During the earnings call following today’s announcement of third-quarter results, CEO Marshall Morton fielded questions on the media company’s loan covenants and refinancing options. One bright spot is that its retrans revenues for the quarter were up 9.3% and Morton noted that the company hopes to conclude negotiations with NBC on a proxy agreement for retrans negotiatons early next month.
Media General’s third-quarter struggles (see earlier earnings story) have investors wondering just how close the company is to defaulting on loan covenants.
That, in turn, has them asking what the company could do to avoid such a scenario.
Among the options discussed during today’s third-quarter earnings conference call: Splitting up newspaper and broadcast operations, as Belo did several years ago, or even selling some assets.
“Your stock is at $1.30 … your debt is selling at 75 cents on the dollar,” noted Mario Gabelli, head of the eponymous Gabelli & Co., during the call. “Where are you thinking about in terms of taking good assets and bad assets and dividing them up? I’m trying to figure out how to make money on the stock.”
Marshall Morton, Media General president-CEO, sounding defensive, responded: “We have not looked at breaking the company into pieces.”
Gabelli wasn’t finished: “Have you talked with your auditors about the going-concern clause? Are you negotiating with banks to reduce the covenant coverage?”
Auditors/accountants may raise the question of whether a company can continue as a going concern in their letter to shareholders typically attached to a company’s annual report. An array of issues can trigger a going-concern question, including defaulting on debt covenants.
“We have not talked to them about going concern,” Morton responded briskly. “We’ve made a point in talking this morning that we’re working hard on getting a refi done.”
However, Morton noted during opening remarks, that may prove challenging. “Most agree that credit markets are seized up right now,” Morton said, adding: “We have no intention of violating covenants.”
Early in the question-and-answer portion of the call, Barry Lucas, SVP-research at Gabelli & Co., noted that a couple of recent M&A transactions, including McGraw-Hill’s sale of nine stations to E.W. Scripps and Four Points Media’s sale of seven stations to Sinclair, yielded double-digit (or close) valuations for the sellers.
“How do you take advantage of that?” Lucas asked.
“Every asset we have is for shareholder value,” Morton responded. “If we see someone who values it more than us, we’d have to think about (monetizing) it.”
The company has $665 million in total debt, putting its current debt-to-EBITDA ratio at 6.62 times. Debt covenants limit the ratio to 8 times before the company technically would be in default.
However, covenant ratios begin stepping down at the end of this year: 7.75 times on Dec. 31; 7.25 times at the end of the first quarter 2012; 6.75 times in the second quarter; 6 times in the third quarter and 5.5 times by year-end 2012.
The new covenants came as part of a debt refinancing Media General conducted in early 2010. Other conditions on that refinance include no dividend payments in 2010 and 2011 and using any excess cash flow to pay down a bank term loan of roughly $364 million that’s due in 2013. Overall debt also includes nearly $300 million in 11.75% senior notes due in 2017.
Despite financial challenges from the newspaper segment and the sluggish national economy, analysts and industry observers familiar with Media General consider a covenant default before 2012 unlikely.
Company management acknowledged that newspaper operations will continue to be a drag on financial performance and that this year’s lack of Olympics and minimal political advertising will be headwinds. However, improving auto advertising in the current quarter, plus the likelihood of robust political revenues, Super Bowl and an Olympics boosts in 2012 should help improve Media General’s performance.
In a note published shortly after the earnings call, Wells Fargo analyst Marci Ryvicker noted that Media General’s broadcast division results were in line with other broadcasters’ and that fourth-quarter pacing, excluding political, was up.
A key bright spot for Media General: Retrans revenues for the quarter were up 9.3%. Morton noted that the company hopes to conclude negotiations with NBC on a proxy agreement for retrans negotiatons early next month. The company’s 18-station group includes eight NBC stations. Affiliation agreements with those stations expire at year-end.
“I think what we’re discussing with NBC is tremendously helpful for us and for them,” Morton.
Morton did not discuss terms of the NBC agreement. However, sources have told TVNewsCheck that NBC’s general proposal is that stations would keep the first 25 cents per subscriber, NBC the next 25 cents, with anything over that to be shared under a formula negotiated with station groups.
Media General’s retrans contract with ABC (one station) expires in 2014 and with CBS (eight stations) in 2015.