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What’s Next for Media General?
Posted by: Amit Chokshi (IP Logged)
Date: March 27, 2012 09:44PM
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, MEG was also able to release its 10K. MEG stock is still about 15% below where it was when MEG management provided an “update” in early March indicating that there could be no assurances of a credit extension only to have BAC provide that extension and amendment a week later! As always, MEG 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 MEG’s movement to the upside. The first is that while BAC 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 BAC facility by May 25th. Investors are hesitant to drive the value of MEG 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 MEG 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 MEG. 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 MEG’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 BAC and JPM have AlixPartners and Capstone both helping management in streamlining the overall business and incorporating those improvements into MEG’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 MEG’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, MEG 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 MEG 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 MEG 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 MEG 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 BAC deal. As Exhibit I illustrates, MEG could generate about $25MM in free cash flow in 2012.
EXHIBIT I: MEG 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 MEG would be in 2012 and 2013. The following are the assumptions used in Exhibit I:
Assuming those firms can provide assistance to this management team, then MEG 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 MEG’s Q1 report. The figures from Q1 2012 should benefit from a number of contested Republican primaries in key MEG 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 MEG 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 MEG’s paper. As I’ve stated before, a sale of the newspaper division is really where MEG can experience a major upward valuation revision. Similar to Exhibit I, Exhibit II attempts to get a closer look at how MEG would look if it could sell off its newspaper segment by the end of Q2 2012.
EXHIBIT II: MEG POST NEWSPAPER DIVISION SALE
As with Exhibit I, Exhibit II attempts to present MEG as close to reality as possible in terms of timing of transactions. The assumptions are as follows:
This scenario is what longs are hoping for while the skeptics are betting on MEG 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 MEG trade.
DISCLOSURE: AUTHOR MANAGES A HEDGE FUND AND MANAGED ACCOUNTS LONG MEG.
Stocks Discussed: MEG, BAC,