Description

Company: TEGNA Inc.

Security: TGNA US Equity

Stock Price: $20.71

Target Price: $24.00

Timeline: 2 months 

Situation: M&A Arb

Investment Overview

On 2/22/22 TEGNA Inc. (TEGNA, TGNA or the company) announced a $24/share in cash acquisition (the Transaction) by Standard General with a targeted H2’22 close. TGNA’s current share price implies a 52% probably of the deal breaking (assuming an initial $17-$18/share break price). The stock has stayed in the $19-$20 range since early October. Given recent (12/16/22, 12/22/22, 12/23/22) concessions and other mitigates put forward, the market implied probably is underestimating the likelihood of a deal closing. The base case is the TGNA deal closes by 2/22/23 (likely sooner), including the ticking fee accumulates, this implies a gross spread of 17%. Hedging using put options reduces downside. 

Over the past week Standard General has submitted three separate letters to the FCC offering further commitments relating to retransmission consent agreements, staffing levels and concerns that Standard General would collude with Apollo (AGM) and Cox Media Group. These recent announcements by Standard General indicate an increasing likelihood to meet Transaction concerns and indicate that a deal is approaching to approve the Transaction. 

If the deal does break, we would expect TGNA to momentarily trade to the $17/$18 level, implying a 5.5-5.6x 2023/2024 average EBITDA, roughly near Sinclair (SBGI) the weakest broadcaster. Once M&A arb selling dissipates, TGNA is expected to trade closer to broadcast averages at of 7x 2023/2024 EBITDA or near the $24 share deal price. With the best balance sheet in the sector (2.5x), TGNA warrants a premium to the sector. This is offset by recent sector weakness in political, advertising and retrans revenue that is likely to continue to pressure the sector.  

Company Overview

TEGNA Inc. (TGNA or the company) is a media company that owns 64 television stations in 51 U.S. markets. TEGNA is the largest owner of top 4 network affiliates in the top 25 markets among independent station groups, reaching approximately 39 percent of all television households nationwide. TEGNA also owns leading multicast networks True Crime Network, Twist and Quest. TEGNA offers innovative solutions to help businesses reach consumers across television, digital and over-the-top (OTT) platforms, including Premion, TEGNA’s OTT advertising service.

Transaction Overview

On 2/22/22 TEGNA announced a $24/share in cash acquisition by Standard General. TEGNA shareholders voted to approve the transaction on 5/17/22. The transaction represents equity value of $5.4B and an enterprise value of $8.6B, including the assumption of debt. 

Following the close of the transaction, TEGNA stations in Austin (KVUE), Dallas (KMPX) and Houston (KHOU and KTBU) are expected to be acquired by Cox Media Group (“CMG”) from Standard General. After closing, Premion (an advertising network for over-the-top (OTT) streaming and connected television platforms) is expected to operate as a standalone business majority owned by Cox Media Group and Standard General. 

The transaction represented a premium of 39% to TEGNA’s unaffected closing share price on September 14, 2021, the last full trading day prior to media speculation about a potential sale of TEGNA, and a premium of approximately 11% to TEGNA’s all-time high closing price since separation from the Gannett publishing business in 2015.

In addition to receiving $24.00 per share, TEGNA stockholders will receive additional cash consideration in the form of a “ticking fee” of $0.00167 per share per day (or $0.05 per month) if the closing occurs between the 9- and 12-month anniversary of signing, increasing to $0.0025 per share per day (or $0.075 per month) if the closing occurs between the 12- and 13-month anniversary of signing, $0.00333 per share per day (or $0.10 per month) if the closing occurs between the 13- and 14-month anniversary of signing, and $0.00417 per share per day (or $0.125 per month) if the closing occurs on or after the 14-month anniversary of signing.

At deal announcement, the transaction was expected to close in the second half of 2022.

