is expected that these negotiations will also result in a reduction to the lenders’ revolving credit commitments. As these discussions are ongoing, there can be no assurance that a definitive agreement will be reached between the Company and the lenders with respect to any or all of the modifications referred to above or as to the terms of any definitive agreement that may be reached.
In my prior posts, I initially assumed Media General’s lenders would force the company into the Term Loan B market. This would mean an entirely new deal and more critically, a higher interest rate attached to the typical TLB deal. This was still good news given the improvement in credit markets and the strong performance of Media General’s secured notes. In Q3 2011, credit markets were pricing in a high teens if not more expensive cost of financing for Media General which tightened to potentially 10-11% as credit markets thawed, benefiting the bonds and equity. While Media General’s management team cost investors about $15-20+MM in additional interest expense due to its bumbling in 2011, Media General’s operating model could still support an interest expense at this level, which would potentially total $72MM in annual interest expense under a 10.5% priced Term Loan B deal along with its existing secured bonds.
Since the start of 2012, credit markets have continued to improve and the bolded portion of the 8K suggests that Media General is working with its lending group to extend its existing deal. My inference is based on the notion that Media General is pushing to get a two year extension, which would mean that it would keep the current Term Loan A but price it relative to Media General’s current credit profile along with some changes to its existing covenants. If the lenders were interested in pushing an entirely new deal (TLB) on Media General, I think the option of an extension would have long passed by now and commentary in the 8K would have been covering structuring a new TLB as opposed to covering a two year extension. So this point in the 8K about a two year extension hints to me that Media General and its lenders are still working on how to maintain the TLA but in an adjusted structure.
The 8K also mentions that the extension is contingent on raising new secured financing which suggests to me that Media General’s lenders want to have an additional financing piece that would reduce the overall size of the TLA. Right now Media General has $363MM in TLA and I would guess that its lenders would be comfortable if a portion of that – say $125MM – is issued in a second set of senior notes to downsize the new TLA. This actually could work out very well for Media General as opposed to a new TLB deal and I think investors may be missing the implications of this.
In my prior posts, I guessed that a new $363MM TLB deal that would take out the existing TLA would run about 10.5% in interest expense based on some market comps. Media General’s $300MM bonds cost the company 11.75% resulting in total annual interest expense of $73MM under this new deal scenario. Since that time, credit markets have improved, further bringing interest costs of a future deal down. In addition, S&P recently upgraded Media General’s recovery rating, potentially making a secured deal easier to execute.
Now back to the present situation – investors know that Media General is trying to refinance and is working on a two year extension of its existing TLA deal provided it can raise secured financing to defray the size of the TLA. Credit markets are healthy now meaning execution of this deal should not be very difficult. Using some basic numbers, BAC may try to raise $125MM in senior notes, reducing the TLA size to about $238MM. What this would do is bring Media General’s TLA leverage down, whereby there is a good chance it prices around 5-6% (no LIBOR floor) given its size and potential BB facility rating. Investors can also check on the pricing of Media General’s 2017 senior notes, which are now trading at par and even traded above par (100.5) in recent weeks. This means a new senior notes issuance could price at the same level or 11.75%. When you factor in a reduced size TLA of $238MM priced at 5%, a new $125MM senior notes offering at 11.75% and Media General’s existing 2017 senior notes priced at 11.75%, total interest expense would be about $62MM or about $10MM less than what a decent TLB deal would cost.
This would be very good news for Media General investors as that $10MM in additional interest expense savings would directly benefit Media General’s free cash flow. In addition, once Media General locks a deal like this in place, any proceeds from the sale of its newspaper segment would be used to further reduce the size of its TLA per the asset sale carve out provision in Media General’s bank debt. As I previously discussed, Media General’s entire newspaper division could be valued at $70-$150MM using public comps as well as the very relevant NYT Regional Media Group transaction. Any proceeds from that sale would be used to reduce the TLA debt, which under a $100MM sale would result in total interest expense of just $57MM. This is serviceable even in off-political years for a Broadcast-only Media General. The result would be a company that does not have solvency risk every odd year, which could result in a significant upward shift in Media General’s valuation range.
Media General has a number of very positive tailwinds:
- Improving credit markets resulting in reduced financing costs.
- Healthy M&A markets for regional newspapers as evidenced by the NYT’s Regional Media Group transaction which valued the segment at 0.6x EV/LTM Sales and 4.1x EV/LTM EBITDA. While I have remained very conservative in my valuation estimate of $70-$150MM, using the NYT RMG transaction comp would point to a valuation of $115MM-$$175MM. Investors should note that Media General’s newspaper division is a bit larger than RMG on a revenue basis and until 2011, performed very favorably against RMG. An adept management team could very likely put the newspaper segment back on track.
- Strong political spending in key battleground states, RNC and DNC conventions in the heart of Media General’s operations, 2012 Summer Olympics, improving retransmission revenues.
- Potential to be a broadcast-only play allowing for healthier valuation and higher share price.
While these are all strong positives, Media General is also saddled with a massive negative – “worst in class” management team:
- This is a team that paid peak prices to acquire its NBC television stations in 2006.
- Management also acquired worthless web entities such as Dealtaker despite investor warnings to avoid these businesses. Since then these segments are performance drags despite accounting for just 6% of revenue.
- Management uses shareholder capital to pay a retainer to an advisory firm yet missed a massive refinancing window in early 2011, costing investors potentially $15-20+MM in additional interest expense.
- Management has no accountability, with the management team enjoying egregious compensation at shareholders’ expense.
- Management appears aware of its own incompetence as illustrated by the lack of insider purchases irrespective of Media General’s price and valuation.
The above mentioned positives are very tangible and could yield incredible positives for Media General but the situation is quite fluid, which combined with the company’s management team can leave many investors with heartburn. Management has a track record of repeated failure and the delay in the 10K is a reminder of the ineptitude of this management team. However, healthy credit markets, strong M&A for Media General’s newspaper division, motivated lenders that may be forcing management’s hands in regard to exploring asset sales, and a very bright fundamental outlook for the coming year could trump the efforts of a bumbling, feckless management team.
: Author manages a hedge fund and managed accounts long Media General.