October 02, 2015 - 8:28pm EST by
2015 2016
Price: 13.93 EPS 0 0
Shares Out. (in M): 130 P/E 0 0
Market Cap (in $M): 1,810 P/FCF 0 0
Net Debt (in $M): 2,220 EBIT 0 0
TEV (in $M): 4,030 TEV/EBIT 0 0

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****  I first published on Media General the week before the Nexstar offer and while I appreciate the strategic logic behind the combination, I believe the offer significantly undervalues Media General.  As can be seen below, the cash generating capabilities, NOLs and surplus spectrum yield value well in excess of $14.50. **** 
Seeking Understanding Through the Noise
Media General
September 2015
Noise surrounding the media space allows for an investment in leading broadcaster
Media General at a 21% free cash flow yield with further upside potential from continued
industry consolidation and the upcoming spectrum auction.
Our best investment opportunities often arise when we can find a deeper understanding through
the noise of the day. The media space has come under great pressure in recent months. There
are countless questions about the long term viability of many business models in the media
landscape. But amidst this noise and uncertainty comes a compelling opportunity to purchase
an enduring broadcasting business at an incredibly high free cash flow yield.
To set the perspective of our approach to investing, we aim to acquire stakes in world class
businesses at a discount to an increasing intrinsic value, allowing for strong future returns with
limited risk of permanent capital loss.
Media General is a nationally leading broadcasting company that owns, operates or services 71
network-affiliated stations in 48 markets and, when combined with its leading digital media
businesses, is one of the largest connected-screen media companies in the country. The
Company’s portfolio of broadcast, digital and mobile products covers 23% of U.S. TV
households and more than two-thirds of the U.S. Internet audience.
The majority of the Company’s stations are with the four major networks: 22 with CBS, 14 with
NBC, 12 with ABC and eight with FOX. The Company also has seven MyNetworkTV stations,
seven CW stations and one Telemundo station.
Media General in its current form came together through the combination of three broadcasters
in recent years. On November 12, 2013 Media General and Young Broadcasting were
combined in a tax-free, all-stock merger and on December 19, 2014 Media General (then
encompassing the Young Broadcasting business as well) merged with LIN Media creating what
is now the current Media General.
The original Media General became a public company in 1969 and has grown through
acquisition purchasing high-quality, privately owned local media entities in the Southeast. The
Company sold all of its newspapers in 2012 to in a deal with Berkshire Hathaway which also
made Berkshire a shareholder in the remaining broadcasting company. Berkshire remains a
shareholder today and has not sold any of its shares in Media General.
The Company also just announced on September 8
anothertransformative merger with
Meredith that will bring total local station count to 88 while enabling the combined entity to cover
30% of US households with free cash flow per share accretion of roughly $0.30 per year, which
is quite material given a roughly $10 current stock price. The proposed merger will also bring
greater heft in the digital arena as Meredith has a portfolio of brands historically tied to
magazines but which in recent years have been used to grow a substantial digital footprint along
with new revenue streams from brand licensing.
Broadcasting is a high returns business that generates large amounts of free cash flow. Local
broadcasters are the preeminent purveyor of highly demanded local news. The dramatic
consolidation in recent years has brought scale to a handful of companies while rendering their
historical financials largely meaningless when considering their current free cash generating
It is important to consider broadcasting results over two years as there are even year spikes in
revenue and cash flow largely attributable to political campaigns. While historical financials
provide an understanding of how the business has performed, it is necessary to value current
pro forma free cash flow given the significance of the Company’s recent acquisitions. Pro forma
for all completed acquisitions and station dispositions, Media General will generate cumulative
free cash flow of $570 million in 2015 and 2016, representing annual average free cash of $285
million. At today’s share count, this equates to average free cash flow per share per year of
Opportunity Summary
With Media General generating an average of $2.20 per share of free cash flow per year on
average in 2015 and 2016 (before the impact of the Meredith merger which would add about
$0.30 per year to that number), a purchase at today’s price around $10.30 equates to an
astounding 21% free cash yield. Moving to a much more reasonable free cash flow yield
of 10% would create a more than doubling in share price. Further upside potential comes
from monetizing its surplus wireless spectrum (conservatively $2 to $4 per share) along with
accretive capital deployment and additional acquisition opportunities (such as the Meredith
merger) given the Company remains well below the FCC ownership cap.
What is Creating the Opportunity?
There is tremendous noise surrounding the media industry and in particular those companies
deriving revenue and earnings from TV-focused business models.
Talk of cord cutting, cord shaving and cord nevers has been a constant topic in recent years but
the airwaves were filled with increasing veracity through the summer after comments by Disney
CEO Bob Iger. Mind you, he actually referenced slower than expected growth from pay TV fees
rather than actual declines, but in a world of severe overreactions to the headlines of the day, a
whirlwind was created and stock prices declined dramatically.
