Media General (MEG) has been in a holding pattern since releasing the terms of its credit extension and amendment with Bank of America (BAC). Since the amendment announcement, Media General was also able to release its 10K. Media General stock is still about 15% below where it was when Media General management provided an "update" in early March indicating that there could be no assurances of a credit extension only to have Bank of America provide that extension and amendment a week later! As always, Media General management is highly adept at managing investor expectations. In either case, the stock appears to have gravitated to a share price of $5.50 as investors await additional news.
There are a few factors that are currently limiting Media General's movement to the upside. The first is that while Bank of America has provided an extension and amended the existing credit facility, the deal is contingent on JP Morgan (JPM) raising at least $225MM in additional notes which will be used to reduce the existing Bank of America facility by May 25th. Investors are hesitant to drive the value of Media General upwards given management's track record while short sellers are probably equally unwilling to further short the stock given the potential upside of a successful notes issuance.
Another potential obstacle is the specter of the credit agencies attempting to appear relevant. I have covered the actions of both Moody's and S&P in relation to Media General and its equity and bond prices and suffice to say the credit agencies have generally been laggards. Nonetheless, Moody's was quick to remind investors following the announcement of the credit extension that it was still determining how to finalize its overall rating of Media General. While Moody's and S&P ratings are generally worthless for the long-term, they can be causes of volatility in the short-term.
Aside from the waiting period and possibility of credit agencies having their say, what really needs to be done? First, JPM needs to amend the existing bond indenture to allow for additional issuance of debt either above or pari passu with Media General's high yield notes. Once this is done, JPM would also probably arrange a roadshow for management to present to potential debt investors. Right now, I would guess that Bank of America and JPM have AlixPartners and Capstone both helping management in streamlining the overall business and incorporating those improvements into Media General's projections for the roadshow. AlixPartners could be suggesting that obscenely excessive management compensation be significantly reduced as an area to boost cash flow or that Media General's Blackdot or DealTaker businesses are shut down as they generate losses. Once these and other steps are accepted and incorporated into the roadshow presentations, Media General should be able to secure a finalized debt structure and if the terms are attractive, the stock could be poised for a nice move up. While this management team is capable of epic failure, the deadline appears to allow Media General to come in with a new deal by early May, providing a cushion of a few weeks.
What is an attractive deal? I think the stock currently reflects an expectation that Media General can secure new notes for about 11-13% excluding fees whereby total interest expense on annualized basis is about $74MM. For 2012, this would mean total interest expense of about $65-70MM given one quarter was basically at the older deal. In previous posts I have presented Media General mainly on a pro forma basis under the assumption of a full calendar year under a new deal but the reality is that 2012 actual interest expense will be lower than the pro forma projections given most of Q1 was under the old, more favorable Bank of America deal. As Exhibit I illustrates, Media General could generate about $25MM in free cash flow in 2012.
EXHIBIT I: Media General POST JPM 225MM NOTES ISSUANCE
Unlike previous posts which presented figures under the assumption certain transactions were in effect at the start of the year, Exhibit I attempts to get as close as possible as to what the true costs for Media General would be in 2012 and 2013. The following are the assumptions used in Exhibit I:
- JPM amends the high yield indenture to allow for the $225MM notes to be issued pari passu with the existing notes. Given that the bonds are trading at par, the issuance of notes at 11.75% could be possible.
- The Revenue and EBITDA figures for 2012 are based on my original estimates but if AlixPartners and Capstone are worth their fees, I would expect some operational and efficiency changes to occur to boost both the bottom and topline in 2013. In 2011, Media General generated about $616MM in revenue and $89MM in pro forma EBITDA so my estimates in 2013 are not too much greater than what Media General's own management team achieved without the assistance of any recognized turnaround firms.
- Interest expense is based on the deal changing in Q2 2012. In Q1, bank interest expense was roughly $4.5MM under the original deal while high yield interest was about $9MM. New notes under 11.75% and the new Term Loan deal would be in effect for just 3 months so total interest is about $70MM in 2012 before being in full effect for 2013.
- CapEx and Pension are kept consistent for both 2012 and 2013 and the 2012 figures are Media General's own estimates. In 2013, I assume similar figures. The 10K discusses potential pension outlays in future years while the Bank of America term loan allows for about 80% of the maximum pension annual pension contribution. Given how these figures can shift, I have left the contribution amount for the pension the same in 2013.
- Media General has stated that it is not expecting to be a cash tax payer.
