Jeff Smith Pushes for Media General’s Sale to Nexstar Broadcasting and Other Investors Will Most Likely Support Him

If you follow the news from the Street regularly, you’ve heard that on Monday Media General Inc (NYSE:MEG)‘s stock spiked on the back of a bid from Nexstar Broadcasting Group, Inc. (NASDAQ:NXST) (see article). The stock was lagging before that after Media General had announced plans to acquire Meredith Corporation (NYSE:MDP) in a deal that many investors viewed as irrational. One of the investors that decided to take public his views regarding the latest developments surrounding Media General is Jeff Smith of Starboard Value. The activist investor said that he views the acquisition of Meredith as “value destructive” and supports the sale of the company to Nexstar Broadcasting. Other hedge funds from our database will also most likely support Mr. Smith as they amassed over 26% of the company at the end of June.

Starboard Value currently holds 4.5% of Media General Inc (NYSE:MEG)’s outstanding stock, which makes it one of the largest shareholders of the company, according to a letter sent to the company’s Chairman J. Stewart Bryan III, CEO Vincent L. Sadusky and the board of directors. The investor initiated a stake right after Media General announced plans to buy Meredith Corporation, because the deal is subject to shareholder approval and Media General is “significantly undervalued with opportunities to create substantial value for shareholders through a restructuring plan,” the statement added.

“Effectively, Media General agreed to pay a significant premium to acquire a larger company with a less desirable business mix and then hand over management control to the target’s management team. This type of transaction structure is unconventional, at best, and upon closer investigation, appears to be contrary to the best interests of your shareholders,” Starboard added.

The investor added that it was surprised to discover that Media General Inc (NYSE:MEG)’s board has previously refused Nexstar Broadcasting Group, Inc. (NASDAQ:NXST)’s bid, which implied a value of $17 per share, which would have represented a premium of 23%. The current proposal involves a cash payment of $10.50 and 0.0898 Nexstar shares for each Media General share, which represents a value of around $14.50 per share.

“It is concerning to us, and we imagine to just about all of your shareholders as well, that management and the Board of Media General would refuse the opportunity to negotiate a potential value-maximizing transaction with Nexstar and instead proceed to expeditiously execute such an unconventional, value-destructive acquisition,” Starboard said.

In this was, Mr. Smith and Starboard consider that the board should initiate discussions with Nexstar regarding the acquisition, which should involve a “superior proposal,” according to the current merger agreement with Meredith Corporation (NYSE:MDP). Starboard added that it would pursue any possibility in order to push for a deal that would maximize Media General’s value for all shareholders, including the nomination of an alternative slate of directors at the next annual meeting of shareholders.

Mr. Smith has an excellent track record of increasing value of small- and mid-cap companies, such as Darden Restaurants, Inc. (NYSE:DRI), where he managed to replace the entire board of directors, which earlier this year announced plans to spin-off the real estate assets. It’s expected that the majority of shareholders will support Mr. Smith with Media General as well.

When it comes to activist investors, imitating them is even more profitable than following the hedge fund industry on the whole, because these investors engage in creating catalysts that push for an increase of the value, rather than wait for the stock to gain ground on its own. However, at Insider Monkey, we track the hedge fund industry as a whole in order to identify profitable investment opportunities and currently our database contains over 700 some of the best hedge funds in the world. We analyze their quarterly 13F filings in order to determine 15 most popular small-cap ideas among them and this approach has helped us generate returns of over 118% since August 2012, compared to more modest gains of 58% registered by the S&P 500 (see more details here).

With this in mind, let’s take a look at the hedge fund sentiment towards Media General Inc (NYSE:MEG). At the end of June, 24 funds reported ownership of $570.30 million worth of Media General’s stock, representing 26.50% of the company. By comparison, a quarter earlier, 35 funds held $739.14 million worth of the company’s shares, which, amid a flat return of the stock, indicates an outflow of capital between April and June. Morever, the largest stake is held by Mario Gabelli’s GAMCO Investors, which often bets on companies that have a high chance of being acquired, and which disclosed holding 6.44 million shares as of the end of June. Billionaire Warren Buffett’s Berkshire Hathaway also owns some 4.65 million shares of Media General.

On the other hand, Meredith Corporation (NYSE:MDP) did not see any significant changes in the hedge fund sentiment during the second quarter, which might indicate that smart money investors were not betting on any developments that could lead to a large growth of the stock in the medium term. In this way, 15 funds held $353.73 million worth of Meredith stock, equal to around 15% of the company.

Disclosure: none