From late 2010 through June 2011, MEG had a massively wide window that it could have taken advantage of to refinance its $363MM of bank debt due in 2013. Instead, management floundered and showed no sense of urgency. MEG’s $363MM bank debt carries a rate of L+450 which equates to an annual interest cost of ~$17MM, extremely attractive for a company with MEG’s credit profile. This is why if one looks back to the conference calls in those periods, investors were constantly mentioning going to market to refinance that debt and secure something similar to those terms to avoid a potentially troubling credit crunch. Given that MEG management is worst in class, no progress was made on refinancing and the world got caught in the Euro-zone crisis resulting in credit spreads blowing out.
Since October, credit spreads have come in significantly but lenders are still nowhere near where they were in late 2010 and H1 2011. As a result, even under the attractive current credit market, MEG’s new term loan will likely carry an interest rate around 10-11% meaning there will be about $20MM of additional cash interest when the new debt is rolled over. This is what I have discussed in a number of previous posts – highlighting that management has without question cost investors $20MM due to its bumbling. This has not been news to investors however, and the $5 stock price more than reflects the additional expected interest burden. MEG’s management team has also felt it deserves to be rewarded for this “achievement” as highlighted by CEO Marshall Morton’s recent option award.
MEG’s ability to obtain a short-term bridge amendment and no extension left longs somewhat concerned and short sellers thrilled. Further, the 8-K discussing the amendment mentioned Capstone Advisory, which is a well known restructuring shop, adding further ammo for short sellers to suggest MEG would be facing imminent bankruptcy. While Capstone is known for restructuring, it seems the short sellers were getting a bit desperate.
It is not uncommon to involve a firm like Capstone for valuation assistance as well as to strong arm the borrower on the behalf of the lender to rationalize costs as well as consider asset sales. In my previous post I also covered why Bank of America (BAC) would favor only an amendment rather than an extension. BAC’s main goal is to avoid taking a hit on the bank debt. With the Term Loan B (TLB) market on fire, there’s a good possibility that BAC can now roll MEG off its Term Loan A into the TLB market whereby BAC has no credit exposure to MEG going forward. As counter intuitive as it sounds, if credit markets were worse, there would be a higher likelihood in my cynical view that BAC would have taken the “delay and pray” approach and have extended MEG’s loan. But with credit markets much more robust, BAC can squeeze MEG out into TLB and things work out for everyone where BAC secures some arranger/syndication fees, takes no hit on its credit, and walks away with no future credit exposure to MEG.
This is why the idea of bankruptcy does not make sense despite what short sellers may have been hoping for. Going in court would make no sense if the debt is trading in the mid to high $90s because the lenders would now be hit with various ongoing fees and just the overall hassle and time sorting out the various creditor claims. There’s no near-term issue that would really prod lenders to pursue bankruptcy, particularly when MEG’s bank debt is not due until March 2013. As demonstrated by a number of recent deals such as Spanish Broadcasting Systems (“SBSA”) which had a significant amount of debt due in the coming months, lenders are not that excited about taking a company into bankruptcy if they can avoid it.
Another reason MEG would fight aggressively to avoid bankruptcy is because management has a major incentive to avoid bankruptcy. This may seem like an obvious statement but the reality is some management teams inherit bad situations. These management teams might come in too late to save the company so when the company does get into Chapter 11, the lenders and a firm like Capstone would probably be fine keeping management as the firm restructures. MEG’s management team is pathetic and created all of its current problems from poor acquisitions to missed financing opportunities. Due to the voting structure of MEG, this management team has been able to remain in place while others – whether it’s employees, shareholders, or creditors – suffer for management’s failures. It would not be unreasonable that MEG’s creditors, if MEG did restructure, would force CEO Morton and his team out the door. Finding a new team would be another headache BAC would not want to deal with and Morton and his team likely realizes that they are finished if they ever leave MEG.
This chain of events and various incentives have led MEG to take steps that may finally enable the company to achieve a much higher valuation than it currently carries. As those familiar with MEG are aware, prior conference calls yielded numerous questions asking whether MEG was exploring asset sales. MEG management would always provide a response that led MEG investors to believe that there was little enthusiasm on management’s part to pursue a sale. This makes sense as most management teams like to manage large companies and can therefore justify higher compensation. MEG management would also claim a certain synergy existed between its regional papers and television stations. However, everyone involved with MEG knows this team has no credibility and its competence from execution of strategy, acquisitions, and financing are all laughable.
