Media General, Inc. (NYSE:MEG) has inked a formal merger agreement with privately owned New Young Broadcasting. While this deal is not particularly large and does not offer an immediate arbitrage premium, it has some interesting characteristics that should encourage investors to take a closer look.
For starters, Media General, Inc. (NYSE:MEG) has been a favorite of Warren Buffett for some time. The renowned investor’s gamble on the rapidly consolidating local broadcast sector appears to have paid off, and Buffett is expected to have a real say in the strategic decision-making of the combined company. In addition, this merger offers plenty of synergies and provides Media General’s shareholders with access to robust new markets. It also offers a straightforward financial calculus that buy-and-hold types will find attractive. Although a formal timetable has not yet been set, the deal should close within the coming quarters.
Media General and the Competition at a Glance
Media General, Inc. (NYSE:MEG) is a small media company that operates a number of broadcast and digital media networks in the southeastern United States. Although it was founded as a print-media concern in the mid-19th century, the company has shed its print assets and now focuses exclusively on multimedia content. Most of its affiliate stations fly the NBC and ABC banners.
While it does compete with a number of public and private broadcast companies, its digital media operations also bring it into conflict with companies like the The Washington Post Company (NYSE:WPO) and the Tribune Company (NASDAQOTH: TRBAA). It is considerably smaller than either of these companies: Its market capitalization of $265 million is a far cry from its competitors’ respective valuations of $3.5 billion and $3.1 billion. Financially, Media General, Inc. (NYSE:MEG) offers a mixed bag. In 2012, it took a narrow loss of a little over $32 million on gross revenues of about $360 million. This compares to a devastating Tribune Company loss of $2.2 billion on revenues of $4.8 billion and a brighter The Washington Post Company (NYSE:WPO) profit of $38 million on about $4 billion in revenues. However, these figures suggest that old-line media companies are struggling across the spectrum.
Media General, Inc. (NYSE:MEG)’s debt load is unusual for a Buffett-favored company. Its $555 million basket of obligations overwhelms its paltry cash hoard of $20 million. The Tribune Company is in similar shape: It has just $260 million in cash to offset debts of $11.8 billion. Thanks to its broad digital network and diversified asset portfolio, the Washington Post has a more stable balance sheet with $458 million in debt and $770 million in cash.
How the Deal Will Work
The terms of the all-stock deal require Media General to create about 60 million new shares for distribution to current Young Broadcasting shareholders. At Media General’s current levels, this distribution would value Young Broadcasting at about $870 million.
After the merger has been finalized, Young shareholders will control just over 67 percent of the new company. Media General’s current shareholders will control the remainder. Although Media General is not taking on a significant amount of debt to finance this deal, it has also telegraphed its intention to mount a refinancing and restructuring offensive after the merger’s completion.
Synergies and Areas of Operation
Media General’s management team is confident that this merger will produce at least $25 million in annual cost savings and synergies. This could be enough to swing the combined company to profitability, and it’s likely to make it far easier for it to restructure its debt load in the coming years. The merger will also substantially increase Media General’s geographic reach. In fact, the addition of Nashville-based Young’s assets will create a company that controls broadcast programming for about 14 percent of all U.S. households. Needless to say, this will enable Media Group to compete with national broadcast networks and cable operators.
Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.B) currently owns a 17 percent stake in Media General. Although it is likely that Berkshire’s stake will soon shrink as a result of merger-related dilution, the company is likely to remain an active shareholder. It should also be noted that Berkshire Hathaway Inc. (NYSE:BRK.B) recently acquired the bulk of Media General’s legacy newspaper holdings at a steep discount. Investors who find print-media assets attractive may wish to investigate these holdings more closely and determine whether they warrant action.
It must also be noted that Media General received a significant loan tranche from Berkshire in the course of the newspaper sale. As such, Buffett’s firm will necessarily be involved in the coming debt restructuring process. This situation bears watching.
Long-Term Outlook and Ways to Play
After news of the merger broke, Media General’s shares soared by nearly 25 percent. Shares of competing broadcasters rose significantly as well. Investors clearly like the idea of this deal, and the fact that Warren Buffett is so deeply involved will only make things more attractive to rank-and-file investors.
However, this merger is not without its risks. Broadcast media is a tricky business that is increasingly vulnerable to digital disruption. While Media Group and Young have taken steps to bolster their digital presences, it remains to be seen whether this will be enough to ensure their long-term success. Investors who believe in this sector should have no problem with a long position in Media Group. At the same time, due diligence and careful hedging mechanisms are essential.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway.
The article Why Should You Invest In This Media Company Like Warren Buffett? originally appeared on Fool.com and is written by Mike Thiessen.
Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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