Jessell | Lougee Is Best Bet In Down-To-Wire Proxy Fight
Over the past 11 days, Tegna has scored some major points in its running proxy battle with hedge fund investor and former Media General honcho Soo Kim, who is demanding seats on the Tegna board for himself and three others so they can exercise some control over the company.
After weighing the claims and counterclaims that Tegna management and Kim have been making via press releases over the past several weeks, three influential proxy advisors — ISS Governance, Glass Lewis and Egan-Jones — came down more or less on Tegna’s side.
ISS recommended that shareholders elect just one member of the Kim team, former Fisher Communications CEO Colleen Brown, while the others told shareholders to reject the entire Kim slate.
According to the advisers, Tegna is far from the strategic and operational disaster that Kim has been portraying it as, although at least two of them agreed that Tegna has some shortcomings.
Concluded Glass Lewis: “Tegna has presented a more convincing case that it has delivered shareholder returns and generated operational performance that is generally in line with or better than that of peers since the company’s transformation into a pure-play company in 2017.”
These endorsements are a big deal. Kim’s Standard General has the biggest single stake in Tegna at 11.8%. But for him to win any seats on the board, he will need the votes of other big Tegna investors, notably Blackrock and Vanguard, which hold 11.7% and 10.9% stakes, respectively.
And according to a proxy expert with whom I consulted, such investors rely heavily on these neutral proxy advisers in determining how to vote.
The votes (gold cards for management; white for the dissidents) are being received and counted as we speak and will be announced this Thursday at Tegna’s virtual shareholders meeting. Given the proxy advisers’ near unanimity, the odds have shifted heavily toward management.
That works for me. It is in the best interest of Tegna’s stations and its employees — and ultimately the shareholders — if Chairman Howard Elias, CEO David Lougee and other current board members win the day.
They should not have to contend with unfriendly directors whose primary goal is, I believe, to see the company merged into another or broken up and sold piecemeal.
Before I go any further, let me say that to wage this contest during this pandemic is inexcusable. To ward off Kim, Tegna is spending by last count between $6.1 million and $10.8 million on outside PR help and other proxy battle mercenaries.
That’s money that could have been used to shore up newsgathering operations at the stations or give hazardous-pay bonuses to producers, reporters and photogs who are exposing themselves to the virus as the Fox stations have done. For just $6 million, Tegna could have given each of its employees a $1,000 pat on the back.
You might ask, could the optics be any worse? Yes, in fact. In early April as death rates were on the rise across the country, Tegna management announced that it would be furloughing employees and cutting the salaries of station managers.
For his part, Lougee would cut his salary by 25%. I wonder if that is on his $950,000 base or his $6 million in total compensation.
I can’t imagine the impact on the morale on Tegna employees who are struggling to do their jobs while keeping themselves and their families healthy.
Management and Kim share the blame for the horrible waste.
I’m no expert on corporate bylaws, but there must have been some way to postpone or suspend the contest until the pandemic crisis has passed. For that matter, there must have been some way to settle this whole affair before any money was spent. Greed and ego have overridden good sense.
ISS blames the failure to settle on Kim, by the way. The board made “two legitimate attempts to settle this contest, both of which stalled over… Kim’s refusal to explore a resolution that did not include giving him a seat.”
The Case For Management
So why am I in management’s camp?
First off, there is nothing seriously wrong with the company, nothing certainly that merits forcing the board to accept board members they neither need nor want.
Through a series of major acquisition starting in 2013 when Lougee was head of the broadcasting division, Tegna has grown into the nation’s third largest TV group, according to BIA. Only Nexstar and Sinclair generate more revenue. It now has 62 stations in 51 markets, including four of the top 10.
In recent acquisitions, Tegna may have paid top dollar. But in doing so, it was making a only slightly riskier bet than other consolidators like Apollo/Cox, Nexstar, Gray and Scripps have in their recent buys. If core advertising does not collapse, and political and retrans grow steadily, Tegna is going to be fine. All these companies will be hurting if the country plunges into a post-pandemic recession.
In their analyses of the company, the proxy advisers’ reports have reassured me that Tegna is financially solid and that its management is at least competent, equal to its peers.
Total shareholder return, the most important metric for those who believe shareholders are the most important part of a broadcasting corporation (I don’t), is either better than Tegna’s peers or worse, depending on what time frame you use, specifically whether you include in your calculation the big boost Tegna shares got when it looked like the company might be sold in early March.
“[W]e believe Tegna shareholders may find solace in seeing that the company’s TSR performance has been better than the broadcast peer median since Tegna became a pure-play company, based on time periods that at least measure performance into the current year,” Glass Lewis said.
Tegna has a weak spot. Kim has charged that Tegna has allowed many of its big-market stations to slide, particularly some of those it bought from Belo. And he may have a point.
At Kim’s request, BIA took a look at the 11 stations in top-50 markets that Tegna bought from Belo in 2013 and found that eight ranked lower in market revenue share in 2018 than they did in 2013.
Tegna’s public response to the criticism was to obfuscate. It said it bought three No. 1 Belo stations in 2013 and had three No. 1 stations in 2018 as if that settled the question. That response is so bad and off point that it tends to confirm the BIA research rather than undermine it.
