Media General’s Restructuring: An Investor’s Perspective
Brian Hindo Sonal Kapoor Nate McMurry Ryan Orton Sumit Suman
April 26, 2010
As prepared for: Prof. Laura Resnikoff Turnaround Management Columbia Business School
CONTENTS
EXECUTIVE SUMMARY ...... 4 INDUSTRY ...... 6 Overview ...... 6 The media industry: challenging headwinds ...... 6 Local vs. national advertising ...... 8 Newspapers ...... 8 The structure of the newspaper industry ...... 8 Readership trends ...... 9 Advertising trends ...... 11 Changing economics ...... 12 Broadcasting ...... 15 The structure of the broadcasting industry ...... 15 Trends in broadcasting ...... 16 The regulatory environment ...... 17 COMPANY ...... 18 Media General’s History ...... 18 Convergence Strategy ...... 19 Recent Performance ...... 23 Corporate Governance ...... 25 Current Strategy ...... 26 Comparable Companies and Ratios ...... 30 DEBT STRUCTURE ...... 33 Senior Secured Bank Debt – Term Loan and Revolver...... 33 Senior Secured Notes ...... 35 Negative Covenants on the Senior Debt ...... 36 Other Long-Term Obligations ...... 38 VALUATION ...... 39 Revenues ...... 39 Segments ...... 39 Margins ...... 41
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Capital Expenditures ...... 42 Covenants ...... 43 Dividends...... 44 Current Market Valuations ...... 44 EBITDA Multiples ...... 45 Cost of Capital ...... 46 Discounted Cash Flow Model...... 46 Liquidation Valuation ...... 47 Refinancing – the Bank’s Perspective ...... 48 A Sustainable Debt Structure ...... 50 Investment Recommendation ...... 50 APPENDIX ...... 51 Figure 1: Comparables & Ratios ($M) ...... 51 Figure 2: Liquidation Valuation ($000) ...... 53 Figure 3: Communications Industry Spending by Segment ...... 54 Figure 4: Communications Industry Segments Ranked by Five-Year Growth ...... 55 Figure 5: Veronis Suhler Stevenson’s Industry Projections ($M) ...... 56 Figure 6: Media General Valuation Ranges ($000) ...... 58 Figure 7: Enterprise Valuations ($000) ...... 59 Figure 8: Unlevered Free Cash Flow Projections ($000) ...... 60 Figure 9: Credit Spreads ...... 64 Figure 10: Debt Service Schedule ($M) ...... 65 Figure 11: WACC Calculation ...... 66 Figure 12: Cash Flow to Debt holders - Before vs. After Refinancing ($M) ...... 67 Figure 13: Other Relevant Data Sources ...... 68
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EXECUTIVE SUMMARY
Media General Inc. (below, “MEG” or “the company”) provides news, information, and entertainment across multiple media platforms, including newspapers, television, and the Internet. The company’s geographical focus is the U.S. Southeast. The company owns and operates 18 television stations and their associated websites, three medium-sized metro daily newspapers (the Tampa
Tribune, the Richmond Times-Dispatch, and the Winston-Salem Journal) and their websites, 20 community newspapers and their websites, and 200 smaller weekly newspapers or niche publications.
MEG also operates three interactive advertising companies, Blockdot Inc., DealTaker.com, and
NetInformer.
In 2009, MEG’s revenue mix was $357.5 million in publishing (54.4%), $258.97 million in broadcasting (39.4%), and $41.1 in digital media (6.3%).
The company’s profits have been in sharp decline for several years as it deals with the effects of a secular shift in the media industry, exacerbated by the recent economic downturn. A substantial portion of the company’s revenues come from advertising sales, which have declined precipitously owing to lower circulation, the recession, and a shift of classified ads from print to online media. The company has a very high debt burden, resulting from an aggressive acquisition strategy. Cyclical factors have contributed to the deterioration in performance, though we believe the company’s core newspaper businesses, and to some extent its broadcast businesses, are unlikely to rebound strongly with the economy.
Media General’s stock price dropped to $1.80 per share in 2009, as it became increasingly clear that the company had no prospect of paying back more than $700 million of debt due in 2011. MEG completed a refinancing in February 2010, which extended its debt maturities, albeit at much higher interest rates. As a result, the company has a $400 million bank term loan due in 2013 and $300 million in senior secured notes due in 2017. The notes carry a coupon of 11.75% (issued with a 12.26% yield,
4 now trading at 10.46%) – a spread of about 700 basis points over the variable rate term loan at the time of issuance. The spread is remarkable, as the securities have substantially the same claim on assets. The company’s equity value has since increased, to a recent price of $12.70 per share, as fears of near-term insolvency have receded.
Our analysis shows that MEG has only delayed the inevitable. While the operating business is viable as a going concern, we believe the company simply cannot service its current levels of debt and will not be able to repay its bank debt in 2013. In order not to break its debt covenants, we predict that
MEG will have to slash investments in the business far below prudent levels and will still not generate enough cash to pay back the principal.
Per our calculations, the firm’s enterprise value is approximately $700 million – implying a slight negative or positive equity value, depending on the scenario. This indicates that the company does have substantial value as a going concern, should it be able to solve its financing issues.
Based on this analysis, our recommendation is to take a long position in the $300M Senior Notes.
The key points leading to this recommendation are as follows:
The Notes currently yield 10.46%, with a coupon of 11.75% - a very attractive yield, given
historically low current interest rates.
The bank debt will definitely need to be restructured in 2013; at this point, the banks will have
the option of restructuring the debt again or forcing Media General into bankruptcy.
The Notes have the same claim on assets as the bank debt, but have a far higher yield.
Whichever they decide, Note holders will do very well. If there is another restructuring, the Note
holders can enjoy above-market returns on the debt. If the company is forced into bankruptcy,
the Note holders and banks will own the company, and there is enough enterprise value for
them to be paid in full. They would then own a company with much more operational flexibility,
as a result of a more manageable and sustainable debt load.
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INDUSTRY Overview
Media General Inc. is a $640 million revenue company operating in the newspaper, television broadcasting, and Internet space. The company’s geographical focus is the U.S. Southeast and it operates 18 television stations, three medium-sized metro daily newspapers, 20 community newspapers, 200 smaller weekly newspapers, and all their associated websites.
The media industry: challenging headwinds
The following table shows media investment bank Veronis Suhler Stevenson’s (VSS) forecast for spending on the segments in which MEG operates – broadcast, newspapers, and Internet.
Communications Industry Spending by Segment YEAR 2003 2004 2005 2006 2007 2008 2009e 2010e 2011e 2012e 2013e Broadcast Television* Spending ($mlns) $ 42,334 $ 46,833 $ 45,834 $ 49,144 $ 48,777 $ 49,078 $ 44,647 $ 45,878 $ 44,852 $ 47,879 $ 47,597 Growth (%) 10.63% -2.13% 7.22% -0.75% 0.62% -9.03% 2.76% -2.24% 6.75% -0.59% Share (%) 6.30% 6.50% 6.00% 6.00% 5.70% 5.60% 5.10% 5.10% 4.80% 4.80% 4.50% Newspaper Publishing* Spending ($mlns) $ 63,012 $ 65,136 $ 66,370 $ 66,350 $ 62,301 $ 54,163 $ 45,351 $ 40,584 $ 38,095 $ 36,804 $ 36,445 Growth (%) 3.37% 1.89% -0.03% -6.10% -13.06% -16.27% -10.51% -6.13% -3.39% -0.98% Share (%) 9.40% 9.00% 8.70% 8.10% 7.20% 6.10% 5.20% 4.50% 4.10% 3.70% 3.50% Pure Play Consumer Internet & Mobile Services Spending ($mlns) $ 21,766 $ 24,515 $ 28,132 $ 32,317 $ 37,506 $ 42,337 $ 45,738 $ 50,203 $ 55,451 $ 61,592 $ 68,902 Growth (%) 12.63% 14.75% 14.88% 16.06% 12.88% 8.03% 9.76% 10.45% 11.07% 11.87% Share (%) 3.20% 3.40% 3.70% 4.00% 4.30% 4.80% 5.20% 5.60% 5.90% 6.20% 6.50% * includes online advertising associated with traditional business lines (e.g. newspaper website sales) Data: Veronis Suhler Stevenson
In recent years, the amount spent on broadcast television has fluctuated. In a characteristic pattern, spending dips in “odd years” (e.g. 2005, 2007) and grows in “even years,” thanks to special events such as political campaigns and Olympics, which tend to increase advertising spending. Going forward, VSS projects a similar pattern, though the growth trend over time is essentially flat.1
In newspapers, VSS projects a continuation of the sharply negative trend in ad spending. By
2013, the firm estimates, the total ad dollars spent on the newspaper industry (including spending on newspaper websites) will plunge to $36.4 billion, from $63.0 billion 10 years prior.
1 Veronis Suhler Stevenson, Communications Industry Forecast & Report, 2009
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The Consumer Internet category, in which MEG’s interactive advertising companies would be situated, has a much more robust growth trend going forward.
The following table, also produced by VSS, ranks communications industry segments by growth prospects. MEG’s two largest segments – broadcast television and newspaper publishing – lag the overall communications industry in terms of forecasted growth from 2008 to 2013, and indeed are expected to post declines. The consumer internet category, however, is the most attractive growth segment in the communications industry.
Communications Industry Segments Ranked by Five-Year Growth 2003-2008 2008-2013 Economic Sector CAGR Rank CAGR Rank Pure Play Consumer Internet & Mobile Services 14.2% 1 10.2% 1 Branded Entertainment 14.0% 2 9.3% 2 Public Relations & Word-of-mouth Marketing 13.6% 3 9.2% 3 Subscription TV 10.2% 5 6.4% 4 Professional & Business Information Services 10.8% 4 6.0% 5 Educational & Training Media and Services 6.7% 7 5.0% 6 Out-of-home Media 9.0% 6 4.9% 7 Direct Marketing 5.6% 8 4.0% 8 Entertainment Media 2.4% 14 3.7% 9 Communications Industry Overall 5.6% - 3.6% - Consumer Book Publishing 2.5% 13 2.3% 10 Consumer Promotions 2.9% 12 1.9% 11 Business-to-business Media 4.5% 10 -0.3% 12 Broadcast TV 3.0% 11 -0.6% 13 Broadcast & Satellite Radio 0.6% 18 -2.0% 14 Consumer Magazine Publishing 1.1% 16 -2.8% 15 Business-to-business Promotions 1.5% 15 -2.9% 16 Yellow Pages Directories 0.9% 17 -3.5% 17 Outsourced Custom Publishing 5.3% 9 -4.8% 18 Newspaper Publishing -3.0% 19 -7.6% 19
Data: Veronis Suhler Stevenson
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Local vs. national advertising
Media General’s broadcast and newspaper properties generally serve local and regional markets in the Southeast U.S. As such, they rely more on local rather than national advertising. A trend hurting local advertising is the emergence of online paid search – in which advertisers pay Internet search companies such as Google to have ads appear in search results for certain keywords. Such search ads have taken share away from local advertising outlets. VSS expects this trend to continue going forward.
Newspapers
The structure of the newspaper industry
Newspapers have traditionally relied on two main revenue streams – advertising and subscriptions. The rates a newspaper can charge an advertiser depend on the size of its readership
(“rate base”). Some newspapers with a broad, national reach or especially large circulation levels compete for business from national advertisers such as department stores and automakers. Many smaller newspapers rely on their access to a particular local community. These have appealed to advertisers such as local businesses and individuals looking to sell goods through classified ads.
Newspapers are sold to readers via home delivery (subscriptions) or through distribution at newsstands.
Traditionally, newspapers derive 80% of their revenue from advertising and the remaining 20% of revenue from subscriptions.
The emergence of new media channels – especially the Internet – has had a profound impact on the economics of the newspaper business. As consumers change their reading and viewing habits, gathering information from a diverse array of media platforms, including online and mobile, newspaper readership has plunged. There has been a concomitant migration of advertising dollars away from print to digital.
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The secular shift in the media industry has been exacerbated by the cyclical downturn.
Advertising expenditures have historically tracked GDP growth, and thus in recessions ad spending has contracted, too. The net result is that newspapers are getting a smaller slice of a shrinking pie. Making matters worse, newspapers (in particular local newspapers) had relied on sectors such as classified, real estate, and autos for advertising. Florida, a key market for MEG, was particularly hard hit by the real estate bust. Also, the Detroit automakers have been cutting back the number of their dealerships. Both developments have negatively impacted the newspaper industry.
As a result, newspaper companies have been forced to reevaluate their business models. The industry has seen high-profile bankruptcies, including Tribune Co., the publisher of the Chicago Tribune and the Los Angeles Times, in December 2008, and Philadelphia Newspapers LLC, the publisher of the
Philadelphia Inquirer and the Philadelphia Daily News, in February 2009. Both companies had been carrying heavy debt loads as a result of leveraged buyouts, and were not able to restructure obligations amid deteriorating economic conditions.2 3
Some newspapers have gone out of business entirely or shifted publication to the Web only.
