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Ishan Majumdar
Ishan Majumdar
Articles (156)  | Author's Website |

Tegna: An Interesting Merger Arbitrage Opportunity

The company has been an acquisition target for a number of media players and is trading more than 30% below its expected acquisition value

Tegna Inc. (NYSE:TGNA) came into the limelight earlier this month after receiving its first acquisition bid from Gray Television Inc. (NYSE:GTN), which was followed by a series of bids from other media companies and investment funds owning media assets.

Given the strong consolidation in the TV stations industry in the U.S., the upcoming presidential election toward the end of 2020 and the huge discount on the stock owing to the coronavirus, it will be very interesting to see how Tegna’s bidding war shapes up.

What does Tegna do?

Tegna is a Virginia-based media company that operates television stations and radio stations in order to deliver television programming and digital content. It offers content and information to consumers across various platforms. The company also provides solutions for advertisers through Tegna Marketing Solutions, which helps businesses through a suite of services and solutions that reach consumers in television, email and social platforms, as well as over-the-top platforms. This local advertising network is known as Premion, which places advertisements alongside premium long-form and live streaming content across networks. Tegna has roughly 49 television stations and two radio stations in 41 markets in the U.S.

Tegna and the bidding war

Tegna’s acquisition story began with an ambitious offer from a smaller player by the name of Gray Television, which is about a third of its size. The company proposed $20 per share through a cash-and-stock deal.

Prior to making its buyout offer, Gray Television acquired a minority stake in Tegna's over-the-top advertising platform, Premion, where it acts as a reseller of its services across all its markets. While Tegna would have been a wonderful fit for Gray, the latter was forced to withdraw the bid a few weeks later due to the coronavirus pandemic sending the markets into chaos.

Private equity fund Apollo Global Management Inc. (NYSE:APO) also joined the bidding war for Tegna and sweetened the deal with the same price of $20 per share, but in all cash.

Apollo has its own set of goals in acquiring Tegna as the fund acquired the TV and radio stations of Cox Enterprises Inc. for over $3 billion. Apollo's assets include 13 TV stations from Cox, plus another 20 from Northwest Broadcasting and over 54 radio stations across 10 markets.

The third player to enter the fray was comedian-turned-media-mogul Byron Allen, who also matched Apollo’s bid of $20 per share, or about $8.5 billion in an all-cash deal. Allen Media owns about 15 television stations in 11 markets, most of which were acquired last month from USA TV for $305 million. The company plans to invest $10 billion to acquire ABC, CBS, NBC and Fox television stations over the next three years with the goal of becoming one of the major players in the broadcast television space in the U.S.

The most recent player to join the contest is private investment firm Najafi Companies and Trinity Broadcasting Network, which also matched the $20 all-cash offer of Allen Media and Apollo Global. There are some concerns with respect to the possibility of each of these three companies having to divest their assets for the deal to be approved by antitrust authorities, should Tegna's management accept an offer anytime soon. However, the offers stand and it is likely that the company will be offering itself for the due diligence process.

Market consolidation in TV industry

As per research published by PricewaterhouseCoopers in 2019, about 67% of U.S. households still have traditional pay-TV subscriptions, which implies a strong decline over time, driven largely by online streaming services provided by the likes of Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), Disney (NYSE:DIS), AT&T's HBO (NYSE:T) and others.

The decline in traditional viewership has led to a wave of consolidation as media companies are readying themselves for the viewership war, especially with the upcoming U.S. presidential election. Tegna is not the first media company to partake in this process. In 2019, Nexstar Media Group Inc. (NASDAQ:NXST) acquired Tribune Media Co. for $7.2 billion. Another example is that of Sinclair Broadcast Group, which acquired Disney's 21 regional sports networks for $10.6 billion. The U.S. presidential election is swiftly approaching, which means there is going to be very high political advertising revenues for these companies. This is expected to be an excellent boost for a sector which has seen a drop in revenues due to online streaming and companies are looking to close on deals as soon as possible.

Tegna is financially strong

Tegna is the classic example of a fundamentally strong small-cap that has suffered in the wake of the Covid-19 pandemici. The company has a strong margin profile and solid cash flows, but trades more than 30% below the average bid value, creating a merger arbitrage opportunity.

In its most recent quarterly results, the company reported revenue of $694 million, which was an 8% increase over the prior-year quarter. This was driven by strong growth in subscription revenue and advertising and marketing services, coupled with some acquisition-related revenue. The company carried out acquisitions of approximately $1.5 billion in 2019. It is considered an exceptionally good amount of growth given the highly competitive environment the company operates in. For over two years, Tegna has consistently been producing an earnings beat every single quarter and it did not fail to disappoint this time either, with earnings of 47 cents per share, above the analyst consensus estimate of 44 cents.

Tegna's management has also been very prudent in managing its leverage after undergoing two rounds of refinancing to reduce the overall interest costs. Given the highly profitable and cash-generating nature of the business, it is ideal for the company to use this leverage to its advantage in order to maximize the value for equity shareholders.

Key takeaways

Tegna’s acquisition looks highly probable at this stage given the reasonably valued bid of $20 (which could go higher), as well as pressure from hedge fund owners and the industry-wide consolidation. The current valuation of around 3.1 times enterprise value-to-revenue appears to be discounted given the size of the bids, the strong positive margins and cash flows, promising ad revenue from the upcoming election and, most importantly, the fact that the bid price could actually go higher.

The company’s cash flows ensure a decent dividend distribution as well. Another factor in its favor is the coronavirus outbreak has not had a significant impact on its business operations to date. The company should ideally get acquired at a price between $20 and $22 depending on how the negotiations go, so merger arbitrage players entering at current levels could make an immediate profit from the deal.

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies.

I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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