In a private meeting, ISS said Tegna dismissed the BIA data as “inaccurate” and that its audited, non-public data shows its stations have not lost market share.
I would note that ISS was generally critical of management’s responses for being inadequate or ambiguous. It’s probably why they called for one Kim director to be installed. Shareholders as well as employees deserve straight answers.
I don’t have the resources to calculate the drift of all of Tegna’s stations either up or down, either by market share or ratings. But I did check the English-language news ratings (Nielsen, adults 25-54) of Tegna’s two biggest stations, both former Belo properties. WFAA Dallas has been in the middle of the pack lately with most of its newscasts ranking 2 or 3. KHOU Houston is buried at the bottom of the ratings pile.
My other big problem with Team Kim is that if it were let loose on the board, I fear the company will inevitably turn from a forward-looking company trying to do its best to thrive in the turbulent media world into one that is just looking for a way out.
Employees may not like the pandemic furloughing, but wait to see what happens when the bosses decide it’s time to gussy up the P&L and balance sheet for a sale. The overriding concerns of general managers become cost-cutting and head count.
Last August, Kim took a big position in Tegna, perhaps aware that Apollo, the private equity firm that bought Cox Media, had been sniffing around Tegna earlier in the year. And since that time his stake has grown to 11.8%. Given last Friday’s stock close ($10.61), that works out to nearly $284 million.
I don’t think he wants to sit around, waiting to see if Lougee can figure out how to drive up the stock price over the next few years as Lougee draws $6 million-plus a year and prepares for retirement.
Kim is also frustrated that Tegna seemed to have blown off four different suitors that emerged early in March when the pandemic hadn’t tightened its grip and some kind of deal might have been done.
In addition to Apollo, Gray Television, Hollywood media entrepreneur Byron Allen and private equity firm Najafi (in league with Trinity Broadcasting) made passes at Tegna. All four were said to be offering around $20 a share, a hefty premium over what Kim paid for his shares.
Kim makes no secret of his intentions. “We believe Tegna’s Board could have achieved a fantastic outcome for shareholders had it actively pursued a strategic transaction when third-party interest first emerged in early 2019,” he said in a statement.
In his press releases and discussions with management and the proxy advisers, Kim has, as far as I can determine, not articulated any real vision for operating the company. Glass Lewis said he came to their sit down with no “specific ideas.”
Although Kim has a deep understanding of the business from his successful roll up of Young, LIN and Media General and his sale of the combined companies to Nexstar, he is not a broadcaster. He is a Wall Street guy who buys low and sells high.
Kim makes a big deal out of the fact two of his proposed shareholders — Brown and former Media General exec Deb McDermott — have extensive experience running network-affiliated TV stations like those in Tegna’s portfolio.
But the company already has plenty of expertise at running TV stations. The last thing the board needs is more Dave Lougees. What it needs is young, creative, out-of-the-box thinkers with a visceral understanding of digital media. The average age of the board is 61. All but one of the current board members grew up in an analog TV world of three networks and rabbit ears.
More Station Groups, More Great Ideas
I’ve long believed that to compete in the broader television world dominated by mega-corporations, the station business would have to consolidate. I’ve consistently argued for easing FCC ownership restrictions, and I have seen a lot of consolidation.
But at the same time, it is important to the vitality of the entire industry that at least a dozen strong station groups hang around.
One of the great things about United States is that it comprises 50 semi-autonomous states. Each governs a little differently and tries out different policies, programs and laws. The states watch each other and pick and choose the best of the others.
Industries work the same way. Ways of doing business, cutting costs and generating new revenue arise in one company and spread to all.
I’m not sure where the next great idea in broadcasting will come from. But it’s important that there are a lot of different companies trying to come up with it. If not for Sinclair, I’m sure that the industry would not be as far along on NextGenTV as it is.
If management is left to its own devices, I believe shareholders who are more patient than Kim will eventually be rewarded. I have no doubt that, at the very least, Lougee and his board can keep up with their industry peers, even if that means guiding the company through a recession.
It’s important to know that Tegna has considerable room to grow through acquisition. Right now, it covers 39% of TV homes. FCC rules would allow it to increase that percentage to between 46% and 53%, depending on the mix of UHF and VHF stations it buys. The more UHF stations, the closer it can get to 53%.
There is also the possibility in a second Trump administration that the FCC will allow in-market duopolies between Big 4 network affiliates. That would allow all the groups to create such duopolies and enjoy great new economies.
And who knows? Lougee and the board may decide at some point that selling is the smart thing to do. “Tegna’s board has undergone significant refreshment in recent years and makes convincing arguments that it is neither entrenched nor unwilling to consider an eventual sale,” said ISS.
The company has actually been in play since last August when it acknowledged that it had been approach twice by Apollo. And even if it wins the vote on Thursday, it will remain under pressure to sell.
The current board and management hold few shares, less than half a percent of the total. That’s like painting a target on your back.
The company is getting a breather from the pressure right now because the pandemic has disrupted the financial markets along with everything else. It would be difficult to line up the billions to finance a Tegna takeover.
What I am saying here — and what the proxy advisers are implicitly endorsing — is if it does come to a sale, current management should be allowed to execute it on its terms and schedule.
Go for the gold.