This trend particularly has affected newspapers in mid-size metro regions not dissimilar to MEG’s key metro areas of Richmond, Va., and Tampa, Fla. Newspapers that have shuttered since May 2007 include the Tucson Citizen, the Baltimore Examiner, and the Cincinnati Post. Noteworthy examples of Web-only newspapers include Denver’s Rocky Mountain News and the Seattle Post-Intelligencer.4
Readership trends
The chart at left below shows the decline in the number of newspapers in the U.S. – from 1,878 in 1940 to 1,422 in 2008. On the right, the chart shows that overall circulation (the number of
2 http://www.reuters.com/article/idUSTRE63B33X20100412 3 http://www.nytimes.com/2009/02/23/business/media/23philly.html 4 NewspaperDeathWatch.com
9 subscriptions taken) has declined since the 1990s. The drop-off becomes more precipitous starting in
2004. The 2008 total circulation level of 48.6 million is the lowest since 1945.
Total Newspapers in the U.S. Newspaper Circulation (in 000s) 2,000 70,000 1,900 1,878 65,000 1,800 1,700 60,000 1,600 55,000 1,500 1,422 50,000 1,400 48,597 1,300 45,000 1,200 40,000 41,132 1,100
1,000 35,000
2008 1940 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004
1940 1948 1952 1976 1980 1984 1988 1956 1960 1964 1968 1972 1992 1996 2000 2004 2008
Data: Newspaper Association of America
Of course, those statistics do not mean that Americans have become less interested in news – and more to the point, they do not mean that Americans are less interested in getting their news from traditional newspaper companies. The chart below plots the readership of newspaper websites. The number of unique monthly visitors to newspaper websites has increased 81% from January 2004 to
January 2010.
Newspaper Website Unique Viewers 80,000,000 70,000,000 74,966,930 60,000,000 50,000,000 40,000,000 30,000,000 41,445,617 20,000,000 10,000,000 - Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Data: Newspaper Association of America, Nielsen/NetRatings
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The overwhelming majority of the newspaper traffic represented in the chart above represents viewers of free (advertising-supported) websites. Among the top 10 most-visited newspaper websites, only the Wall Street Journal is a paid site5 – though readers may access a limited number of articles at wsj.com free of charge if they visit through Google News or another of the Wall Street Journal’s online partners. Notably, the New York Times, the highest-trafficked newspaper website, has announced that in 2011 it will commence a “metered” pay model . The paper will “offer users free access to an unspecified set number of articles per month and then charge users once they exceed that number.”6
Advertising trends
Newspapers remain the third-largest category of advertising expenditures in the U.S., although the share has been eroding in recent years. In 2008, the secular shift away from print to digital was exacerbated by the cyclical downturn in the economy. As a result, the 16.6% drop in newspaper advertising revenue was the largest yearly drop since such statistics began to be tracked7. The following chart, from an S&P industry report, shows the amounts advertisers spent on newspapers by category – national, retail, classified, and online.
5 http://blog.nielsen.com/nielsenwire/consumer/web-traffic-to-top-10-online-newspapers-grows-16-percent-in- december/ 6 http://techcrunch.com/2010/01/20/new-york-times-metered-model-2011/ 7 S&P industry report
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Classified advertising had long been a steady revenue stream for newspapers. Before the advent of the Web, there were few more convenient ways for sellers to reach a broad, local audience of buyers.
The arrival of free classified sites such as Craigslist.org, however, has hurt newspapers a great deal. Even
2006 levels, before the impact of the housing bust and recession rippled through the economy, classified advertising spend in newspapers ($16.98 billion) was lower than 1998 levels ($17.87 billion).
Online advertising has been a source of revenue growth. Expenditures in that category have nearly tripled in five years, from $1.21 billion in 2003 to $3.11 billion in 2008. Of course, that fast growth comes off a relatively small base, and in 2008 online advertising represented just 8% of the total advertising expenditure in newspapers. The 1.8% decline in online advertising spending likely reflects a cyclical downturn, as industry observers expect that category to experience more robust growth going forward, as opposed to the print advertising business, which is expected to decline over time.
Changing economics
In the past century, the newspaper business enjoyed tremendous economies of scale owing to a large fixed cost structure with low variable costs. Moreover, the massive fixed costs required to set up a credible challenger (i.e. a printing press) provided a significant barrier to entry. Incumbents could keep new entrants at bay by, for example, temporarily lowering prices.
As a 1992 economics research paper describes, “Newspapers are faced with high first issue costs; those costs necessary to produce the first copy of the paper which do not fluctuate with circulation. These costs include creating the content, news gathering, purchasing and editing costs, costs of typesetting, and printing plate preparation. James Rosse, Professor of Economics at Stanford
University, estimates that first copy costs may account for as much as 40% of total costs for a ‘small circulation’ *newspaper+.”8
8 Reimer, Eric. “The Effects of Monopolization on Newspaper Advertising Rates.” American Economist. Vol. 36, 1992.
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By contrast, in the digital world the fixed cost structure disappears. The fixed costs of publishing news on the Web amount basically to a computer and an Internet connection. The idea of “first copy” costs becomes irrelevant; the publisher has a distribution network that can reach millions at a negligible incremental expense. The cost structure in the digital world features significant variable costs – a large problem for a labor- and asset-intensive industry.
Confounding this problem for both newspaper and broadcast companies has been the tradeoff of “analog dollars for digital pennies,” as NBC Universal President and CEO Jeff Zucker put it.9 The rates media companies charge to advertisers for a print newspaper ad or a broadcast television spot are much higher than the rates charged to advertise online. For example, in 2007 the New York Times would have charged $157,122 to run quarter-page advertisements in its Sunday business section over four weekends. To run a comparably sized and timed campaign on the paper’s website, however, the cost would have been approximately $7,500 – less than 5% of the cost.10 Since then, across the industry online rates have increased and print rates have declined somewhat, an industry rule of thumb holds that online rates are 20% of print rates.
The newspaper business has not yet come fully to terms with the industry shifts. On the one hand, companies with established legacy print businesses such as MEG have cut costs and trimmed staff dramatically in light of diminished revenues. Yet traditional news and information gathering remain a labor-intensive endeavor, especially if the organization has aspirations to produce a quality report. At
Media General, for example, compensation represents about 50% of the cost structure, despite significant staff reductions.
On the other hand, some startup, online-only newspapers have emerged with a lean cost structure. Examples include the Minneapolis-based MinnPost.com and VoiceofSanDiego.com. These are not-for-profit organizations, employ a thin reporting and editorial staff and get revenue from online
9 http://newteevee.com/2008/02/27/nbc-jeff-zucker-dishes-on-strike-hulu-itunes-kitchen-sink/ 10 http://publishing2.com/2007/07/17/newspaper-online-vs-print-ad-revenue-the-10-problem/
13 advertising and user and sponsor donations. They also seek to exploit “user-generated content,” contributions submitted free of charge by interested local citizens and readers. The eventual sustainability and scalability of these new enterprises is as yet unclear.11
In terms of competitive advantage, while newspapers will no longer count on large fixed costs to keep new entrants out, the brand equity and visibility of their media properties figure to be salient going forward. Online publishers often charge advertisers based on thousand-reader increments (an industry metric called CPM, or “cost per mille”). For instance, if a website charged a $25 CPM, the advertiser would be billed $25 for every thousand viewers of the ad. Web publishers can charge higher CPMs if they attract more desirable demographics or have large traffic. In reality, it does cost money to acquire readers and advertisers. As such, incumbent media properties have the advantage of an established brand and user base.
The nature of the Internet has changed the relationship between a newspaper and its readers.
Before the Web, a local newspaper was one of the few efficient ways for a citizen to be apprised of developments in diverse fields such as local, state, and national governments; science; the arts; international affairs; and local and national sports. A newspaper’s value proposition included the promise of such comprehensiveness. As a result, a newspaper’s large, well-trained reporting staff served as another hard-to-replicate barrier to entry. Now, however, Web users can browse easily and free of cost from one specialist news site to another. The implication is that a comprehensive news report is no longer essential – and in fact, the large staff needed to compile it can become a cost disadvantage.
Indeed, industry consultant Jeff Jarvis advises newspapers to “cover what you do best *and+ link to the rest.”12
11 http://www.nytimes.com/2008/11/18/business/media/18voice.html 12 http://www.buzzmachine.com/2007/02/22/new-rule-cover-what-you-do-best-link-to-the-rest/
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Broadcasting
The structure of the broadcasting industry
The broadcast television business has been characterized over the past two decades by rapid technological change and industry consolidation, sparked in large part by the Telecommunications Act of
1996, which loosened restrictions on cross-platform media ownership. According to S&P analysts, “We expect these factors to contribute to an increasingly competitive environment that requires innovative strategy and financial flexibility from the broadcast media companies.”13
Broadcast networks compete for viewers, and make money by charging advertisers based on the size of their viewership. As opposed to cable and satellite television providers, broadcast stations do not receive subscription income. The broadcast industry is marked by a rapidly changing technological and regulatory environment. There are a number of large players in the industry. The total English- language broadcast TV advertising market was $25 billion as of October 2009. The local TV spot advertising market was $17 billion, of which the top 10 TV station operators account for more than 70%.
MEG’s television properties, in terms of audience coverage, do not rank in the top 15.
TV stations that are network affiliates receive programming produced and/or purchased by the network. Affiliate agreements are arranged by contract, typically negotiated anywhere from every two to 10 years. Affiliates of the best-rated networks generally command higher advertising rates. Stations compete with others in the local market, as well as other local media channels such as newspapers, radio, outdoor media (billboards, e.g.), and Internet. The station typically has a sales force that sells the ad inventory, but can also sell some inventory through national firms, from whom the local station receives a commission. Ad rates in the television business are measured in CPMs – thus, the higher the rating, the more revenue volume the station can make.
13 Amobi, Tuna, et al. Standard and Poor’s Industry Surveys: Broadcasting, Cable & Satellite. Feb. 18, 2010.
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Political campaigns have a large impact on revenues of local television stations. Those stations located in areas with hotly-contested races (for example, Florida) can see bigger jumps. As an illustration, according to the Television Bureau of Advertising, political spending on TV spot advertising in the first three quarters of 2008 totaled $290.5 million, but fell to $51.1 million in the same period for
2009.
Trends in broadcasting
Broadcast television revenues are forecast to remain essentially flat through 2013, according to
VSS. Broadcast benefits from the perception that it is the best way to reach a mass audience in a particular market. The four major networks – CBS, NBC, ABC, and Fox – all reach more than 70% of a market’s audience in a given week, according to Nielsen. For the most popular cable networks, such as
ESPN or TNT, the audience reach hovers around 35%. Also, according to VSS, the success of Hulu, a network partnership that streams broadcast content over the Internet, shows that online CPMs for video content may accelerate more rapidly than other forms of online media.
Still, VSS forecasts that, over time, brands will continue to shift ad dollars to cable television, because of steadily increasing ratings and the ability to target specific demographic niches. By 2013, according to VSS, total ad spending on pay television will be nearly equal to total spending on broadcast television. This trend is shown in the chart below.
Ad Dollars Spent: Broadcast vs. Pay TV $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 2003 2004 2005 2006 2007 2008 2009e2010e2011e 2012e 2013e
Broadcast Television ($mlns) Subscription Television ($mlns)
Data: Veronis Suhler Stevenson
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The regulatory environment
The broadcast industry is regulated by the FCC, which licenses spectrum on which the stations send their signals. The past 15 years have seen substantial changes in the industry regulatory regime. In
1996, the Telecommunications Act eased restrictions on national television broadcast and radio ownership. The FCC now holds quadrennial reviews on media ownership regulation; the next review is slated for 2010.
The following table, from Standard and Poor’s, summarizes the old and new restrictions on media ownership across platforms:
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COMPANY Media General’s History
The company traces its roots back to antebellum Richmond, Va., where James A. Cowardin started the Richmond Dispatch newspaper in 1850. The modern Media General, whose premier property is the Richmond Times-Dispatch, is the result of a series of mergers and acquisitions dating to the 19th century. After the Civil War, as Richmond’s economy rebounded, a number of competitors to the Dispatch entered the market, including the Daily Times in 1886. By 1908, Joseph Bryan, the Times’ owner, controlled multiple newspapers in Richmond, the largest of which was the newly-combined
Richmond Times-Dispatch. Bryan also controlled The News Leader, Richmond’s evening newspaper.
Bryan’s son, John Stewart Bryan, with a partner purchased the Tampa Tribune in 1927.
In 1940, the Bryan family created Richmond Newspapers Inc., which consolidated their holdings.
The Bryans owned 54% of the company. The same year, the company founded its first radio station. In
1966, the company first offered shares to the public. In 1969, as the company’s scope and geography expanded, the company reorganized as Media General Inc., with Richmond Newspapers as a wholly- owned subsidiary. Over the next few decades, the company was an active acquirer of media properties – newspaper, radio, and television – as well as interests in printing, paper, and pulp companies.