This is probably where Capstone came in during the current refinancing process and quickly demonstrated that a healthy market for all of MEG’s properties – broadcast or print – exists, and that pursuing a sale could help defray MEG’s financing issues. So in spite of MEG management avoiding any sale opportunities in the past, MEG equity holders are getting lucky between healthier financing markets and now what is likely a forced effort by BAC and Capstone to dispose of its Newspaper division. MEG’s bank debt also has a special asset carve out provision which gives it seniority over the bonds so the proceeds of the Newspaper segment would immediately benefit BAC and the rest of the bank group. If MEG can get a decent valuation for its Newspaper segment, MEG’s valuation could improve markedly from current levels.
TABLE I: MEG 2011 SUMMARY FINANCIAL DATA ($MM) (SOURCE: MEG Q4 2011 EARNINGS RELEASE)
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Table I highlights basic information regarding MEG’s various divisions. What is clear is that its Digital division, which MEG’s management team embarked on several years ago, has been a total failure and value destroyer, and the Newspaper division generates margins on a platform basis that detract from MEG’s key Television segment. Nonetheless, the Newspaper segment is cash flow positive on a platform basis and a number of buyers could improve upon what MEG management has achieved. The question is what price does the Newspaper segment command? A September 2011 conference by the Jordan Edminston Group (“JEGI”) illustrates what typical Newspaper multiples have been. As JEGI notes, the lack of transaction data leads to a composite of publicly traded data for valuation support. This data along with current public comps of regional pure play newspaper companies suggest there could be significant value for MEG’s Newspaper division.
EXHIBIT I: MEDIA TRANSACTION MULTIPLES (SOURCE JORDAN EDMISTON GROUP 2011 PRIVATE EQUITY FORUM – SEPTEMBER 22 2011)
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TABLE II: PUBLIC NEWSPAPER COMPARABLES
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Table II demonstrates the difficulty in comparing pure play regional newspaper comps due to varying capital structures and as a result includes both Enterprise Value and Market Capitalization metrics based on sales and EBITDA. Even with the extreme discrepancies between the companies’ capital structures (AHC and DJCO have no debt while LEE and MNI are extremely levered), Table II can still help establish a floor for the value of MEG’s Newspaper division.
LEE and MNI may be the most appropriate comps given their scale and leverage. The Price/Sales multiples they both carry can be instructive for establishing a worst case valuation for MEG and I believe MNI’s P/S multiple of 0.2x is a good lower bound for MEG’s Newspaper division. This would translate into a valuation of $60MM or about 2.0x MEG’s LTM EBITDA. As I have mentioned in prior write ups, I believe this division can be sold for a conservative 2.0x-4.0x+ EBITDA so this is actually consistent with the lower bound of my cautious estimate.
While the public comps establish a very conservative floor, I think there is one very recent transaction that is near ideal for MEG’s Newspaper division to comp to, providing a lot of potentially positive and relevant information regarding the potential value of MEG’s Newspaper division. On January 6, 2012, The New York Times Company (“NYT”) sold its Regional Media Group (“RMG”) which consists of 16 regional newspapers for about $150MM. Exhibit II provides RMG’s segment data for recent fiscal years and compares it to MEG’s Newspaper division.
EXHIBIT II: RMG 2011 FINANCIAL DATA
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As recently as 2010, MEG’s Newspaper division compared very favorably to RMG, with lower operating costs and higher EBITDA margins. In 2011, MEG’s segment took a hard turn downwards with a nearly 9% decline in revenues in the Newspaper segment. However, a competent acquirer could be very willing to pay a similar valuation relative to what RMG was sold for. The sizes of both RMG and MEG’s Newspaper division are comparable and it was not long ago when MEG’s Newspaper division performed better than RMG. Better overall strategy relative to MEG’s management could probably yield a turnaround that has eluded MEG’s management team.