- I assume all free cash flow is used to pay down the existing bank debt. Bank of America appears to want to get out of this deal by 2015 and have Media General be financed primarily with high yield and/or Term Loan B and a minimal revolver.
- The Cash Balance segment is the cash reported from Media General's 10K. I estimate fees will total about $18MM in 2012.
The main focus for potential debt investors will be to understand how Media General performs in 2013 given it's an off-political year. In 2011, Media General generated pro forma EBITDA of roughly $89MM. As previously stated, Media General has hired AlixPartners and Capstone to assist in improving its overall business. I would expect that these two firms will be able to find cost savings and implement operational initiatives that can result in key savings in both 2012 and 2013. As it currently stands, Media General should generate about $125MM in EBITDA in 2012 but if AlixPartners and Capstone can work some magic, EBITDA and cash flow could perhaps be a bit higher. The same can be said with 2013. If the consulting firms can find areas to improve upon that management missed, Media General will be in a much better position. Even with my conservative estimates, Media General would come in needing to just slightly draw $4MM off its $45MM revolver.
Assuming those firms can provide assistance to this management team, then Media General should be in a solid position to lock up relatively attractive financing terms. The overhang from the stock would be removed. In addition, in late April investors should receive Media General's Q1 report. The figures from Q1 2012 should benefit from a number of contested Republican primaries in key Media General states - most notably FL - as well as ad dollars from the NBC broadcast Super Bowl. Removing the overhang of financing will allow the attractive fundamentals to resonate with investors.
What's more, once Media General removes the financing overhang, it may be possibly to focus on selling off its newspaper division. I believe management will aggressively pursue a sale given the new debt terms and the types of investors that will hold Media General's paper. As I've stated before, a sale of the newspaper division is really where Media General can experience a major upward valuation revision. Similar to Exhibit I, Exhibit II attempts to get a closer look at how Media General would look if it could sell off its newspaper segment by the end of Q2 2012.
EXHIBIT II: Media General POST NEWSPAPER DIVISION SALE
As with Exhibit I, Exhibit II attempts to present Media General as close to reality as possible in terms of timing of transactions. The assumptions are as follows:
- Same financing assumptions as in Exhibit I whereby Media General announces a sale of its newspaper division for $115MM with the deal set to close at the end of Q2 2012.
- The proceeds are used to pay down Bank of America's $138MM term loan resulting in just $23MM in the Bank of America facility.
- Revenue and EBITDA are based on my estimates for a broadcast and newspaper Media General in H1 2012 followed by a broadcast only Media General (also includes its web based ad division) in H2 2012. In 2013, I assume broadcast revenue would decline by about 11% (consistent with its decline from 2010 to 2011) with EBITDA margins contracting from 35% to 32% on a platform level (consistent with 2011 levels) and assume the DealTaker segment generates about $30MM in revenue and is cash flow neutral. I assume that a combination of the consulting firms and Media General being a smaller company can result in overhead reduced from $26MM to $11MM yielding EBITDA of $87MM.
- Interest expense is based on Q1 being under the original deal, Q2 being under the new deal, and then Q3 and Q4 under a bank facility reduced by the proceeds of the newspaper sale.
- CapEx is $15MM in 2012 under the assumption that H1 capex was $10MM based on a broadcast and newspaper Media General while H2 capex would be half given the sale of the newspaper division. In 2013, I assume CapEx is half of the annual $20MM as a broadcast-only Media General.
- Pension expense is constant as I assume Media General retains the legacy costs associated with the newspaper segment.
Exhibit II is the slam dunk scenario for both equity investors and Bank of America. Bank of America's actions demonstrate that it wants to be out of the Media General credit over time. It scaled down its credit facility and any asset sales are used to further reduce debt. In a scenario where Media General gets the financing squared away and then can sell off its newspaper division for a decent price, equity investors can win big and so does Bank of America. Under Exhibit II, Media General can still generate about $19MM in free cash flow in 2012, greatly reducing its bank debt, and allowing the company to fully retire its bank loan in 2013 despite an off-political year. While the volatility in free cash flow is still fairly high, Media General is still free cash flow positive and enjoys much higher margins.
This scenario is what longs are hoping for while the skeptics are betting on Media General coming up short and as a result, the stock price appears to be in a tight range. It should be apparent in the coming weeks how prospects are looking for both sides of the Media General trade.
Disclosure: Author manages a hedge fund and managed accounts long MEG.