Joseph Bryan’s great grandson, J. Stewart Bryan III, became chairman and CEO of Media General in 1990. In 1992, the Times-Dispatch and the News Leader were merged into a single, morning-edition newspaper. The ‘90s saw debt-fueled acquisitions of various community newspapers and local television stations throughout the Southeast, and divestitures of properties located in other geographies. The largest chunk came in 1997, when the company consummated a $700 million merger with Park
Communications.
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Convergence Strategy
In the past decade, MEG’s strategy focused on “convergence,” or aligning newsroom operations with television and Internet assets in the same local markets. In 2003, that strategy was given a tailwind by the FCC’s decision to relax media ownership regulations that limited the number and types of media properties one company could own in a single market. As a result, the company increased its debt- financed acquisition strategy, purchasing more television and newspaper assets in the Southeast as well as some Internet properties. Additionally, J. Stewart Bryan stepped down as CEO in 2005, staying on as chairman while longtime MEG executive Marshall N. Morton assumed the CEO and President roles.
The company expanded its traditional media assets as well as new media. In 2000, the company spent $600 million to acquire 13 television stations in the Southeast, and later in the year purchased local papers in Alabama, South Carolina, and Florida for $237 million. In 2006, MEG paid $600 million in cash to buy four NBC affiliate stations. In 2005, the company acquired Blockdot Inc, which uses interactive gaming to deliver advertising. And in 2008, MEG purchased DealTaker.com, an online social shopping site, and Web portal Richmond.com.
The following graphic, from the company’s 2004 annual report, illustrates the company’s local convergence strategy in action. The company focused its acquisitions on building dominant positions in local markets across the Southeast across media platforms. As the company explained in the report,
“Convergence delivers stronger local journalism by sharing news gathering and reporting resources. By becoming the preferred local provider of news and information, and increasing audience share, convergence drives revenue growth.”14
14 Media General 2004 Annual Report
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MEG’s “Convergence” Footprint in 2004
The acquisition strategy did drive revenue gains, as MEG grew overall sales from $600 million in
1993 to a peak of $931 million in 2006. The company was disposing assets over the period, as well. As a result, the composition of the company’s portfolio of assets had shifted, with an increased geographical focus on Southeast markets, a larger proportion of broadcast assets, the addition of new media properties, and the loss of a newsprint business.
In 1997, the business portfolio consisted of: 21 daily newspapers in the Southeast, as well as 100 weekly and other periodicals; a 40% interest in Denver Newspapers Inc., publisher of the Denver Post;
14 broadcast stations; small cable television businesses; and a recycled newsprint production business.
In 2009, Media General owned 23 metro and community newspapers, mainly in the Southeast, as well as 200 weekly or niche publications, 18 broadcast stations and three interactive advertising services companies.
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The active acquisition strategy had a much more profound impact on the bottom line than on the top line. The next two charts show MEG’s revenue totals and revenue growth rates and EBITDA totals and EBITDA growth rates, both plotted against GDP growth.
MEG: Revenue Growth $1,000 30.00% $900 25.00% $800 $700 20.00% $600 $500 15.00% $400 10.00% $300 $200 5.00% $100 $0 0.00% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Revenue ($mlns) Revenue Growth (5-yr CAGR) GDP growth
MEG: EBITDA Growth $250 30.00%
25.00% $200
20.00% $150 15.00% $100 10.00%
$50 5.00%
$0 0.00% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
EBITDA ($mlns) EBITDA Growth (5-yr CAGR) GDP growth
Data: Capital IQ, Bureau of Economic Analysis
The first chart shows that the company’s revenue growth tracks GDP growth very closely over the entire period. The second chart shows that the company was realizing significant growth in EBIDTA in the 1990s, but that EBIDTA growth turns negative in the 2000s. To summarize, over this period MEG pursued an active mergers and acquisitions strategy, which was a significant use of funds and left the
21 company with a large debt load. The strategy provided no extra boost to the top line, and did provide
EBIDTA gains earlier in the period but did not help EBITDA later in the period.
Through the ’90s and early ’00s, the market appeared to ratify MEG’s strategy. The chart below plots MEG’s debt/EBITDA level against its share price. Even as the debt/EBITDA crept up steadily throughout the 1990s to levels above 4.0x, the company’s share price soared. Yet the company’s acquisition spree caught up with it in the 2000s, as the media landscape began to shift dramatically. The company saw significant share price declines from 2005 through 2009, reflecting lower realized and expected earnings. As EBITDA plunged, the company’s debt burden grew larger on a relative basis.
MEG: Debt/EBIDTA vs. Share Price 7.00x 70 6.32x 6.00x 60
5.00x 50
4.00x 40
Debt/EBITDA 3.00x 30 Share Price 2.00x 20
1.00x $8.31 10
0.00x 0
Data: Capital IQ
Over this period, the Southeast – and particularly Florida – was one of the fastest-growing regions in the U.S. But the geographical focus left MEG exposed to the effects of the housing bust.
According to industry journal Editor and Publisher, MEG’s “ambitious expansion plans into television and
22 consumer online sites, all to be integrated seamlessly with its Southern newspaper properties, left it with massive debt, just as Florida housing collapsed and the advertising market contracted.” 15
Recent Performance
Over the past three years, MEG has seen significant deterioration in sales and income. The main factors include: 1) the secular shift in the media business, as advertisers and readers move away from traditional media in favor of digital media; 2) the housing-led recession, which was felt earlier in the company’s key market of Florida and 3) impairment charges related to goodwill write downs in 2008
($912 million) and 2009 ($84 million).
Revenues declined 11% in 2008, from $896.3 million to $797.4 million, and another 17.5% in
2009, to $657.6 million. Declines in the newspaper publishing business – the company’s largest segment
– contributed most to the overall decline. Publishing revenue fell 16.75% in 2008 and 18.2% in 2009, to a level of $357.5 million. The company’s broadcasting segment did not fare as poorly. Broadcasting revenues declined 4.3% in 2008 and 19.6% in 2009, to $258.97 million. The company’s digital media was a bright spot. Digital media revenues increased 9.6% in 2008 and 7.2% in 2009, to $41.1 million.
The company responded to the revenue declines with aggressive cost reductions. Total employee compensation costs, production costs, and SG&A costs fell 6.9% in 2008 and another 20% in
2009.
Reflecting the declining market value of broadcasting and publishing assets, the company has recently recorded substantial impairment charges. In 2009, the $84 million charge related primarily to goodwill, FCC licenses, and network affiliation. In 2008, the $912 million charge related to goodwill associated with publishing operations ($512 million), FCC licenses ($289 million), network affiliation
15 Fitzgerald, Mark. Editor and Publisher. 18 Feb. 2009.
23 agreements ($103 million), trade names and other intangible assets ($2.2 million) and real estate ($5.7 million).
MEG owns three Internet businesses. In 2005, the company acquired Blockdot, a business that uses online gaming to deliver advertising messaging on the Web. The company acquired two other
Internet companies in 2008: Dealtaker.com, an online social shopping portal, and NetInformer, a mobile advertising and marketing services provider. In 2009, these businesses generated $27 million in revenue and $5 million in operating profit. Dealtaker.com, which makes commission fees by driving traffic and sales at online retailers, generated revenue of $9.4 million in 2009, up 65% from $5.7 million in 2008, reflecting an increase in site traffic. MEG did not disclose revenue data for Blockdot or NetInformer, although the company said Blockdot sales fell $2.4 million in 2009 due to “the sluggish economy.”16
The following table summarizes the company’s operating results over the past three years.
MEG: OPERATING RESULTS 2009 2008 2007 Revenues: Publishing $ 357,502 $ 436,870 $ 524,775 Broadcasting 258,967 322,106 336,479 Digital media and other revenues 41,143 38,399 35,039 Total Revenues 657,612 797,375 896,293 Operating costs: Employee compensation 300,439 380,434 399,157 Production 154,785 193,034 211,426 Selling, general and administrative 94,031 111,549 124,884 Depreciation and amortization 59,178 71,464 72,998 Goodwill and other asset impairment 84,220 908,701 - Gain on insurance recovery (1,915) (3,250) (17,604) Total operating costs 690,738 1,661,932 790,861 Operating income (loss) (33,126) (864,557) 105,432
16 Media General 10-K 2009
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Corporate Governance
The company has a dual class share structure. Class A shares are traded in on the NYSE (ticker
“MEG”). Class A shares have limited voting rights. Class B shares have full voting rights and are not traded publicly. J. Stewart Bryan III, the company’s chairman, controls 85% of the Class B shares, and
Lisa Bryan Brockenbrough controls 10%.
Because the Bryan family holds most of the voting shares, investors have had little success impacting the company’s strategic decisions. For instance, Mario Gabelli, who remains a significant shareholder, criticized the rapid expansion in the late ’90s.17 And in 2008, the company engaged in a proxy battle with hedge fund Harbinger Capital. Harbinger believed MEG overpaid for acquisitions, especially the 2006 NBC deal, and considered the Internet companies a distraction to the company’s core print and broadcast businesses. The fund was able to nominate and seat three board directors in
April, but they were unable to effect any changes in strategy. In June, just two months later, MEG expanded the board of directors, reinstating the former board members who had been replaced in the proxy vote. By December, Harbinger sold off most of its shares, and the Harbinger-nominated directors left the board after their one-year term expired.
The Bryan family’s monopoly over the Class B shares has been a bone of contention between the firm and its shareholders over the years. In 1988, Hollywood producer Burt Sugarman had bid $70 a share for a takeover bid, against the trading price of $47. His bid was rejected by the Bryan Family, the controlling shareholders. Class A shareholders filed a class action lawsuit challenging the company's dual classes of stock. In the suit, the Class A holders claimed that last year the company had solicited proxies to amend the corporate charter to enable the Bryans to convert their Class B shares, which aren't publicly traded. As a result, the Bryans can convert and sell all but a single class B share and still retain
17 Ludwig, Catherine. “What Do Media General’s Financial Woes Mean for the Daily Progress?” C-Ville. July 7, 2009.
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70% voting control. The suit was dismissed18. Under terms of a family trust established in 1987, the
Bryans apparently absolved themselves of any fiduciary responsibility to consider a takeover offer.19
Current Strategy
Despite the massive business model upheaval, MEG has acted to cut costs and shore up its balance sheet. Its main tactics have included:
asset sales;
cutting the dividend;
employee reductions;
cap-ex reductions;
increased innovation efforts;
debt restructuring (discussed in “Debt Structure” section).
The company recently began a series of asset sales intended to raise money for debt repayment.
In 2008, MEG sold its ownership stake in SP Newsprint Company to White Birch Paper Company.
Additionally, the company sold four of its television stations that were classified as “held for sale” WTVQ in Lexington, Ky., WMBB in Panama City, Fla., KALB/NALB in Alexandria, La., and WNEG in Toccoa, Ga.
According to the company, the asset sales allowed for debt reductions totaling $165 million. In 2009, the company sold held-for-sale station WCWJ in Jacksonville, Fla., and a small local business magazine.
According to the company, the sales allowed for debt reduction totaling $18 million.
In January 2009, the company announced it would suspend its dividend. The cited reason: a need to conserve cash to make debt payments. The move underscored the urgent cash needs of the
18 Roberts, Johnnie L. “Media General Inc. Holders Sue to Test Dual Stock Classes.” Wall Street Journal. March 21, 1988. 19 Roberts, Johnnie L. “Aristocratic Bryans Likely to Stand Fast.” Wall Street Journal. March 2, 1988.
26 business, as the Bryan family controls 95% of the Class B voting shares and the board remains filled with allies.
As revenues declined, MEG began a series of significant workforce reductions. From an apex of
7,500 employees in 2003, the company employed 4,700 as of December 2009, a 37.3% decline. Benefits and compensation for remaining workers declined, too. In January 2009, the company announced it would suspend its 401(k) matching program. And in February 2009, the company put into place a furlough program. Employees were required to take 10 days off – four days in the first quarter and three days in each of the next two quarters. The dividend suspension and the labor actions provided an additional $28 million for debt reduction in 2009, according to the company’s estimates.20
The staff reductions are not uncommon in the newspaper industry, given its challenges. But many analysts and industry observers worry that the size and speed of the layoffs will hamper the company’s media properties’ ability to produce quality journalism. According to S&P equity analysts, “In our view, workforce reductions are likely to bring a decline in the breadth of reporting coverage at various newspapers and magazines.”21 That becomes a more significant factor as the industry looks to subscription-based revenue streams, which rely on the user to attach value to the news report – unlike the traditional, ad-supported models, in which the advertiser attaches value to the readership of the newspaper or viewer of the television program.
Another lever MEG has pulled is a drastic reduction in capital spending. The company spent $78 million on cap-ex in 2007. That total was trimmed by 59% in 2008, to $32 million, and another 44% in
2009, to $18 million. To get a sense of the extent of the cap-ex “diet,” the 2007 level represented 8.7% of sales. The 2008 cap-ex outlay was 4% of sales. And the 2009 cap-ex outlay was just 2.74% of sales. As part of the company’s debt restructuring (more below), limits were placed on capital spending. Yet the
20 Media General 8K, dated Feb. 18, 2009 21 Agnese, Joseph, et al. Standard and Poor’s Industry Surveys: Publishing & Advertising. Oct. 22, 2009.
