Musings On The Merger Of The Year (So Far)

The news on Tuesday that Media General had snagged Meredith for $2.4 billion caught me by surprise. I had convinced myself that mergers of such magnitude wouldn’t occur until after the incentive auction next year and everybody figured out what their spectrum was worth.

Now that I have had a couple of days to think about the deal, I offer here a few observations and a little speculation.

The deal creates another behemoth station group. How big depends on your measure. The press release boasts that Meredith Media General, as the new combined company will be called, will be the third largest owner of Big Four affiliates with 88 stations in 54 markets.

By audience reach, it will be the ninth largest commercial group with a footprint covering 30% of TV homes. And, according to the TVNewsCheck/BIA/Kelsey Top 30 based on the latest available spot revenue estimates (2014), it will No. 3.

This is a case of a big fish eating a bigger fish. Media General had $1.3 billion in revenue in 2014, mostly on the strength of broadcasting, while Meredith posted a pro forma $1.7 billion for the year with 55% coming from magazines like Better Home and Gardens and Parents and related digital outlets.

One consequence of the merger is that we are going to see a little more action in the station trading market since Meredith and Media General are going to have to spin off stations in six markets where they have overlapping stations to comply with the FCC ownership limits.

The six: Portland, Ore. (DMA 23), Nashville (29), Hartford (30); Greenville, S.C. (37);  Mobile, Ala. (59) and Springfield, Mass. (115).

It’s hard to speculate on which stations will go and which will stay. In four the markets, the Meredith and Media General are more or less equal in generating spot revenue, according to BIA/Kelsey. But in Hartford, Meredith’s CBS affiliate WFSB dominants all. And in Greenville, Media General’s CBS affiliate WSPA has double the revenue of Meredith’s Fox affiliate WHNS. I would suspect Meredith Media General will want to hang onto WFSB and WSPA.

These are not necessarily going to be straight sales. In a conference call with analysts after the announcement, executives said they would entertain swaps, underscoring their interest in being as big as they can be. Also underscoring that interest were comments that at 30% household penetration, the post-merger company will still have headroom under the FCC’s 39% cap.

Complicating the spin offs or swaps in Hartford and Springfield is that stations in those markets may have great value in the incentive auction. That would have to be factored into any deal.

Enough about numbers and call letters. Let’s talk about people.

The big surprise other than the deal itself is the banishment of Vince Sadusky, Media General’s CEO. Typically, the CEO of the company doing the acquiring emerges as CEO of the company getting acquired. Not in this case. The new CEO will be Meredith CEO Steve Lacy.

Nobody is saying why. Sadusky may be in the dog house. He is the architect of a bold and expensive digital strategy that went beyond station-based websites into the realm of digital marketing services.

Last month, he was called on the company’s weak digital performance by Wells Fargo analyst Marci Ryvicker. She pointed out that the sector “keeps missing” its projections, and Sadusky didn’t have a good explanation. “The digital pace is much more difficult to predict versus television,” he offered.

Or, it just might mean that Steve Lacy insisted that he and CFO Joseph Ceryanec keep their jobs as a condition of the deal.

Sadusky’s being eased out is easier to understand if you remember that Sadusky didn’t cut the deal. The dealmaker is board member and large shareholder Soohyung Kim, who built Media General over the past five years by bringing together the stations of Media General, Young Broadcasting and LIN Media.

So, who is actually going to run the stations at the new company?  Lacy is no broadcaster. He is a publishing guy through and through. He needs somebody who knows about selling time, not space. The candidates are Paul Karpowicz at Meredith and Deb McDermott at Media General. Both are well known and well respected as first-class station operators.

You don’t want to bet against McDermott. She survived the messy Young bankruptcy and, after Kim took over the company, he tapped her as CEO. She remained the top broadcaster when Kim merged Young with Media General and then with LIN Media in rapid order in 2013 and 2014. At Media General, she now holds the title of SVP and COO.

But Lacy may want to keep his own guy, Karpowicz,  in charge of the stations, which will be generating most the revenue and cash flow in the new company.

The grand irony is Media General is back in the publishing business, albeit in the more stable magazine end of it. As a prelude to its broadcasting expansion, it divested its newspapers holdings just before they would have dragged the entire company into the financial abyss.

The parties did not talk about it much, but they hinted that the Meredith magazines might yield some good TV shows. Maybe so, but Meredith’s one big attempt at making the print-to-TV leap, The Better Show, never really took off, although it lasted eight seasons. Meredith confirmed at NATPE last January that the 2014-15 season would be its last.

Like a bunch of other groups, Media General has syndicated programming ambitions. In fact, on Monday, in a partnership with Fox TV Stations, it is launching a celebrity talk show. Hollywood Today Live will air on 12 Fox and 33 Media General stations. Last month, Media General hired Tony Optican as its new head of programming, reporting to McDermott.

Stories in the popular media about TV station deals invariably mention that they were driven by political advertising. Clearly, buyers benefit from heavy political spending in even-numbered years, but it’s been my experience that each even-numbered year is followed by an odd-numbered years. And in those years, station revenues take a tumble.

What’s more, as I look down the list of Meredith stations, I don’t see any in presidential battleground states, unless you are counting Michigan and Nevada. So, Media General is not improving itself much there.

Generally speaking, even with political, spot TV revenue is a slow-growth business. What’s driving the deals is retrans or, I should say, net retrans (retrans minus the network payments). That’s where the upside in the business is right now.

The companies say that some of the $80 million in “synergies” will flow from improvement in net retrans that Meredith Media General’s greater size will bring.

Harry A. Jessell is editor of TVNewsCheck. He can be contacted at 973-701-1067 or [email protected]. You can read earlier columns here.