What else happened that week? Discovery disclosed an accelerating high single digit affiliate
fee outlook. CBS revealed a faster ramp to $1 billion in retransmission fee revenues and many
media companies reported a stronger second half advertising environment.
Beyond the news of that week, there has recently been a lot of discussion about declining
ratings across the cable and broadcast TV footprint due in large part to a disaggregation of
linear viewers as viewing is time shifted and moved online.
But what does all this mean for the media industry and specifically Media General? We will
spend considerable time below debunking myths that have plagued the minds of investors. In
short, those companies with must have content will find their video content in continued
demand. How they get paid for this content may change but consumers will retain a desire to
watch great shows, great movies and important news. It is possible that niche audience
oriented content will lose value as skinnier bundles take away some of today’s revenue from
such offerings. But those with the most in demand content will continue to get paid.
What will be the impact on Media General? We already have a good idea of the cash flow
Media General will produce in 2015 and 2016. As we look past these two years, continued
growth in retransmission fees, digital revenue, and political ad spending combined with
enhanced cost controls and merger synergies will driver higher free cash flow above and
beyond 2015/2016 levels. Much of the growth coming from retransmission fees is already
under contract and expense control and synergy plans simply need execution. So we can look
forward and have comfort about continued growth in free cash flow for Media General.
More fundamentally, what provides comfort about the longer term viability of Media General? It
largely comes down to the content of its stations. The big four networks and their local affiliates
will play prominent roles in even the skinniest bundles. ABC, CBS, NBC and FOX are not
niche, small audience cable channels.
Live local programming is a primary revenue driver for Media General and other broadcasters
and has shown to be resilient in the midst of challenges facing media companies more broadly.
In fact, ratings for most local news are actually increasing whereas the declines across cable
have been pronounced and much better documented.
In summary, Media General has a solid and enduring business that generates
tremendous levels of free cash flow and is available today at a wildly attractive valuation.
Before going further, I want to point out three key tenets to the investment thesis with local
broadcasters generally and Media General more specifically:
1. Broadcasters deliver by far the largest audiences across the TV landscape.
2. Local broadcasters in particular have a preponderance of live programming throughout
the day including three large chunks of local news, sports and weather, morning and
daytime talk shows, live sports, live events and late night talk, amongst other
programming viewed in real time. This makes them less reliant on any continued
declines in the linear viewing of scripted primetime programming.
3. Many local broadcasters including Media General trade at by far the best valuations in a
media industry that is already attractive in many other areas. Media General is available
at a greater than 20% free cash flow yield and that, paired with some of the best
underlying business dynamics with continued growth coming from increasing retrans
fees, growing digital revenue streams, accretive M&A and effective capital allocation,
makes for an unusually attractive investment.
TV is Dead, Long Live TV (or at least the local news, sports and programming of the
broadcast networks…)
The decline, even death, of TV has been one of the most discussed topics amongst investors
with the intensity of the discussion gaining yet more steam this summer. But let’s peel back the
headlines and see what is happening with the business of TV.
People are still watching a lot of TV. While that statement may seem benign and even
obvious, sometimes simple statements of truth are needed to gain perspective. As the chart
below illustrates, we are actually watching slightly more hours of TV per day than we were five
years ago. That is a somewhat startling fact given recent headlines.
It should be noted we are also spending much more time on digital devices which is terribly
obvious to all of us. But that does not mean we are watching less TV. Our digital time has
taken from other places including our time conversing face to face.
It also is important to note that local broadcasters, particularly Media General, have strong and
growing digital businesses. In fact, the stability of local news and the big four network TV
business paired with the growth in retrans fees and digital businesses portends continued
growth ahead for Media General.
TV remains the most effective way to reach mass audiences. This is another seemingly
simple and obvious statement that needs to be restated. The broadcast networks in particular
have retained the singular ability to garner large audiences at one time, in one place.
In the eyes of advertisers, TV remains the most influential medium to influence purchase
decisions. As important, the broadcast networks remain the only place to reach mass
audiences. Broadcast networks dominate household ratings and total viewing times. They
house the vast majority of must see viewing including sports, primetime shows, national and
local news and other event based shows drawing massive, real time audiences.
Broadcast network viewing trounces cable viewing. The dominance of broadcast networks
relative to cable holds across day parts and across programming.
The following chart paints two very interesting pictures. The bottom half of this slide from a
recent Sinclair Broadcast presentation starkly reveals how the broadcast networks post
dramatically higher ratings than even the best cable networks. The top half of the slide is even
more compelling for the business side of a broadcasting business. As can be seen, even
though the broadcast networks have substantiallymore viewership, they lag in compensation
received per subscriber. So while they capture more eyeballs, they get paid much less per
subscriber. This is one reason we see secular growth coming from the broadcasters. They can
expect to see higher retrans fees in coming years as they capture more of the value they