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2008 and 2009 levels appear to be an unsustainably low level, given the company’s need to drive innovation and find new revenue streams.
Employees Capital
8,000 6,900 Spending 5,600 6,000 4,700 ($mls) 4,000 100 78
50 32 2,000 18 0 0 2007 2008 2009 2007 2008 2009
In terms of the top line, the company has been making tactical decisions, as well. Scott Anthony, president of Innosight LLC, a growth strategy consultancy, was added to the board in 2009. According to
MEG, “In 2005-2006, he spearheaded a major project with the American Press Institute to help the newspaper industry address the challenges of transformation spurred by technology and changing customer preferences. He helped create the Newspaper Next process for researching and testing viable new business models.”22
The company reorganized its reporting structure, as well. Previously, MEG operated with three divisions based on platforms – newspapers, broadcast, and Internet. MEG now operates with five geographical reporting units. In descending order of revenue, they are: 1) Virginia/Tennessee, 2) Florida,
3) Mid-South, 4) North Carolina, and 5) Ohio/Rhode Island.23 Additionally, the company formed a sixth segment to house its digital advertising properties. The company believes this change in organizational structure will facilitate cross-platform and multimedia initiatives in both editorial production and
22 Media General 8K, dated March 13, 2009 23 At first glance, there seems to be little strategic rationale for pairing non-contiguous Ohio and Rhode Island – states outside of Media General’s geographic focus. The division operates one television station each in Columbus, Ohio, and Providence, R.I., allowing MEG to retain exposure to large, capital-city markets with high potential for political advertising revenue.
28 advertising sales. As media evolves and consumers adopt new technologies, MEG argues that this structure will allow the company to be more nimble in response. The company is focused on developing mobile versions of its websites.
Amid its investments in technology, MEG remains committed to traditional media. As the company writes in its 2009 Annual Report, “Even as the world becomes more and more digital, there is still a strong and stable customer base for traditional printed newspapers and broadcast television programs.” The company’s mission is to be “the leading provider of high-quality news, information and entertainment in the Southeast.”24
The company sees growth on its Internet properties and from digital partnerships in its traditional media businesses. For example, MEG has strategic partnerships with Yahoo! and Zillow.
Yahoo places local job listings from its HotJobs subsidiary on the websites of MEG newspapers and television stations. MEG works with Zillow, a real estate listing website, in a similar way. The company also uses Yahoo’s behavioral advertising services, which serves Internet advertising on MEG websites to different users based on their demographics and Internet activity. Advertisers pay higher rates to place such behaviorally targeted ads. Finally, Yahoo uses local content generated by MEG’s newspapers and television stations. This arrangement referred 13 million additional users to MEG websites, which helps increase its online CPMs. The company reported an incremental revenue gain of $7 million in 2009 from its Yahoo agreement. The company believes such partnerships provide a way to scale digital revenue.
Going forward, MEG plans to build on its position of strength in local markets across the
Southeast. The company is constrained in terms of mergers and acquisitions and capital expenditures by debt covenants (please refer to the “Debt Structure” section for details). MEG believes that the significant cost reductions achieved in the past three years, together with higher expected revenues at its broadcasting and digital properties will enable it to service its new capital structure.
24 Media General 2009 Annual Report
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Comparable Companies and Ratios
The largest part of MEG’s revenue comes from the newspaper business, but the company has significant broadcast and digital media revenues. We chose a set of comparable firms that operate both in the print space – AH Belo (AHC) and Lee Enterprises (LEE) – and also in more diversified media businesses – Washington Post (WPO), Gannett (GCI), McClatchy (MNI), and New York Times (NYT).
MEG Industry Average Stats Print Comps Diversified Comps Others
Industry Industry
MEG (Publishing) (Broadcasting) AHC LEE WPO GCI MNI NYT Market Cap: 241.64M 282.40M 406.87M 172.40M 195.20M 4.96B 4.28B 546.38M 1.80B Employees: 4,700 5400 2400 2,300 5,400 21,500 35,000 8,590 7,665 Qtrly Rev Growth (yoy): -14.10% 0.00% 0.40% -15.30% -13.80% 6.40% -14.40% -16.50% -10.70% Revenue (ttm): ($M) 657.61 808.31 339.47 518.35 808.31 4570.00 5610 1470.00 2440.00 Revenue/ $ $ $ $ $ $ $ Employee 139,917 $ 149,687 $ 141,446 225,370 149,687 212,558 160,286 171,129 318,330 Gross Margin (ttm): 31.78% 51.02% 55.66% 6.45% 52.18% 56.17% 41.12% 51.02% 58.15% EBITDA (ttm): 114.96 173.21 87.22 33.85 173.21 541.89 1100 369.94 320.31 EBITDA/Revenue 17.5% 21.4% 25.7% 6.5% 21.4% 11.9% 19.6% 25.2% 13.1% Oper Margins (ttm): 8.48% 16.61% 17.60% -2.30% 11.79% 4.80% 15.29% 16.15% 7.64% Net Income (ttm): -44.79M N/A N/A -110.26M -46.61M 91.85M 355.27M 60.26M 1.56M EPS (ttm): -1.608 0.08 N/A -5.366 -1.048 9.779 1.505 0.645 0.136 P/E (ttm): N/A 54.78 28.64 N/A N/A 54.78 11.99 10.02 90.81 PEG (5 yr expected): N/A 2.16 1.93 N/A N/A 0.85 2.16 1.46 N/A P/S (ttm): 0.36 0.69 1.32 0.32 0.22 1.1 0.77 0.35 0.76 Debt/EBITDA 6.3x no debt 6.7x 0.8x 2.8x 5.1x 2.4x Debt 726 0 1162 430 3061 1896 769 Assets 1236 405 1511 5186 7148 3302 3088 Cash 33 25 10 862 99 6 37
Total shareholders equity 155 322 24 2940 1603 170 607
Debt/Capital 82% no debt 98% 13% 66% 92% 56%
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Private companies Raycom and Times Publishing Company have business profiles that are quite similar to Media General’s. Because updated, audited financials were not readily available, we explored only publicly-traded comparables.
As shown in the chart above, the broadcast industry growing slightly more than the publishing industry on a quarter-to-quarter basis. Broadcast businesses have, on average, better EBITDA/revenue figures. This implies that the industry enjoys a better cost structure and that the segment is not shrinking overall, as publishing is. More diversified businesses are performing much stronger than print- only companies, due to a pickup in broadcast advertising revenues as the economy rebounds and the continued secular shift away from print readership and advertising. As advertising and TV spending tend to be cyclical and as GDP is set to increase in 2010 and 2011, broadcasting is expected to continue to do better in coming years. Also, while this segment is facing changes due to shifts in technology, globalization and demographic shifts, all of which are affecting its costs, broadcast has not experienced the same pressure as print. This is evident from the comparable ratios above, especially in terms of
EBITDA margins, quarterly growth and price-to-earnings ratios.
MEG’s debt/EBITDA ratio is among the highest of the comp set. Its EBITDA/revenue figure is closer to the middle of the range, but this is due largely to shrinking revenue and aggressive cost cuts.
These two ratios combined with the overall industry perspective and knowledge of their cost cuts points to impending financial distress. Other margin ratios point to a similar story – MEG is closer to the mid- range at the present moment, but we feel this is unlikely to remain so in the coming quarters.
One notable point is that despite the many cost cuts, MEG’s revenue/employee ratio (the dollars of revenue generated per employee) is still low. We believe this is because it operates so many small, regional newspapers. The company pursued a rapid pace of acquisitions in service of its convergence strategy, but evidently MEG has not been able to maximize all the cost and revenue synergies that come from operating diverse media assets in the same market. MEG has already reduced
31 its staff drastically and it is unlikely it can do so again without integrating business segments or either substantially integrating some of its print operations or shrinking that portion of its business.
The comparable companies enjoy gross margins of near 50%, while MEG has a 32% gross margin. Assuming that MEG incurs a cost per employee of $75,000, and taking the current 32% gross margin, we calculated that the company’s fixed cost per employee is approximately $20,000. Using these figures, we determined that MEG would need to earn revenue of approximately $890 million to have a gross profit margin of 50%, which is much closer to the industry and comparables’ averages. This represents a 35% increase in revenue for MEG. We believe this is not realistically achievable given the company’s current debt burden, unfavorable industry trends, and the fact that MEG has already trimmed its costs down significantly in an attempt to remain profitable.
Real Calculated Revenue (ttm): ($M) 658 893
Gross Margin (ttm): 32%
Revenue/ Employee 139,917 190,000
Cost / employee (assume w benefits etc) 75,000 75,000 Fixed cost (calculated from current gross margin and projected per employee cost) 20,000 20,000 Profit margin / Employee 32% 50%
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DEBT STRUCTURE Media General substantially restructured its long-term debt on February 12, 2010. The restructuring pushed out the maturities of its senior debt, providing Media General with enhanced operational flexibility. The table below summarizes Media General’s long-term debt before and after the restructuring.
Media General Long Term Senior Secured Debt - Before and After Refinancing Before Refinancing - Dec 27, 2009 After Refinancing - Feb 12, 2010 Drawn Available Int Rate Maturity Available Drawn Int Rate Maturity Revolver $ 575.0 $ 426.0 L + 30-350 2011 $ 70.0 $ 6.0 L+375-475 2013 Term Loan $ 285.8 $ 285.8 L + 30-350 2011 $ 400.0 $ 400.0 L+375-475 2013 Senior Notes $ 300.0 $ 300.0 11.75% 2017 Total $ 711.8 $ 706.0
Media General Reduced the size of its revolver from $575 million to $70 million, and decreased the revolver outstanding from $426 million to $6 million. The balance went into a larger term loan – which increased from $286 million to $400 million – and a $300 million, seven-year notes offering, bearing a coupon of 11.75%. The notes were sold at a discount of 2.31%, raising $293 million in cash.
The spread between the bank debt and the senior notes is remarkable; while the notes sold with a yield of 12.26%, leverage ratios and LIBOR gave the bank debt a yield of 4.73% at the time of issuance a spread of more than 750 basis points (bps) – for securities have substantially the same claim on assets.
Granted, the notes carry greater a longer term and face more interest rate risk, but judging by current yield curves, that difference could only have accounted for a small percentage of the difference. The spread does indicate that it must have been extremely difficult for the bank to place these notes.
Senior Secured Bank Debt – Term Loan and Revolver
The Senior Secured Bank Debt is secured by the company’s subsidiaries, as well as the assets of the company and its subsidiaries and a pledge of capital stock from the company’s subsidiaries. This
33 debt was refinanced at a higher interest rate, and stretched out the maturity for two years over the debt it replaced. It carries equal claims priority with the holders of the senior notes over almost all assets. The interest rates on the term loan and revolver increased substantially post-refinancing, from LIBOR + 30-
350 bps to LIBOR + 375-475 bps. The exact rate is contingent on the company’s leverage ratio, with a higher ratio driving a higher spread over LIBOR – these spreads are shown on the table below. The leverage ratio is computed on a rolling basis, as the company’s level of indebtedness at any moment in time, divided by the total of the last four quarters of EBITDA. The commitment fee is the rate charged on any portion of the facilities that is not drawn down.
Table of Leverage Ratios and
Associated Credit Spreads of Senior
Bank Debt
Leverage Commitment Spread over
ratio Fee LIBOR (bps)
>6.5 1.00% 4.75%
>5.5 1.00% 4.50%
>5.0 1.00% 4.25%
>4.0 1.00% 4.00%
<4.0 1.00% 3.75%
The maximum leverage ratio allowed was 6.5 at the time of closing, and increases gradually to
8.0 in Q3 2011 before decreasing to 5.5 by Q4 2012. This structure gives MEG a bit of flexibility over the next couple years, while ensuring that debt is brought to more manageable levels over time. Note that at the maximum leverage allowed, MEG will be at the highest interest rate allowed (LIBOR + 475 bps) until Q3 2012, when maximum leverage drops to 6.0. The other major restriction is the Fixed Charge
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Coverage ratio. It is computed as follows: (EBITDA-CapEx)/(Interest Exp + Principal + Taxes Paid). After this time the ratio decreases, bottoming out at 5.5 in Q4 2012, and staying flat thereafter. The minimum fixed charge ratio starts at 1.8, and decreases to 0.95 for the year of 2011. After this time it gradually increases to 1.8 in Q4 2012, and stays flat thereafter. The quarterly limits for the two ratios are shown in the table below.
