Applause For Media General’s Young Merger

After taking flak for moving too slowly in shedding its money-losing newspapers, Media General is drawing praise from analysts for its merger with New Young Broadcasting announced yesterday.

“Strategically for Media General, it’s nothing short of a great deal,” says Barry Lucas, SVP-research at Gabelli & Co. “It’s a home run for them.”

Investors appear to hold a similar view. At the close of trading Thursday, Media General shares were up 33.7% to $9.76.

The deal’s a positive for Media General on multiple fronts, Lucas says: “They get platform, they get scale, lower interest costs, lower interest expense and a meaningful step-up in FCF [free cash flow].”

To execute the merger, Media General is issuing 60.2 million shares to Young’s investors. Upon closing, Young investors will end up with 67.5% of the stock; Media General’s current shareholders, 32.5%.

Noting that there are many moving parts that make valuing the deal challenging, Gabelli’s Lucas estimates the cash flow multiple at 6-7 times on the low end and possibly 10-11 times on the high end.

Based on Young’s $77 million in blended average 2011-12 EBITDA and using those multiples, the Young stations would be valued at somewhere between $462 million and $847 million.

Media General said it expects the deal to close by October. When it does, Media General will own or operate 30 full-power TV stations across 27 markets, reaching 16.5 million or 14% U.S. TV households. Sixteen of the stations are located in the country’s top 75 DMAs.

The new company will be diverse, not only geographically, but also in terms of affiliations. It will have 11 CBS, nine NBC, seven ABC, one Fox, one CW and one My TV. Sixteen of the 30 stations are located in the country’s top 75 DMAs.

The deals boosts Media General from No. 17 to No. 12 on the TVNewsCheck–BIA/Kelsey Top 30 ranking of TV station groups based on 2012 revenue. Young had been No. 24 on the chart.

George Mahoney will remain president and CEO of the combined group. Deborah McDermott, CEO of Young, will head day-to-day operations of the stations.

In an interview with TVNewsCheck, McDermott said she would be moving to Richmond, Va., where Media General maintains it headquarters. She is currently managing Young from its Nashville station, ABC affiliate WKRN.

According to Media General, the merger will provide an immediate boost to free cash flow, yield first-year synergies of $25 million to $30 million and reduce debt leverage from 6.5 times to an estimated 4.3 times by year-end.

On a conference call for analysts following the announcement, Mahoney said that most of the synergies would come equally from savings in operations and reduced financing costs. The estimate also include a “modest” boost in retransmission consent fees, he said.

News of the merger explained why McDermott decided to cancel her appearance at the SNL Kagan TV & Radio Summit in New York yesterday, but it was still a topic on the panel, which featured Nexstar CEO Perry Sook and LIN Media CFO Richard Schmaeling.

Schmaeling welcomed Media General-Young as “a new consolidator” that will be buying stations. “They are going to pursue it with gusto.”

But Sook wasn’t so sure about that. Media General and Young had been “sub-scale” companies. Now that they have merged, he said, “they are going to be a more attractive target to be consolidated.”

If the merger is a home run for Media General, it’s also pretty good news for GAMCO, the parent company of Gabelli & Co. SEC filings show that various GAMCO entities own a total of just under nine million shares of Media General.

One crucial element of the stock merger transaction is that Media General will unwind its dual class stock structure. Currently, the company has Class A and supervoting Class B shares. Those Class B shares historically have given voting control of the company to J. Stewart Bryan III, who holds 85% of them.

J. Stewart Bryan III is the grandson of Media General founder John Stewart Bryan.

“It’s very salutary for long-term shareholder value to see a media company convert from a dual-class stock structure to a single-class structure,” says Michael Alcamo, president of media investment bank M.C. Alcamo & Co.

Like Lucas, Alcamo sees the deal as a good one for Media General and its investors.

“Strategic acquisitions in the middle market are driven by opportunities for news-sharing, growing a regional cluster, or gaining a permitted duopoly,” Alcamo notes.

While the Media General-Young deal doesn’t immediately create duopolies, it does help Media General with clustering in Virginia, where it owns WSLS, the NBC affiliate in Roanoke-Lynchburg (DMA 68) and where it will gain Young’s WRIC, the ABC affiliate in Richmond (DMA 57).

Moreover, the merger means “the new company will have an enhanced ability to participate in ongoing industry consolidation, especially the creation of duopolies,” said George L. Mahoney, president-CEO of Media General, during this morning’s conference call on the deal. (A transcript of the call is available here.)

Alcamo also notes that Albany, N.Y.; Lansing, Mich., and Richmond all are state capitals and thus, “excellent platforms for political advertising sales.”

One lingering question is what happens to KRON, the former NBC affiliate in San Francisco that Young infamously purchased for $823 million in 1999 and then promptly lost the NBC affiliation. That eventually drove the company into bankruptcy.

“If I were in Richmond, I might consider picking up the phone and calling Steve Burke [CEO of NBCU] and say why don’t we see if we can bury the proverbial hatchet,” Lucas said.

On the conference call, Mahoney praised the new Young management for the “turnaround” of KRON. “Young has done a terrific job taking that station from something that was in a cash flow deficit position and turning it into a cash flow positive,” he said. “They run 55 hours a week of news, which is remarkable for any station. And they managed to do it and keep themselves as sort of a news leader in that market.”