The details of the Standard General transaction are:

1. Transfer outstanding equity interests in (TEGNA), the ultimate parent of the licensees of 64 full-power television stations, two full-power radio stations, and other related FCC licenses, to an indirect subsidiary of SGCI Holdings III LLC (SGCI Holdings), whose Managing Member is Soohyung Kim, the Managing Partner of Standard General L.P. (Standard General).

2. Series of related transactions:

   1. Standard General affiliate Community News Media LLC transfers control of its four full-power television stations  to a subsidiary of CMG Media Corporation (CMG), which are under the de facto control of Apollo Global Management, Inc. (AGM).

   2. CMG transfers control of WFXT(TV), Boston, MA, to SGCI Holdings. 

   3. Post-merger TEGNA (New Tegna) proposes to assign the licenses of four full-power television stations  to indirect, wholly-owned subsidiaries of CMG.

• Essentially, Standard General is selling four TV stations it owns to CMG Media (formerly Cox Media Group). Apollo, which owns 71% of CMG through one of its funds, is among those buying $925 million worth of non-voting, preferred stock to help Standard General finance the Transaction.

Transaction Concerns / Mitigates 

The staunchest opposition to the transaction comes in the form of two petitions and four comments:

Petitions to deny:

• Petition to Dismiss or Deny of the NewsGuild-CWA and National Association of Broadcast Employees and Technicians-CWA (together, “NewsGuild”), MB Docket 22-162 (filed June 22, 2022) (“NewsGuild Petition”); 

• Petition to Deny of Common Cause and United Church of Christ Media Justice Ministry (“UCC”), MB Docket 22-162 (filed June 22, 2022) (“Common Cause/UCC Petition”). 

Four Comments:

• Comments of the American Television Alliance (“ATVA”), MB Docket 22-162 (filed June 22, 2022) (“ATVA Comments”); 

• Letter from NCTA – The Internet & Television Association (“NCTA”) to Marlene H. Dortch, MB Docket No. 22-162 (filed June 22, 2022) (“NCTA Comments”); 

• Comments of Altice USA, Inc., MB Docket 22-162 (filed June 22, 2022) (“Altice Comments”); and 

• Comments of Graham Media Group, Inc., MB Docket 22-162 (filed June 22, 2022) (“Graham Comments”). 

• FCC documents refer to the ATVA, NCTA, and Altice collectively as “MVPD Commenters” and, together with Graham, as “Commenters.” MVPD stands for Multichannel Video Programming Distributor, the service providers that deliver multiple television channels to customers or subscribers. 

Arguments and their accompanying mitigates against the transaction can be divided into the following:

• Retransmission fee increases

• Concern: There is an “after-acquired” clause in retransmission (retrans) contracts to immediately boost fees. The NCTA-The Internet & Television Association, said it has no problem with the FCC approving the Standard General-Tegna deal, if the commission imposes conditions that holds Apollo Global Management/Cox Media Group to their pledge they would not strike TV station sharing arrangements or sidecar deals post-merger. NCTA is concerned that the web of license transfers and spin-offs in the deal could prove a way to end-run the FCC's ban on joint, coordinated, retrans negotiations.

• Mitigate:  At no point in negotiating the Transaction did TENGA / SGCI Holdings or AGM propose joint retransmission negotiations. TEGNA will negotiate retransmission consent as any other station group.

• Mitigate:  On 12/16/22 Standard General agreed to waive some contractual rights in TGNA acquisition. Any impact of the Transaction on the retransmission consent fees payable by multichannel video programming distributors (MVPDs) is not central to Standard General’s thesis for the proposed Transactions.  On 12/23/22  Standard General reiterated it has not considered coordinated retrans negotiations other than short-term transition services agreements needed to avoid disruption of service to the public and agreed to conditions that NCTA requested to not oppose the transaction.