Min Fixed Charge Max Levg Period Covg Ratio Ratio Q1 2010 1.80 6.50 Q2 2010 1.40 6.80 Q3 2010 1.20 7.60 Q4 2010 1.00 7.60 Q1 2011 0.95 7.50 Q2 2011 0.95 7.75 Q3 2011 0.95 8.00 Q4 2011 0.95 7.75 Q1 2012 1.20 7.25 Q2 2012 1.40 6.75 Q3 2012 1.60 6.00 Therafter 1.80 5.50
MEG has entered into interest rate swaps valued at $14.4 million (notional value $200 million, expiration in 2011) in order to hedge the risk of higher interest rates on their bank debt; it is unclear what happened to these swaps as a result of the refinancing. To simplify our analysis, we assumed they no longer hold the swaps. The company can prepay the term loan at anytime, without penalty.
Senior Secured Notes
The 11.75% senior secured notes (with a 12.26% yield, as the notes were sold at a 2.31% discount) provide Media General with significant breathing room. The new debt replaces $300 million worth of bank debt that had been due in 2011 with a bond issue due in 2017. The breathing room came at a heavy price – the notes carry a far higher interest than the bank debt did. Notes are being sold only
35 to qualified institutional buyers (QIBs), who are being represented by Bank of America and Suntrust
Robinson Humphrey Inc.
The senior secured notes carry a substantially equal claim on assets as the bank debt, with the exception of certain subsidiary stock, for which the bank debt holders have priority.
The notes can only be prepaid with a significant penalty:
In 2014, the penalty is 5.875% of face value, in 2015 it is 2.938%, and in 2016 it is 0.
Before Feb 2014, the penalty is 5.875% plus the greater of either 1%, or all interest payments
due by Feb 2014.
Negative Covenants on the Senior Debt
The bank debt has a wide range of covenants, with restrictions driven by – (1) leverage ratios and (2) fixed charge coverage ratios. The covenants place substantial restrictions on MEG’s operating activities, including:
Non-Capital Investments – these are restricted based on the ratios mentioned, with the following provisions:
Covenants - Investment Restrictions
Min Fixed
Leverage Charge Coverage Max Cap Max CapEx -
Ratio Ratio Investment Aggregate
>6.0 None None
<6, >5.5 1.25 $5M $5M
>1, <5.5 1.25 $10M $20M
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Further Indebtedness - the company is permitted to incur further indebtedness if no default has taken place, only for the following reasons:
Swap contracts, provided they are for business hedging needs and not speculative
Capital leases for fixed assets, provided they do not exceed $10 million in aggregate
Further unsecured debt of $15 million is permitted if (i) it does not mature until at least six months
after the Secured Notes (ii) there are no payments or set-asides of any kind during the duration of
the loan and (iii) the leverage ratio is less than 7:1. It is unlikely MEG would be able to find anyone
willing to lend under such circumstances.
Asset Sales - Sale of fixed assets is permitted only under the following circumstances:
The asset sale proceeds are being used to finance replacement with similar assets
The leverage ratio does not exceed 3.5:1
EBITDA associated with disposed assets does not exceed 20% of total EBITDA
These restrictions – particularly the very low leverage ratio requirement – will likely make it impossible for MEG to conduct any asset sales. Furthermore, MEG has just $422 million of book value property, plant, and equipment – most of its assets are intangibles and goodwill. This supports the notion that asset sales will do little to provide MEG with any operating flexibility.
Dividend Payments and Equity Issuance – No dividend payments are permitted in 2010 or 2011. For
2012 and thereafter, dividend payments of up to $7.5 million may be made if (i) the leverage ratio is between 3.5 and 4 and (ii) the fixed charge coverage ratio is at least 1.0. If the leverage ratio is below
3.5, payments up to $10 million may be made. No other payments to equity holders can be made. The proceeds of any equity issuances made by MEG or a subsidiary must be used to pay down debt.
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Capital Expenditures – capital expenditures up to $25 million are allowed in 2010, and up to $35 million per year thereafter, provided such expenditure would not lead to default. Up to 50% of any unspent capex in any given year may be carried over.
Other Long-Term Obligations
Operating Leases – $26.3 million. MEG has $26.3 million in non-cancelable operating leases – primarily rental commitments. $15.2 million of these expire by the end of 2014.
Broadcast Film Rights –$41 million. These are commitments MEG has made to purchase the rights to films, once they are made available for broadcast. $38.1 million is due by 2012, though MEG would have to continue to make similar commitments thereafter to secure the rights to new films.
Estimated Benefit Payment from Company assets - $64.9 million. This is the company’s unfunded pension liability. The company currently plans to contribute $15 million in 2010 and $20 million in 2011
– in excess of its required contribution during this period, which totals $17.1 million.
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VALUATION While the markets have shown positive momentum for MEG’s debt and equity values, we believe the nature of the industry, the challenges in revenue growth and margin improvement, and heavy debt loads make the current equity prices unrealistic.
Revenues
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 t assumptions* FY 2015 t+1 Publishing Revenue 325,327 305,375 295,026 292,148 289,298 286,476 % change -9.00% -6.13% -3.39% -0.98% -0.98% -0.98% Digital Media and Other Revenue 45,159 49,880 55,404 61,980 69,336 74,883 % change 9.76% 10.45% 11.07% 11.87% 11.87% 8.00% Broadcasting Revenue 290,250 283,759 302,910 301,126 299,352 302,346 % change 12.08% -2.24% 6.75% -0.59% -0.59% 1.00% Total Revenue 660,737 639,014 653,340 655,254 657,986 663,705 % growth 0.48% -3.29% 2.24% 0.29% 0.42% 0.87%
While advertising spending may rebound from recession lows, we do not see significant upside potential for the print business. Real estate will eventually bounce back but the decline in ad revenues from car dealers and classifieds is secular. The digital business, which is growing at a 10% rate is impressive, but represents less than 7% of revenues in 2010. In discussing its plan for future growth in its most recent annual report, MEG makes the following statement: “Digital Is Our Future. “MEG’s long- term strategies embrace the new digital frontier. We are aggressively building new audiences that advertisers want to reach. Our younger customers have moved to a digital environment, and we are going to be there for them.” Unfortunately for MEG’s planned future as a digital company, it carries a
$700 million debt load that will need to be serviced and re-financed by a brick and mortar company for many years to come.
Segments
Media General’s financial reporting, which is now done on a geographic basis, makes it difficult to value product segments separately – but the analysis we are able to do shows that the majority of the value of the company is in the broadcast business; digital makes up just 6% of enterprise value, despite
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MEG’s public focus on Digital as a strategic growth driver. The results of our segment valuation, and sensitivities, are shown in the table below.
Assumptions around margins and growth are detailed in the following sections. This segment valuation is built on that analysis. The total Enterprise Value of $738 million here is roughly equal to our
Base Case valuation in our DCF using an EBITDA exit multiple ($732 million, see details below). It is slightly higher than our Base Case DCF using a Terminal Growth rate ($691 million, see details below).
EBITDA Multiple Total Segment Value ($M) % of EV 4.0 5.0 5.5 6.0 6.5 7.0 7.5 8.0 9.0 News 31% 202 226 239 251 263 275 288 300 324 Broadcast 63% 357 401 423 444 466 488 510 532 576 Digital 6% 29 33 35 37 39 41 43 45 50 Total Enterprise Value $ 738 588.0 #REF! 660.3 696.4 732.6 768.7 804.9 841.0 877.2
In 2007, MEG began reporting business unit results along a geographic rather than a product basis; this is in keeping with its stated strategy of developing synergies between the broadcast, newspaper and interactive media routes within a particular market – but it serves to shield the fact that they are operating product lines with very different profitability trends.
Though the company does not report EBITDA by product segment, Gabelli & Co. analyst reports do attempt to find these numbers. We applied Gabelli’s margin split by product to our own total EBITDA and cash flow projections to yield the valuations above. In our base case, we applied a 5x terminal value
EBITDA multiple to the Newspaper business, 6.5x to Broadcast, and 8x to Digital. We recognize limitations on the Gabelli & Co. analysis, so we were leery of relying on their EBITDA-by-product estimates. However, the results are still directionally very telling. Digital will remain a small portion of the business in any scenario; and despite the Broadcast and Newspaper business contributing approximately equal shares of revenue, Broadcast is the far more valuable segment.
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Margins
MEG has made significant improvements in operating margins over the last three years. We believe these improvements can be maintained but will not be improved upon. This will leave the long
Revenue 100% term cost structure in line with industry - Employee Compensation 47% - Production 24% comparables. Despite these significant cost - Selling General & Administrative 15% Capital Structure and Margins 14% cutting efforts, MEG will continue to be in an industry with fundamentally low margins – further squeezed by high leverage (see table above left). This combination will continue to put pressure on the company’s ability to generate free cash flow.
Over the last three years, MEG has had an operating margin between 5.1% and 9.8%, and we do not see much room for improvement over these levels. The fundamental operating structure of the business leaves few opportunities to improve margins based on economies of scale or scope. Moreover these levels already include significant gains via drastic cost cutting measures.
Employee compensation makes up roughly half of all operating costs (45-48% of Revenues).
After cutting deeply over the last two years, these expenses have been reduced from $400 million to
$300 million. After the cuts detailed above, we do not believe there is much room for further expense reduction. Last year’s drop was driven by layoffs, 401(k) contribution suspension and mandatory unpaid furloughs – austerity measures not sustainable over the long-term. Furthermore, MEG cannot cut deeper easily without selling assets and cutting into revenues. The company operates 18 TV stations, three digital businesses and over 200 newspapers, and has already cut 30% of its workforce since 2007.
While there may be some additional opportunities to consolidate functions and generate synergies between the three businesses, we anticipate this to be limited. Reporting and information gathering is a labor intensive activity. Despite attempts to leverage technology and user-generated content, we
41 believe that ultimately, there will be a limit to automation and efficiency gains driven by technology.
Moreover, an insufficient number of skilled employees directly impacts the quality of the product.
Production and SG&A expenses are nearly 39% of sales after the changes, having been brought down in line with revenues. Production costs (~24% of sales) have come from $211 million in 2007 down to $154 million in 2009 with a combination of lower newsprint costs due to declining demand, and lower circulation. SG&A (~14% of sales) costs tend to correlate with employee compensation and for the same reasons as compensation has limited potential for further reduction.
Production, SG&A and employee compensation demand over 80% of revenues, with few opportunities for expansion. Adding in $60 million per year of depreciation brings operating costs to over 92% of revenues, and despite massive write-offs over the last two years, the company still has $355 million in goodwill on the balance sheet. If additional impairments are taken, which is likely, MEG may have a negative operating margin for several years.
The first quarter’s earnings announcement, on April 21, 2010, supports this view. Despite aggressive cost cutting, operating margins were just 5.5% and expenses are projected to be 3% to 4% as management backs off of austerity measures (i.e. the mandatory furloughs and suspension of 401(k) matching).
Capital Expenditures
Debt covenants mandate a maximum of $25 million in Capital Expenditure in 2010, and $35 million thereafter. This is far below the $74 million to $94 million levels seen in 2005-2007. While the business is not capital intensive, the company clearly has very little room for spending on any new initiatives in the coming years. This is yet another factor limiting any upside revenue potential, even as the critical search for novel revenue streams continues.
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Capex was just $18 million in 2009 and just $2.1 million in Q1 F10. Even if MEG were to max out its $35 million capex limit – which is unlikely, as this would likely cause a breach in the Fixed Charge covenant – the company would still see Net PP&E decline from $421 million in 2009 to around $322 million in 2009. It is unclear whether that would allow a stable level of functioning for the company. In our model, for the perpetuity year we set capex equal to Depreciation.
We believe the company’s capex “diet” will have a negative impact on its ability to compete in the new digital world. Competitors with no such encumbrances – both traditional media companies and newer, digital media companies – will be freer to make acquisitions and fund developments in technology. As the industry overall transitions to more substantial digital revenue streams, MEG will be further behind.
Covenants
Per the Margins discussion above, keeping operating costs (ex-depreciation and goodwill write- offs) at around 83% of sales will be adequate to keep MEG from breaching its Leverage Ratio covenants
(thought the first year will be close with the ratio reaching above 7.6). However, a strong performance from the Broadcast division driven by political spending on midterm elections should be enough to give
MEG the cash flexibility to stay in compliance with debt covenants. The company’s Q1 announcement showed just $692 million in debt on the balance sheet, which is well under the covenant threshold.
However, without substantial improvements in EBITDA, or elimination of CapEx, MEG will likely default on the Fixed Charge Coverage Ratio covenant by 2012 (computed as (EBITDA-CapEx)/(Int Exp +
Principal due + Taxes due). These ratios need to be in the 1.6-1.8 range for 2011 and 2012. We forecast
EBITDA near $110 million. With zero taxes due (reasonable given tax carry back and forward provisions), minimal principal payments (probable) CapEx would have to be limited to a very small amount (if any) in
2012, before almost certain default without refinancing in 2013.
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Dividends
Given the tight cash constraints of MEG, the company is covenant-controlled not to pay dividends in 2010 and 2011, and will presumably not begin to pay dividends thereafter until the capital structure has been improved.
Current Market Valuations
MEG’s equity and debt prices have been steadily increasing since the company’s stock price hit a low of $1.80 last summer. After announcing a smaller than expected loss of $0.18 per share on April 21,
2010, the stock jumped an additional 3.5% to a 52-week high of $12.75. Debt prices have also been improving. At the time of the refinancing in February, MEG issued 11.75% notes at a discount, with a yield of 12.26%. The notes are now trading above face value with a yield of 10.46%.