RMG owns properties in Florida, North Carolina, Alabama, as well as California. Halifax Media, with its own operations in Florida and other southern states, was the buyer of RMG and could very well be a suitable buyer for MEG’s Newspaper division. Matching geographies would allow significant cost savings for the combined company, provided there were limited antitrust issues. One favorable sign is that the FCC has been relaxing rules related to newspaper-broadcast overlap so perhaps combining newspapers in similar regions, primarily when a case can be made for poor chance of survival on their own, would allow these deals to breeze by. In either case, RMG and the valuation of public comparables suggest that MEG’s Newspaper division can fetch a pretty attractive price. If a valuation can be realized close to what RMG sold for, then MEG’s aggregate valuation stands to significantly improve.
TABLE III: MEG NEWSPAPER VALUATION SENSITIVITY ANALYSIS
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Table III helps illustrate how an attractive sale for the Newspaper segment can help MEG with the yellow highlighted range as where I think a deal could shake out. If MEG’s Newspaper Platform EBITDA figures are the “real” segment figures, then it is very possible for MEG to sell the division for a valuation similar to RMG. If the company can realize $100+MM for the division, those proceeds would go towards reducing its bank debt, per the carve out provision that the bank debt has over the high yield bonds. This is reflected in the Post Newspaper Transaction Capital Structure segment of Table III where the pro forma (“PF”) bank debt is reduced by the sale proceeds.
Given MEG’s credit rating, state of the credit markets, and cash flow profile, it is very likely that MEG’s refinancing would yield interest rates in the 10-11% range or about $38MM related to the $363MM in existing bank debt. I believe this has been more than priced into shares in the $5 range. The current interest rate yields about $17MM in interest expense on that same piece. By reducing the bank debt by $100MM, MEG’s overall credit profile could improve, resulting in both cheaper rates for MEG to refinance along with a lower aggregate debt burden.
The major benefit is that MEG gets rid of an asset that would be a perpetual drag on its operations. After 2012, MEG would face a challenging 2013 without the aid of a strong political year, the Summer Olympics, and NBC broadcast Superbowl. This is the concern most lenders have as the Broadcast division would have a reduction in revenue. However, if MEG keeps the Newspaper segment it is likely that this segment continues to wither away in 2013, becoming an increasing operational drag.
EXHIBIT III: MEG POST NEWSPAPER SEGMENT SALE ANALYSIS (KINNARAS ESTIMATES)
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EXHIBIT III is a crude presentation as the closing of a sale is not assured and terms of the refinancing would vary based on the sale process but it nonetheless helps illustrate the benefit of selling the Newspaper segment. Exhibit III assumes MEG’s Newspaper division is sold for 4.0x 2011 platform EBITDA generating $113MM which is used to pay down $363MM of existing bank debt. I also take a leap of faith and assume MEG’s credit rating would be improved through divesting its Newspaper segment and paying down debt. With an improved rating, MEG’s reduced size $250MM TLB could be priced at L+700 with a 1% floor or effectively 8%. For 2012, I assume the Television segment increases revenues by 23% over 2011 segment revenues while the Digital (Dealtaker) segment declines by 4%. I assume Digital generates a $1MM EBITDA loss while Television generates 35% platform EBITDA margins. When television ad demand is robust, broadcasters experience significant margin expansion. In 2010, MEG’s Television segment generated platform EBITDA margins of 34%. I also assume that if MEG is able to sell off its Newspaper segment, it’s corporate overhead will be reduced by roughly 50% or $13MM. This could be over or understated, it’s a guess primarily in that I assume a number of corporate functions in Richmond dedicated to the significant size of the Newspaper segment could dissolve.
I also assume capex tracks at $15MM with the Newspaper segment sold. Public pure play broadcasters have capex that runs anywhere from 3-6% of sales and I assume MEG will run capex at roughly 4.5% of sales. Public pure play regional newspapers run capex at
About the author:
Amit Chokshi is the founder and owner of Kinnaras and affiliated companies and is responsible for security analysis, selection, portfolio management, and Firm operations. Prior to founding Kinnaras, he worked as an associate at the Royal Bank of Scotland ("RBS") in the firm's Corporate Advisory Services group, which provided corporate finance and mergers and acquisition ("M&A") services to the firm's clients with a particular emphasis on private equity firms. Amit also worked at Morgan Stanley and received a B.S. in Finance from Bryant University and an MBA from Emory University. In addition to passing the NASD Series 7, 63, and 65 exams, Amit is also a CFA Charterholder and on the Board of the Stamford CFA Society. Amit has appeared on Bloomberg Radio and has also been quoted in various publications regarding Firm-specific holdings.