• Control / Size (driving retrans fears)

• Concern: The Transaction would enlarge two large television group conglomerates – Apollo and Standard General, which could use their bargaining power in retransmission negotiations with cable and satellite distributors for higher prices, that will be passed on to consumers. In particular, it is claimed Apollo would work with Standard General to put pressure on cable operators in retransmission consent negotiations and consolidate newsrooms in markets where both own stations.

• Mitigate:  The Transaction will not result in AGM having de jure ownership nor control of the TEGNA nor results in retransmission negotiations. The preferred securities AGM and CMG hold in TEGNA do not give either company any right or ability to participate in management of TEGNA or any contract negotiation (including retransmission contracts). Following the original March 10, 2022 filing of the Applications, AGM syndicated a portion of the Series A preferred shares originally reserved to it to an affiliate of Pacific Investment Management Company LLC (“PIMCO”). The Applications were amended at that time to include this update and reflect the current composition of Series A preferred shareholders:

  • SG Media Investment LLC (a Standard General entity) (14.39% of Series A shares) 

  • Cox Enterprises, Inc. (4.86% of Series A shares) 

  • PIMCO affiliate (8.11% of Series A shares) 

  • Ares Management Corporation affiliates (50.00% of Series A shares) 

  • AGM (22.64% of Series A shares).

• Cut local staff 

  • Concern: Allow Apollo to increase the use of a national news desk and cut local newsroom staff.

• Mitigate:  Standard General has said it doesn’t plan any newsroom cuts and McDermott sent a note to employees emphasizing Standard General’s commitment to stations and local news. Standard General has a historical commitment to local news operations and plans to invest to counter the more than half of TEGNA stations in Nielsen Metered Markets have lost market position since 2019. On 12/22/22 Standard General commits that it will not conduct any journalism or newsroom staffing layoffs or similar reductions at the stations for a minimum of two years following the Transactions. 

Key Items Timeline

March 2020

• WSJ reported Apollo made a $20/share cash offer for TGNA, first contacting the company in early 2019.  This offer was after Gray Television Inc. made a $20/share cash and stock offer. Apollo’s plan was to combine TGNA’s assets of Cox and Northwest Broadcasting, both acquired by Apollo in 2019.

02/22/2022 

• Standard General to buy TEGNA for $24.00 per share in cash, equity value of $5.4 billion and enterprise value of $8.6 billion.

6/3/22

• The FCC asked TGNA several new questions, among which was how Standard General would negotiate retransmission agreements with cable providers for rights to carry TV station signals and about potential layoffs. 

6/7/2022 

• Standard General rejected the argument that their purchase of TGNA would result in higher consumer costs and job cuts. 

  06/22/2022

• Labor unions ask the US Federal Communications Commission to deny Standard General’s proposed $5.4 billion purchase of TV broadcaster Tegna. The NewsGuild-CWA and the National Association of Broadcast Employees and Technicians-CWA in filing say deal “would create excessive concentration” and threaten journalism jobs

07/14/2022

• Bloomberg article on transaction. Concerns are Apollo’s Boston station sale triggers fears of Pay-TV rate hikes and Altice warned the Transaction impact stiff consumers with rate increases. 

12/16/22

• Standard General agrees to waive some contractual rights in TGNA acquisition. Standard General issues statement that “We have committed to waive certain contractual rights we would have had a result of the transaction. This commitment further demonstrates the public interest benefits of the transaction.” 

12/20/22

• Action on Standard General’s proposed buy of Tegna isn’t expected soon, and recent concessions by Standard founder Soohyung Kim aren’t moving deal opponents, said industry attorneys and groups. “The reality is that the proposed investment increases the parties’ incentive and ability to collude in ways unaddressed by Standard General’s offer," said the American Television Alliance in a release Monday. Standard’s deal for Tegna was filed in February 2022, and the arrangement is now under the effects of a “ticking fee” clause in the merger agreement, which raises the price the longer the deal isn’t approved by regulators (see 2210280062). The “purchase price is increasing every day,” said Kim in a statement Friday.