While the market has generally been very bullish, few analysts are making forecasts, and those that are arrive at varying conclusions. Gabelli & Co. expects a return to top-line growth, and EBITDA margin expansion from the 17% to 18% range over the last couple of years, to 22% to 25%. This values the company near $20 per share. Research firm New Constructs expects margins to remain flat, which would lead to negative equity value.
While the market has been enthusiastic, we are skeptical. While we believe MEG will continue as a going concern, and perhaps even a profitable business, it is unlikely to do well with the current capital structure. Despite MEG’s focus on cost-cutting, margins remain very weak, with little prospect for substantial improvement. It is extremely unlikely that MEG will be able to generate enough free cash flow to pay off the $400 million term loan when it is due in 2013. As 2013 draws near, the company will have to refinance the principal balance. We also think it will be challenging for MEG to be able to maintain the minimum Fixed Charge Coverage ratio required, and we project the company could breach that covenant as soon as 2011.
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While the restructuring has bought MEG two years to continue growth plans into digital markets, the company will still have to develop a new financing strategy near 2012.
EBITDA Multiples
The analysis below shows the Enterprise Value using an EBITDA exit multiple for the terminal value, instead of a terminal growth rate. In this case, our base case has a slightly positive equity value; after subtracting $700 million in debt, equity is valued at nearly $0.50 per share. While this analysis shows a higher range of scenarios with positive equity values, they are dependent on EBITDA multiple ranges that are likely overstated, given the company’s growth prospects and limited opportunities for cost cutting. Moreover, the industry comparables trade at an EBITDA multiple of 4x-8x. It should be noted the company carries the refinanced debt below $700 million, as it sold at a discount. The company will continue to amortize the difference over the life of the debt.
We forecast EBITDA of more than $90 million in 2010, and around $110 million with little growth thereafter. Applying a 5-7x multiple yields an enterprise value range of $684 million to $835 million. Subtracting $692 million in debt yields a share price of near $0 (a range of -$7.50 to $3.18). The cells shaded in the table below represent enterprise valuations that produce a positive equity value.
Enterprise Value WACC (horizontal), EBITDA Multiple (Vertical) #REF! 7.92% 8.84% 9.98% 10.98% 11.98% 12.98% 13.80% 4.5 646,484 625,806 601,468 581,218 561,933 543,557 529,130 5.0 684,341 662,091 635,910 614,137 593,408 573,663 558,167 5.5 722,199 698,375 670,353 647,055 624,882 603,769 587,204 6.0 760,056 734,659 704,795 679,973 656,357 633,875 616,241 6.5 797,914 770,944 739,238 712,892 687,831 663,981 645,278 7.0 835,771 807,228 773,680 745,810 719,306 694,087 674,315 7.5 873,629 843,512 808,122 778,728 750,780 724,193 703,351 8.0 911,486 879,796 842,565 811,647 782,255 754,299 732,388
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Cost of Capital
The calculated WACC for MEG is 8.84%. However, this number is deceptively low. At the time of refinancing, MEG had $706 million in debt, at an after tax weighted cost of 5.28% (4.73% for the term loan, 11.75% for the senior notes). MEG’s recent market cap was $292 million. Applying the 10 year T-
Bill rate, a Beta of 2.67 and market risk premium of 5% gives us a 17.1% cost of equity – but the relatively small value of the equity brings the company WACC to very low levels.
WACC Calculation Instrument Amount Rate Notes 292 12.26% Term Loan + Revolver 406 4.73% Avg Cost of Debt 698 7.9%
After Tax Cost of Debt 5.39%
10 Yr Treasury 3.74% Market Risk Premium 5.00% Beta 2.67 Cost of Equity 17.1% MV of Equity 292 Debt 71% Equity 29% WACC 8.84%
As a note, we did not include operating leases in the calculation of MEG’s WACC. Although these can be considered a form of long-term debt, we excluded them because of the relatively small amount that the company holds ($26.3 million) and for simplicity’s sake.
Discounted Cash Flow Model
It is difficult to get an extremely tight range around a DCF valuation, because of a couple key variables:
WACC – the current WACC of 8.84% we judge to be an unsustainable long-term rate, as it relies
on what we believe are unsustainably high debt levels.
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Terminal Growth Rate – due to the very low WACC in our base case, even a low terminal growth
rate of has a very big impact on our valuation. Our base case has a 0.9% terminal growth rate for
the business as a whole, weighted between business units – 1% broadcast, 8% digital, -0.98%
newspaper. This is based on i) the VSS forecasts for growth until 2013 and ii) our smoothing
assumptions, which adjust for lumpy political broadcast spend, and a slowdown in digital growth
over the long term.
Margins – as discussed we don’t see the margins returning to historical levels. However this is a
key sensitivity to the enterprise valuation.
Our base case is based on the generous WACC of 8.84% this gives the company a slightly negative equity value. Sensitivities are shown in the table below. Note that only in the best cases, a 2% to 3% terminal growth and a very low WACC, does the company have a positive equity value after subtracting
$700 million in debt. The cells shaded in the table below represent enterprise valuations that produce a positive equity value.
Enterprise Value WACC (horizontal), Terminal Growth (Vertical) #REF! 7.92% 8.84% 9.98% 10.98% 11.98% 12.98% 13.8% -3% 607,574 566,037 522,491 489,943 461,577 436,616 418,266 -2% 637,999 590,649 541,773 505,736 474,661 447,565 427,789 -1% 675,244 620,263 564,568 524,165 489,761 460,080 438,599 0% 721,896 656,576 591,931 545,951 507,382 474,523 450,976 0.9% 775,245 697,080 621,711 569,255 525,961 489,567 463,756 2% 853,232 754,404 662,580 600,565 550,494 509,149 480,223 3% 975,633 840,136 721,062 644,071 583,792 535,221 501,858
Liquidation Valuation
A liquidation valuation does not make much sense as Media General is clearly capable of continuing as a going concern, and has recently completed a restructuring plan. The liquidation value shows a significant discount to book value of the company’s assets. While book value is more than $1.2
47 billion, the liquidation would yield roughly $430 million. This liquidation would not be adequate to cover debt repayment from the current restructuring plan. Calculations are given below:
Assets - Dec 09 Liquidation value Cash & Equivalents 33,232 100% 33,232 Accounts Receivable 104,405 90% 93,965 Inventories 6,632 60% 3,979 Other 60,786 40% 24,314 Total Current Assets 205,055 155,490
Land 37,362 80% 29,890 Buildings 308,538 60% 185,123 Machinery & Equipment 545,050 30% 163,515 Construction in Progress 4,191 10% 419 Accum Depreciation (473,933) 45% (213,270) Net PP&E 421,208 165,677
FCC Licenses and Other Intangibles 220,591 50% 110,296
Goodwill 355,017 0% -
Other Assets 34,177 10% 3,418
Total Assets 1,201,871 434,880
Refinancing – the Bank’s Perspective
The lenders had considerable incentive to refinance MEG’s debt. The refinancing allowed them to raise interest rates substantially, while booking $5.5 million in fees related to the new debt issuance.
Using some simplifying assumptions (assuming a constant 200 bps spread between old and new bank debt – the old range was 30-350 bps and the new range is 375-475 bps), the table below summarizes the increase in cash flow to debt holders under the refinancing.
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Cash Flow to Debtholders - Before vs. After Refinancing ($M) Old Structure Rate Amount 2010 2011 2012 2013 2014 2015 2016 2017 Revolver 2.50% $ 426 11 11 11 11 11 11 11 11 Term Loan 2.50% $ 286 7 7 7 7 7 7 7 7 Interest Payments $ 712 18 18 18 18 18 18 18 18 Cumulative 18 36 53 71 89 107 125 142
New Structure Notes 11.75% $ 300 35 35 35 35 35 35 35 35 Bank Debt 4.50% $ 400 23 20 19 19 - - - - Revolver 4.50% $ 6 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Arranging fees 5.5 Reduction in Principal 6 Interest Payments $ 706 70 55 55 55 36 36 36 36 Cumulative 70 125 180 235 270 306 341 377
Net Increase in CFs to Debt Holders 52 37 37 37 18 18 18 18 Cumulative Increase 52 90 126 163 181 199 217 234
Net Increase to Bank Debt Only 17 2 2 2 (18) (18) (18) (18)
By the end of 2011, when MEG would have defaulted, debt holders will have already seen an additional $90 million in cash flow under the new structure ($125 million under new vs. $36 million old).
Assuming, for the sake of argument, that MEG could maintain its old or new structure until 2017 (i.e., the bank debt was rolled over), and debt holders will have booked an additional $297 million in interest revenue by 2017. Interestingly, the revenue due on the bank debt stays almost exactly the same – but the bank debt’s exposure shrinks from $712 million to $406 million.
MEG should be able to cover its interest payments over the duration, but will have little chance at paying down the principal. Given the short duration of the bank debt, the bank will be given the option of charging progressively higher interest rates, or putting the company into default and taking the equity. This is especially attractive for the note holders, who face a no-lose situation – they have a similar claim on assets as the banks, but are earning a far higher 11.75% coupon. The high coupon will generate a lot of cash; the holders will enjoy this coupon until they are cashed out during a subsequent refinancing, or the company defaults and they are handed equity in a company that, as we have shown, is quite viable with a lower debt structure.
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A Sustainable Debt Structure
For our model, to determine a sustainable debt structure, we estimate a worst case margin scenario, use a minimum interest expense coverage ratio, and thus determine the implied debt levels.
The company had just a $190 million in book equity value at the end of last year, which will likely drop to about $170 million by the end of 2010. The company’s equity market value was about $290 million, though for reasons outlined about we believe this to be unsustainable. The company is carrying $389 million in intangible assets – these have been impaired substantially already, and may be further impaired. Combined with a depreciating asset base due to a lack of ability to make capital expenditure, and the company runs a real risk of its book equity value going negative.
Investment Recommendation
Based on this analysis, our recommendation is to take a long position in the $300M Senior Notes.
The Notes currently yield 10.46%, with a coupon of 11.75% – a very attractive yield, given historically low current interest rates. The bank debt will definitely need to be restructured in 2013; at this point, the banks will have the option of restructuring the debt again or forcing Media General into bankruptcy.
The Notes have the same claim on assets as the bank debt, but have a far higher yield. Whichever they decide, Note holders will do very well. If there is another restructuring, the Note holders can enjoy above-market returns on the debt. If the company is forced into bankruptcy, the Note holders and banks will own the company, and there is enough enterprise value for them to be paid in full. They would then own a company with much more operational flexibility, as a result of a more manageable and sustainable debt load.
NOTE: Relevant charts and tables presented within have been reproduced in the appendix below, for the reader’s convenience, as well as our team’s projections and full earnings model.
