2023-05-19 05:31:47 ET
Summary
- The Standard General M&A deal appears dead.
- We believe that management should use any break-up fees received, regardless of the amount, and repurchase shares.
- We are buyers of TGNA shares again as we see numerous tailwinds which could dampen the blow from the slump in the general ad market.
TEGNA ( TGNA ) decided once again not to host a conference call to discuss their quarterly results due to the pending transaction with Standard General. While the deal now appears to be dead in the water, the company is continuing to move forward with Standard General to fulfill their duties on helping close the deal. Standard General has been a good partner throughout this ordeal, but unfortunately it appears that the government is going to kill/prevent the transaction and we think investors probably need to look at the business as it currently is constructed and how management will move forward.
Merger Probably Does Not Get Approved
Initially we were quite bullish on this transaction as we thought that Standard General would draw few antitrust concerns due to the fact that they did not own outright assets that overlapped with TEGNA's or could be considered as being combined to create a larger media player. Elizabeth Warren's interest in this transaction, probably mostly due to the fact that ownership in a Boston station would change, is probably what will ultimately did this deal in. In a letter dated May 17, 2023 she once again is calling on the FCC to block the transaction and laying out the argument for why it should not go through.
Standard General has done everything they can to get this deal over the finish line, and in the current political environment we do not see any maneuvers left for them to attempt to get the FCC's approval for the deal to close.
Looking Forward
It appears that TEGNA is going to be receiving at least $136 million as the break-up fee from all of this. The max they could receive is $272 million, but it looks like Standard General has met all of their obligations to keep their liability at $136 million - and from what we can tell the structure of the extensions keeps them at the lower level of break-up fees. This is from the proxy :
So What Should The Company Do?
TEGNA has been in a holding pattern since the merger was announced. They were allowed to make their normal business payments (think the interest payments on debt, etc.) and to continue paying shareholders the dividend, but share repurchases and other moves were off the table. According to the company's SEC quarterly filings, the share count has increased by 3,746,979 during this period due to equity awards and employee benefit plans. This is an increase of 1.69%, taking the total shares outstanding from 221,281,397 to 225,028,376.
We think management should take the $136 million break-up fee (or whatever it comes out to) and turbocharge share buybacks. With shares trading around $16.50/share, the company could repurchase almost 8.25 million, or 3.67%, of the total shares outstanding. That would make up for the year of no repurchases and put the company back on track for the previous share buyback plans. Best of all, this would not impact the company's net leverage ratio as they would be using cash from the break-up fee - not the cash they have on the balance sheet - and one could argue that it might help net leverage as the cash would sit on the balance sheet and earn interest during the duration of the buyback (unless they did a tender).
Management could also announce an increase to the dividend of half a penny to bring the dividend to $0.10 per share per quarter. Based on the current share count, that would only increase the cost of the dividend by $4.5 million annually.
Latest Quarterly Results
It was not a great quarter but certainly not as bad as it could have been. Adjusting for political ad spend and the Winter Olympics and Super Bowl both taking place last year during this quarter on the company's NBC affiliates, and one can see some of the same issues facing the entire industry; economic headwinds driving down ad spending. Unlike some peers, subscription revenue was up due to rate increases taking effect for about a third of subscribers at the end of last fiscal year - although this benefit was partially offset due to subscriber declines.
Even with the growth in year-over-year subscription revenue, the decline in ad spending saw Advertising & Marketing Services (or AMS) down 13% (but this was also due to political spending, Winter Olympics and the Super Bowl not being comparable comps in the period). The company still generated Adjusted EBITDA of $205 million and FCF of $133 million. While these results do not trouble us, especially as there are some tailwinds moving through the year in the ad space (including auto improving), we think investors should pay attention to 2024.
While political revenues should pick up in late 2023, and many expect 2024 to be a record year for political spending, the company has more affiliate agreements expiring in late 2023 and early 2024 which represent about two-thirds of their subscribers which might also be beneficial.
TEGNA's portfolio of stations is quite attractive and should capture significant political ad dollars in late 2023 and throughout 2024. (TEGNA Investor Presentation, Q1 2023)
Final Thoughts
We think that the Standard General deal is dead and it is time to look forward. TEGNA is still a great asset, and would be a suitable takeover target for private equity in a different regulatory environment. While investors will not be getting the instant payday expected, we believe that TEGNA management has numerous levers to pull in order to create value. Podcasting looks to be delivering solid growth among listeners and video content views, while the OTA portfolio has continued to reach more households. We do believe that efforts such as Premion should be undertaken by all media companies, as the potential is immense and are the low-risk, high-reward type of investments that can change a company and position it for the future.
We are once again buyers of TEGNA shares, but would move it to a 'Strong Buy' if it fell to $15/share or less.
For further details see:
TEGNA: Looking To The Future