12/22/22

• Standard General filed a second letter with the FCC stating that it will not conduct any journalism or newsroom layoffs for two years following the close of the transaction and will honor existing collective bargaining agreements. The NewsGuild-CWA and NABET-CWA labor unions have vocally opposed the transaction and have been holding ex-parte meetings with FCC commissioners and staff in recent weeks.

12/23/22

• Standard General sent a third letter in which it offered commitments that it said would “further remove any doubt about potential coordination” between Standard General, Apollo and Cox Media Group with respect to joint retransmission consent negotiations. Outside interest groups, including the Internet and Television Association, previously urged the FCC to impose such conditions on the merger.

Financials, Valuation, Recent Peer Results 

Q3’22 results were weak across the board for most broadcasters. TGNA’s EBITDA missed consensus by 9% with advertising and marketing services (AMS) revenues of $321mm down -12% y/y and -6% vs consensus. The company attributed its quarterly weakness to a crowding out of political spend by macroeconomic headlines and comping Olympics revenues (TNGA is the largest NBC affiliate group).  Political revenue was also light, reporting $93mm compared to $101mm consensus. Weak political revenue has occurred throughout peer Broadcaster earnings. Retrans revenues of $377mm were 3% below consensus as sub declines exceeded expectations. Adjusted EBTIDA of $266mm was 9% below consensus, FCF of $148mm was below consensus of $176mm. TGNA ended Q3’22 with 2.52x leverage, the strongest balance sheet in the broadcaster sector. 

Political spending was down across the sector. Gray Television, Inc. (GTN) sold off 35% after reporting Q3’22, with weakness driven by a large miss in political spending ($144mm compared to $193mm - $195mm guidance). The company attributed the weakness to pullback in certain key races and cut full year political guidance to $495mm - $505mm compared to prior guidance at $625mm (2020 levels). The combination of weak political spending and guidance, as well as high leverage, drove the equity selloff. Peer The E.W. Scripps Co. (SSP) also saw weak political spending with Q3’22 political revenue of $63mm vs. guidance at $90mm. With weakness in political spending, SSP reduced its FCF guidance from ~$400mm for the year to ~$320mm. Peer Nexstar Broadcasting Group, Inc. (NXST) exceeded political guidance and bucked the sector trend. 

With weakness in political spending and retrans flattening, broadcast average two-year EBITDA multiples (a two-year average is needed to smooth out lumpy political send) have been declining from 9x in 20217 to 8x in 2021/early 2022 and currently at 7x. Multiples represent future expectations of political weakness and cord cutting pressures reduce retrans cash flows in an environment with higher costs.  

Broadcast Industry Average Two-Year EV/EBITDA Multiple

Broadcaster Peer Valuation 

Risks

• Deal

  • Political risk - The FCC has a 2-to-2 partisan split. The nomination of Gigi Sohn for the fifth commissioner’s slot has languished for over a year. Chairwoman Jessica Rosenworcel leads the agency, a Democrat selected by President Joe Biden.  Rosenworcel declined to comment on the Tegna transaction, or to say whether she considered fees charged by broadcasters to be too high, when asked during a June 8, 2022 news conference. There is a risk Democrats may not want a Broadcast assets to be controlled by private investors. 

• Industry Concerns 

  • Broadcast stocks (advertising revenue) are highly sensitive to a recession and recent political revenue has softened. During the last recession broadcasting stocks declined by 75%+. 

• Retrans Trends

  • Retrans revenue has been weak at TGNA and peers. TGNA has not communicated its sub repricing, however as the company repriced 45-50% of subs in Q4’19, given 3-year deals this indicates repricing in Q4’22. New retrans deals with price escalators will result in upward pricing pressure eventually passed through to the consumer leading to more cord cutting. 

Appendix

Amendment No. 1 to Agreement and Plan of Merger

Merger Agreement

FCC Standard General and Tegna, MB Docket 22-162

FCC filing 

Proxy 

Catalyst

Deal approval