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APPENDIX Figure 1: Comparables & Ratios ($M)
Industry Stats Print Comps Overall Comps Other Media Companies Industry Industry
MEG (Publishing) (Broadcasting) AHC LEE WPO GCI MNI NYT Market Cap 241.64 282.4 406.87 172.4 195.2 4960 4280 546.38 1800 Enterprise Value 934.64 147.4 1347.2 4528 7242 2436.38 2532 Employees: 4,700 5.40K 2.40K 2,300 5,400 21,500 35,000 8,590 7,665 Qtrly Rev Growth (yoy) -14.10% 0.00% 0.40% -15.30% -13.80% 6.40% -14.40% -16.50% -10.70% Revenue (ttm) 657.61 808.31 339.47 518.35 808.31 4570.00 5610 1470.00 2440.00 Gross Margin (ttm) 31.78% 51.02% 55.66% 6.45% 52.18% 56.17% 41.12% 51.02% 58.15% EBITDA (ttm) 114.96 173.21 87.22 33.85 173.21 541.89 1100 369.94 320.31 EBITDA/Revenue 17.5% 21.4% 25.7% 6.5% 21.4% 11.9% 19.6% 25.2% 13.1%
EV/EBITDA 8.1 4.4 7.8 8.4 6.6 6.6 7.9 Oper Margins (ttm) 8.48% 16.61% 17.60% -2.30% 11.79% 4.80% 15.29% 16.15% 7.64% - Net Income (ttm) 44.79M N/A N/A -110.26M -46.61M 91.85M 355.27M 60.26M 1.56M EPS (ttm) -1.608 0.08 N/A -5.366 -1.048 9.779 1.505 0.645 0.136 P/E (ttm) N/A 54.78 28.64 N/A N/A 54.78 11.99 10.02 90.81 PEG (5 yr expected) N/A 2.16 1.93 N/A N/A 0.85 2.16 1.46 N/A P/S (ttm) 0.36 0.69 1.32 0.32 0.22 1.1 0.77 0.35 0.76 Debt/EBITDA 6.3x no debt 6.7x 0.8x 2.8x 5.1x 2.4x Debt 726 0 1162 430 3061 1896 769 Assets 1236 405 1511 5186 7148 3302 3088 Cash 33 25 10 862 99 6 37 Total Shareholders Equity 155 322 24 2940 1603 170 607 Debt/Capital 82% no debt 98% 13% 66% 92% 56%
MNI: McClatchy Print (Miami Herald etc), digital media (careerbuilder.com, apartments.com etc) WPO: Washington Post Print, Broadcasting, Educational programs AHC: AH Belo Print, Commercial printing, Digital (cars.com, homegain.com) NYT: New York Times Co. Print, Digital LEE: Lee Enterprises Print, online advertising, commercial printing GCI: Gannett Print, Digital, Broadcasting
Data: Capital IQ, company reports
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Figure 2: Liquidation Valuation ($000)
Assets - Dec 09 Liquidation value
Cash & Equivalents 33,232 100% 33,232 Accounts Receivable 104,405 90% 93,965 Inventories 6,632 60% 3,979 Other 60,786 40% 24,314 Total Current Assets 205,055 155,490 Land 37,362 80% 29,890 Buildings 308,538 60% 185,123 Machinery & Equipment 545,050 30% 163,515 Construction in Progress 4,191 10% 419 Accum Depreciation (473,933) 45% (213,270) Net PP&E 421,208 165,677 FCC Licenses and Other Intangibles 220,591 50% 110,296 Goodwill 355,017 0% - Other Assets 34,177 10% 3,418 Total Assets 1,201,871 434,880
Data: Company reports, team estimates
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Figure 3: Communications Industry Spending by Segment
YEAR 2003 2004 2005 2006 2007 2008 2009e 2010e 2011e 2012e 2013e Broadcast Television* $ $ $ $ $ $ $ $ $ $ $ Spending ($M) 42,334 46,833 45,834 49,144 48,777 49,078 44,647 45,878 44,852 47,879 47,597 Growth (%) 10.63% -2.13% 7.22% -0.75% 0.62% -9.03% 2.76% -2.24% 6.75% -0.59% Share (%) 6.30% 6.50% 6.00% 6.00% 5.70% 5.60% 5.10% 5.10% 4.80% 4.80% 4.50% Newspaper Publishing* $ $ $ $ $ $ $ $ $ $ $ Spending ($M) 63,012 65,136 66,370 66,350 62,301 54,163 45,351 40,584 38,095 36,804 36,445 Growth (%) 3.37% 1.89% -0.03% -6.10% -13.06% -16.27% -10.51% -6.13% -3.39% -0.98% Share (%) 9.40% 9.00% 8.70% 8.10% 7.20% 6.10% 5.20% 4.50% 4.10% 3.70% 3.50% Pure Play Consumer Internet & Mobile Services $ $ $ $ $ $ $ $ $ $ $ Spending ($M) 21,766 24,515 28,132 32,317 37,506 42,337 45,738 50,203 55,451 61,592 68,902 Growth (%) 12.63% 14.75% 14.88% 16.06% 12.88% 8.03% 9.76% 10.45% 11.07% 11.87% Share (%) 3.20% 3.40% 3.70% 4.00% 4.30% 4.80% 5.20% 5.60% 5.90% 6.20% 6.50% * includes online advertising associated with traditional business lines (e.g. newspaper website sales)
Data: Veronis Suhler Stevenson
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Figure 4: Communications Industry Segments Ranked by Five-Year Growth 2003-2008 2008-2013 Economic Sector CAGR Rank CAGR Rank Pure Play Consumer Internet & Mobile Services 14.2% 1 10.2% 1 Branded Entertainment 14.0% 2 9.3% 2 Public Relations & Word-of-mouth Marketing 13.6% 3 9.2% 3 Subscription TV 10.2% 5 6.4% 4 Professional & Business Information Services 10.8% 4 6.0% 5 Educational & Training Media and Services 6.7% 7 5.0% 6 Out-of-home Media 9.0% 6 4.9% 7 Direct Marketing 5.6% 8 4.0% 8 Entertainment Media 2.4% 14 3.7% 9 Communications Industry Overall 5.6% - 3.6% - Consumer Book Publishing 2.5% 13 2.3% 10 Consumer Promotions 2.9% 12 1.9% 11 Business-to-business Media 4.5% 10 -0.3% 12 Broadcast TV* 3.0% 11 -0.6% 13 Broadcast & Satellite Radio 0.6% 18 -2.0% 14 Consumer Magazine Publishing 1.1% 16 -2.8% 15 Business-to-business Promotions 1.5% 15 -2.9% 16 Yellow Pages Directories 0.9% 17 -3.5% 17 Outsourced Custom Publishing 5.3% 9 -4.8% 18 Newspaper Publishing* -3.0% 19 -7.6% 19 * includes online advertising associated with traditional business lines (e.g. newspaper website sales) Data: Veronis Suhler Stevenson
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Figure 5: Veronis Suhler Stevenson’s Industry Projections ($M)
Annual Growth Rate Annual Growth Rate
2003- 2008- 2003 Gross 2008 2008 Gross 2013 2013 Gross Expenditur 200 200 200 200 CAGR Expenditur 200 201 201 201 201 CAGR Expenditur Industry Segment es ($M) 4 5 6 7 2008 (%) es ($M) 9 0 1 2 3 (%) es ($M) Pure Play Consumer Internet & 12.6 14.8 14.9 16.1 12.9 10.5 11.1 11.9 Mobile Services $ 21,766 % % % % % 14.2% $ 42,337 8.0% 9.8% % % % 10.2% $ 68,902 Pure Play Internet Services 20622 9.5 13.1 12.7 13.7 11.6 12.1 36493 6.9 8.3 8.7 9.0 9.1 8.4 54637 Pure Play Internet Advertising 5955 30.2 43.6 36.3 22.9 16.9 29.7 21821 9.2 10.4 10.9 11.2 11.5 10.6 36176 Pure Play Internet Access 12995 -1.5 -6.6 -12.1 -2.1 0.8 -4.4 10375 0.3 0.6 1.6 2.3 2.4 1.5 11150 Pure Play Paid Internet Content 1672 20.7 20.3 26.3 22.5 14.4 20.8 4297 11.0 14.2 12.1 10.2 8.6 11.2 7311 Pure Play Mobile Services 1144 69.8 34.5 36.1 35.0 21.7 38.6 5844 15.0 18.4 19.6 21.1 23.8 19.5 14266 Text Messaging 1081 63.6 22.5 25.1 24.1 17.7 29.7 3961 13.4 15.9 14.5 13.0 11.1 13.6 7483 Pure Play Mobile 122. 151. 101. Advertising 41 0 6 0 81.3 32.7 93.3 1107 18.1 24.6 33.4 41.1 50.4 33.0 4606 Pure Play Paid 277. 161. Mobile Content 22 3 4 77.9 56.0 28.9 103.9 776 18.9 22.0 23.2 24.5 26.0 22.9 2176
10.6 - - - - - Broadcast Television $ 42,334 % 2.1% 7.2% 0.7% 0.6% 3.0% $ 49,078 9.0% 2.8% 2.2% 6.7% 0.6% -0.6% $ 47,597 Network & Local Advertising 41814 10.4 -3.2 5.8 -3.3 -1.3 1.5 45092 -11.5 0.8 -5.2 4.5 -4.8 -3.4 37943 Television Stations 23468 10.3 -5 8.5 -6.2 -4.5 0.4 23918 -14.2 4.8 -7.6 6.7 -8.1 -4.0 19469 Television Networks 15997 9.8 -1.8 2 1.1 1.9 2.5 18125 -9.4 -4.8 -2.2 1.5 -0.2 -3.1 15487
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Annual Growth Rate Annual Growth Rate
2003- 2008- 2003 Gross 2008 2008 Gross 2013 2013 Gross Expenditur 200 200 200 200 CAGR Expenditur 200 201 201 201 201 CAGR Expenditur Industry Segment es ($M) 4 5 6 7 2008 (%) es ($M) 9 0 1 2 3 (%) es ($M) Barter Syndication 2349 15.1 4 5 -3.2 6.7 5.4 3049 -2.0 4.5 -4.2 5.1 -5.0 -0.4 2987 Online & Mobile Advertising & Content 500 31 60.2 60.7 64.4 26.8 47.7 3515 15.8 16.9 18.0 19.3 21.1 18.2 8108 Internet Advertising & Content 496 28 51 55.7 62.1 23 43.1 2977 13.1 13.5 13.9 14.0 14.0 13.7 5653 Mobile Advertising 114. & Content 4 400 350 1 82.4 52.8 166.5 538 30.7 33.0 34.7 37.6 41.6 35.5 2455 374. Retransmission Fees 20 35 1 77.3 42.7 45.4 88.1 471 38.4 33.4 25.8 21.5 16.4 26.8 1546
- - - Newspaper - 13.1 16.3 10.5 - - - Publishing $ 63,012 3.4% 1.9% 0.0% 6.1% % -3.0% $ 54,163 % % 6.1% 3.4% 1.0% -7.6% $ 36,445 Daily Newspapers 56164 2.7 0.8 -1.6 -8.2 -14.6 -4.4 44877 -18.1 -12.1 -7.5 -4.9 -2.6 -9.2 27641 Print Advertising 44939 3.9 1.5 -1.6 -9.5 -17.3 -4.9 34904 -21.5 -15.0 -9.7 -6.0 -2.5 -11.2 19286 Print Circulation 11225 -2.1 -2.2 -1.3 -2.5 -3.6 -2.3 9973 -6.4 -3.9 -1.9 -2.3 -2.8 -3.5 8355 Weekly Newspapers 5569 4.9 4.5 3.8 1.8 -7.1 1.5 5994 -8.8 -5.9 -3.8 -2.2 -1.2 -4.4 4788 Print Advertising 5189 5.1 4.7 4.0 1.8 -7.5 1.5 5595 -9.2 -6.3 -4.2 -2.4 -1.1 -4.7 4402 Print Circulation 380 1.8 2.3 0.8 0.8 -0.7 1.0 399 -2.8 -0.3 1.1 0.5 -1.8 -0.7 386 Digital Advertising & Content 1279 25.6 31.4 31.7 19.4 -0.8 20.8 3292 -4.3 0.3 4.5 8.3 12.3 4.1 4016 Internet Advertising & Content 1278 25.4 30.8 30.9 18.6 -1.6 20.2 3204 -5.1 -0.3 3.7 7.0 10.1 2.9 3703 Mobile Advertising 273. 250. 150. & Content 1.1 8 0 0 82.9 37.5 141.6 88 22.9 17.9 25.0 33.2 47.4 28.9 313
Data: Veronis Suhler Stevenson
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Figure 6: Media General Valuation Ranges ($000)
Perpetuity Perpetuity Perpetuity Competitive Competitive with Growth with Growth with Growth Competitive Markets Markets 7.8% 9.5% wacc 12% wacc Markets 13% wacc 15% wacc Residual Value 684,319 533,092 436,607 613,377 373,700 323,873
Present value of free cash flows (2010 - 2015) 305,765 291,885 279,032 305,765 272,484 261,021 + Present value of residual value 467,459 332,211 248,627 418,999 202,829 161,022 = Present Value of Operating Assets 773,224 624,096 527,658 724,764 475,313 422,044 + Non Operating Assets (XS Cash, Mktable Sec, Real Estate) = Present value of the firm 773,224 624,096 527,658 724,764 475,313 422,044 Implied multiple over Y1 EBITDA 8.38 6.76 5.72 7.86 5.15 4.57 - Market value of debt 700,070 700,070 700,070 700,070 700,070 700,070 = Present value of equity 73,154 (75,974) (172,412) 24,694 (224,757) (278,026)
/ Number of Shares Outstanding 22,991 22,991 22,991 22,991 22,991 22,991 = Present Value / Share $3.18 ($3.30) ($7.50) $1.07 ($9.78) ($12.09) WACC 7.9% 10% 12% 7.9% 13% 15% Terminal Growth Rate 0.87%
Data: Team forecasts
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Figure 7: Enterprise Valuations ($000)
Sensitivity analysis of enterprise values, with different WACC and Terminal Growth assumptions (shaded cells represent positive equity value):
Enterprise Value WACC ####### 7.92% 8.92% 9.92% 10.92% 11.92% 12.92% 13.8% -3% 607,574 562,719 524,598 491,769 463,177 438,029 418,266 -2% 637,999 586,897 544,121 507,747 476,405 449,093 427,789 -1% 675,244 615,950 567,219 526,405 491,682 461,746 438,599 0% 721,896 651,517 594,974 548,481 509,521 476,358 450,976 0.9% 775,245 691,111 625,216 572,116 528,345 491,587 463,756 2% 853,232 747,011 666,778 603,910 553,227 511,426 480,223
Terminal Growth Rate Growth Terminal 3% 975,633 830,314 726,370 648,156 587,040 537,869 501,858
Sensitivity analysis of enterprise values, with different WACC and EBITDA multiple assumptions (shaded cells represent positive equity value):
Enterprise Value WACC ###### 7.92% 8.92% 9.92% 10.92% 11.92% 12.92% 13.80% 4.5 646,484 624,053 602,715 582,406 563,064 544,635 529,130 5.0 684,341 660,204 637,252 615,413 594,623 574,821 558,167 5.5 722,199 696,356 671,788 648,420 626,182 605,007 587,204 6.0 760,056 732,507 706,324 681,428 657,741 635,193 616,241 6.5 797,914 768,658 740,861 714,435 689,300 665,379 645,278
7.0 835,771 804,809 775,397 747,443 720,859 695,565 674,315 EBITDA multiple EBITDA 7.5 873,629 840,960 809,934 780,450 752,418 725,752 703,351 8.0 911,486 877,112 844,470 813,458 783,977 755,938 732,388
Data: Team forecasts
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Figure 8: Unlevered Free Cash Flow Projections ($000)
FY 2007 FY 2008 FY 2009 Assumptions FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 t Assumptions* FY 2015 t+1 Publishing 524,775 436,870 357,502 325,327 305,375 295,026 292,148 289,298 286,476 Revenue % change -16.75% -18.17% -9.00% -6.13% -3.39% -0.98% -0.98% -0.98% Digital 35,039 38,399 41,143 45,159 49,880 55,404 61,980 69,336 74,883 Media and Other Revenue % change 9.59% 7.15% 9.76% 10.45% 11.07% 11.87% 11.87% 8.00% Broadcasting 336,479 322,106 258,967 290,250 283,759 302,910 301,126 299,352 302,346 Revenue % change -4.27% -19.60% 12.08% -2.24% 6.75% -0.59% -0.59% 1.00% Total 896,293 797,375 657,612 660,737 639,014 653,340 655,254 657,986 663,705 Revenue % growth -11.04% -17.53% 0.48% -3.29% 2.24% 0.29% 0.42% 0.87% 8.1% 9.0% 9.0% 37.5% 38.2% 37.8% - Employee 399,157 380,434 300,439 310,954 287,556 294,003 294,864 296,094 298,667 Compensatio n 45.00% - Production 211,426 193,034 154,785 24.00% 160,202 153,363 156,802 157,261 157,917 159,289 - Selling 124,884 111,549 94,031 97,322 91,379 93,428 93,701 94,092 94,910 General & Administrati ve 14.30% - 72,998 71,464 59,178 59,812 54,868 48,497 41,610 40,672 39,866 Depreciation & Amortization 14.20% - Goodwill - 908,701 84,220 ------and Other Asset Impairment - Gain on (3,250) (1,915) ------Insurance (17,604) Recovery Total 790,861 1,661,932 690,738 628,290 587,167 592,729 587,437 588,774 592,732 Operating Costs 97.50% 97.50% 0.09% 0.21% 0.11%
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FY 2007 FY 2008 FY 2009 Assumptions FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 t Assumptions* FY 2015 t+1
EBITDA (also 178,430 115,608 110,272 92,258 106,715 109,108 109,427 109,884 110,839 excl Impairment) % margin 19.9% 14.5% 16.8% 14.0% 16.7% 16.7% 16.7% 16.7% Operating 105,432 (864,557) 32,446 51,847 60,611 67,817 69,212 70,972 income (loss) (33,126) i.e. EBIT % margin 11.76% -108.43% -5.04%
Interest (36,015) (36,015) Expense (59,577) (43,449) (41,978) (59,235) (55,910) (55,360) (55,360) Impairment (4,419) 701 ------of and (34,825) income (loss) on investments Other, net 1,126 979 972 ------Total Other (36,015) (36,015) Expense (93,276) (46,889) (40,305) (59,235) (55,910) (55,360) (55,360)
Income (loss) 12,156 (911,446) (4,063) 5,251 12,457 33,197 34,957 from (73,431) (26,789) continuing operations before income taxes
Income tax 2,921 (288,191) (8,452) (1,282) 1,657 3,930 10,473 11,029 expense (28,638) (benefit) 31.55% 31.55% Income (loss) 9,235 (623,255) (2,781) 3,594 8,527 22,724 23,929 from (44,793) (18,337) continuing operations
NOPAT 49,102 (594,150) 22,210 35,490 41,488 46,421 47,376 48,581 (21,530) + 72,998 71,464 59,178 59,812 54,868 48,497 41,610 40,672 - 39,866 Depreciation and Amortization
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FY 2007 FY 2008 FY 2009 Assumptions FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 t Assumptions* FY 2015 t+1 + Goodwill - 908,701 84,220 ------and Other Asset Impairment + Gain on (3,250) (1,915) ------Insurance (17,604) Recovery - 18,453 31,517 78,142 25,000 10,000 - 35,000 35,000 39,866 Maintenance CapEx - Mandated ------CapEx - Growth ------CapEx - Change in - - 73,939 (2,202) 1,452 194 277 335 net working (39,505) capital
Free Cash 86,043 351,248 96,526 82,560 88,533 52,838 52,771 48,246 Flow (32,128)
Financing Costs Interest (36,015) (36,015) Expense (59,577) (43,449) (41,978) (59,235) (55,910) (55,360) (55,360) Net Change (167,523) (9,153) 847 (347,153) - in Debt (18,140) (18,140) (11,839) (41,153) Interest 3.0 2.7 2.6 1.6 1.9 2.0 2.0 3.1 3.1 Coverage Ratio Debt / - 6.3 6.5 7.6 6.2 6.0 5.9 2.8 - EBITDA
Current Assets Cash - 7,142 33,232 2.97% 19,654 19,008 19,434 19,491 19,572 3.00% 19,911 Accounts - 102,174 104,405 94,783 91,667 93,722 93,997 94,389 92,919 Receivable 14.35% 14.00% Inventories - 12,035 6,632 1.26% 8,318 8,045 8,225 8,249 8,283 1.30% 8,628 Other - 38,849 60,786 7.06% 46,633 45,100 46,111 46,246 46,439 7.00% 46,459 Total Current - 160,200 205,055 169,389 163,820 167,493 167,983 168,684 167,917 Assets
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FY 2007 FY 2008 FY 2009 Assumptions FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 t Assumptions* FY 2015 t+1 Projected ------PPE and CapEx PP&E - 453,627 421,208 386,396 341,528 293,031 286,421 280,749 280,749
Projected Current Liabilities Accounts - 41,365 26,398 30,400 29,401 30,060 30,148 30,274 29,867 Payable 4.60% 4.50% Accrued - 86,291 72,174 72,011 69,643 71,204 71,413 71,711 71,016 Expenses and Other Liabilities 10.90% 10.70% Total - 127,656 98,572 102,411 99,044 101,264 101,561 101,984 100,883 Current Liabilities
Net Working - 32,544 106,483 66,978 64,776 66,228 66,422 66,699 67,034 Capital nwc / 4.08% 16.19% 10.14% 10.14% 10.14% 10.14% 10.14% 10.10% revenue
Long Term 730,049 711,909 Debt 700,070 658,917 649,764 650,611 303,459 305,153
Sufficiency of Cash Flow to Service Capital Structure Financing (210,972) (383,168) (36,015) Costs (77,717) (60,118) (71,074) (97,063) (64,513) (54,513) Free Cash 86,043 351,248 96,526 82,560 88,533 52,838 52,771 48,246 Flow (32,128) Net CFs after 8,326 140,276 (92,246) 25,452 (14,503) 24,020 (1,675) (330,397) 12,231 Debt Service Adequate? OK DEFAULT OK DEFAULT DEFAULT OK
Max Leverage Debt/EBITDA 7.6 6.2 6.0 5.9 2.8 2.8 Ratio Debt 7.6 7.8 6.0 5.5 5.5 5.5 Covenants - Max Allowed
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FY 2007 FY 2008 FY 2009 Assumptions FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 t Assumptions* FY 2015 t+1 Adequate? OK OK OK DEFAULT OK OK
Fixed Charge Ratio EBITDA - 159,977 84,091 32,130 67,258 96,715 109,108 74,427 74,884 70,972 CAPEX Interest + 80,638 31,480 62,622 95,781 66,169 58,443 393,641 47,044 Principal + (77,219) Taxes Ratio 2.0 (1.1) 1.0 1.1 1.0 1.6 1.3 0.2 1.5
Min Allowed 1.0 0.95 1.6 1.8 1.8 1.8 Adequate? OK OK OK DEFAULT DEFAULT DEFAULT Data: Team forecasts
Figure 9: Credit Spreads
Commitment Levg Ratio Fee LIBOR Spread 6.5 1.00% 4.75% 5.5 1.00% 4.50% 5.0 1.00% 4.25% 4.0 0.75% 4.00% 4.0 0.75% 3.75%
Data: Company reports
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Figure 10: Debt Service Schedule ($M) 2010 2011 2012 2013 2014 2015 2016 2017 Term Loan 400.0 358.0 348.0 348.0 0.0 Revolver (70M limit) 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 Notes Balance 294.1 294.9 295.8 296.6 297.5 298.3 299.2 300.0 Notes Face Value 300.0 300.0 300.0 300.0 300.0 300.0 300.0 300.0 Total Senior Debt 700.1 658.9 649.8 650.6 303.5 304.3 305.2 306.0
Interest Rates LIBOR Assumption 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Term Loan - LIBOR +3.75-4.75 4.75% 4.50% 4.50% 4.50% 3.75% 3.75% 3.75% 3.75% Revolver +3.75-4.75 4.75% 4.50% 4.50% 4.50% 3.75% 3.75% 3.75% 3.75% Commitment Fee - 75-100 bps 1.00% 1.00% 1.00% 1.00% 0.75% 0.75% 0.75% 0.75% Senior Notes 11.75% 11.75% 11.75% 11.75% 11.75% 11.75% 11.75% 11.75%
Interest Paid
Term Loan - LIBOR +3.75-4.75 23.0 19.7 19.1 19.1 - - - -
Revolver +3.75-4.75 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Commitment Fee - 75-100 bps 0.6 0.6 0.6 0.6 0.5 0.5 0.5 0.5 Senior Notes 35.3 35.3 35.3 35.3 35.3 35.3 35.3 35.3
Total 59.2 55.9 55.4 55.4 36.0 36.0 36.0 36.0
Principal Repayment Term Loan 42 10 0 348 Revolver 0 0 0 0 0 0 0 0 Senior Notes 0 0 0 0 0 0 0 300 Total 42 10 0 348 0 0 0 300
Debt/EBITDA Ratio 7.6 6.2 6.0 5.9 2.8 2.8 2.8 2.8 Debt Covenants - Max Allowed 7.6 7.75 6 5.5 5.5 5.5 5.5 5.5 Data: Company reports, team forecasts
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Figure 11: WACC Calculation WACC Calculation Instrument Amount Rate Notes 292 12.26% Term Loan + Revolver 406 4.73% Avg Cost of Debt 698 7.9%
After Tax Cost of Debt 5.39%
10 Yr Treasury 3.74% Market Risk Premium 5.00% Beta 2.67 Cost of Equity 17.1% MV of Equity 292 Debt 71% Equity 29% WACC 8.84%
Data: Company reports, team forecasts
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Figure 12: Cash Flow to Debt holders - Before vs. After Refinancing ($M) Cash Flow to Debtholders - Before vs. After Refinancing ($M) Old Structure Rate Amount 2010 2011 2012 2013 2014 2015 2016 2017 Revolver 2.50% $ 426 11 11 11 11 11 11 11 11 Term Loan 2.50% $ 286 7 7 7 7 7 7 7 7 Interest Payments $ 712 18 18 18 18 18 18 18 18 Cumulative 18 36 53 71 89 107 125 142
New Structure Notes 11.75% $ 300 35 35 35 35 35 35 35 35 Bank Debt 4.50% $ 400 23 20 19 19 - - - - Revolver 4.50% $ 6 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Arranging fees 5.5 Reduction in Principal 6 Interest Payments $ 706 70 55 55 55 36 36 36 36 Cumulative 70 125 180 235 270 306 341 377
Net Increase in CFs to Debt Holders 52 37 37 37 18 18 18 18 Cumulative Increase 52 90 126 163 181 199 217 234
Net Increase to Bank Debt Only 17 2 2 2 (18) (18) (18) (18)
Data: Team forecasts
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Figure 13: Other Relevant Data Sources Standard & Poor’s Industry Surveys, Broadcasting Standard & Poor’s Industry Surveys, Publishing Media General Inc. Consolidated Financial Statements, FY 2007 Media General Inc. Consolidated Financial Statements, FY 2008 Media General Inc. Consolidated Financial Statements, FY 2009 Media General Inc. Annual Report FY2008 Media General Inc. Annual Report FY2009 Media General Inc. Annual Report FY2010 https://www.capitaliq.com/CIQDotNet/company.aspx?companyId=288355 http://www.mediageneral.com http://www.marketwatch.com/story/media-general-reports-first-quarter-2010-results-2010-04-21?reflink=MW_news_stmp, April 21, 2010. Gabelli and Co. Analysis Report: Media General Inc, 3 April 2010. http://topics.nytimes.com/topics/news/business/companies/media-general-inc/index.html
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