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Media General merger could be springboard to add more television stations

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Posted: Tuesday, November 5, 2013 5:30 pm | Updated: 6:22 pm, Tue Nov 5, 2013.

Shareholders of Media General Inc. will vote this week on a proposed merger that will expand the Richmond-based company’s broadcasting portfolio while also dramatically changing its ownership structure.

If the company’s proposed merger with Nashville, Tenn.-based New Young Broadcasting Holding Co. Inc. wins approval as expected, Media General will go from owning and operating 18 television stations (including WSLS in Roanoke), mostly in the Southeast, to owning 31 stations in markets from New York state to San Francisco.

With some newfound financial flexibility and confidence from Wall Street, Media General may use the merger as a springboard for opportunities to add more stations to its portfolio, its top executive said.

“We do expect to grow the footprint of Media General,” George L. Mahoney, Media General’s president and chief executive officer, said in an interview last week at the company’s downtown Richmond headquarters.

The merger comes as broadcasting companies have been seeing a rebound in advertising sales following declines during the economic downturn, and as the industry is undergoing consolidation.

The merger is a game changer for Media General, said Barry Lucas, who follows the media and publishing industry as senior vice president of research at Gabelli & Co., which is an affiliate of Gamco Investors Inc. Gamco owns about 32 percent of Media General’s Class A shares and will own 10.2 percent of the combined company once the merger is completed.

“Media General will be a bigger, pure-play broadcaster with greater scale in a consolidating industry,” Lucas wrote in a research note on the merger.

Mahoney said the company expects to participate in industry consolidation.

“The first thing for us is to look for additional duopoly opportunities,” he said, referring to arrangements in which the company might own one station in a particular market while managing another one under a contract with the owner.

The company also might seek out acquisitions, Mahoney said.

“We will be opportunistic about that,” he said, adding that the company might look for opportunities to do station swaps with other companies in a way that would “realign properties in a more logical fashion.”

Besides the shareholder vote, the company is awaiting approval by the Federal Communications Commission for the merger to move forward. Although the company could not say for sure when that will happen, Mahoney said he expects no problems receiving FCC approval.

The deal also will transform Media General’s ownership structure, marking the first time that J. Stewart Bryan III and his family won’t control the company.

Under the merger agreement, Media General will reclassify all of the outstanding shares of its Class A stock and the super-voting Class B stock into shares of a newly created class of voting common stock. Shareholders will receive one share in the new company for each share they currently own.

After the merger, the stockholders and other equity holders of Media General will own about 32.5 percent of the combined company’s shares, while investors in the privately held New Young Broadcasting will own about 67.5 percent of the combined company.

The merger eliminates the dual-class stock structure that has given Bryan, the company’s chairman and former CEO, voting power to elect 70 percent of its board of directors.

Bryan, the great-grandson of the founder of the newspaper company that grew to become Media General, will remain the combined company’s chairman. He has said he will own about 1 million shares, but his holdings won’t put him among the five largest shareholders — the smallest has about a 5 percent stake — in the new company, regulatory filings show.

Bryan has said it was no longer necessary to maintain a dual-class stock structure after the company exited the newspaper business.

Media General got out of the newspaper business in 2012. It sold 63 publications, including the Richmond Times-Dispatch and The (Lynchburg) News & Advance, that June to a subsidiary of Berkshire Hathaway Inc., the investment company managed by billionaire Warren Buffett. The Tampa Tribune was sold to a different buyer in October 2012.

As a part of the merger deal, Berkshire Hathaway, which owns about 17 percent of Media General’s Class A stock, will own no more than 4.99 percent of the combined company’s voting shares.

Dropping the dual-class stock structure “changes things dramatically” for Media General, said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

“It means investors have more control,” he said.

Historically, dual-class stock structures have been used by media companies or family-owned businesses whose founders wished to insulate the company from short-term investor demands or hostile takeovers.

Dual-class stock structures have never been popular with investors, Elson said, adding that some research has shown dual-class stock companies tend to underperform the market, trading at a discount because investors view them as riskier.

More recently, however, some of the major technology and social media companies have adopted dual-class stock structures. Internet giants Google Inc. and Facebook Inc., for instance, have dual-class stock giving the founders more voting power than other shareholders.

“They argue it ensures a long-term perspective,” Elson said. “Others argue it insulates management from shareholders.”

In Media General’s case, Elson said, the company had little choice but to eliminate the dual-class stock if it wanted to merge with another company.

The combined company initially will have a 14-member board with Bryan as its chairman.

At the company’s 2014 annual meeting of stockholders, the size of the board will be reduced to 11 members, with five Media General designees being nominated including Bryan as chairman, Marshall N. Morton as the company’s vice chairman and former CEO, and Mahoney as the company’s president and CEO. Five New Young designees also will be nominated along with one additional person selected by the board’s nominating committee.

The possibility of changes in ownership of Media General began about a year ago.

During last year’s third quarter, Media General was approached by an investor that indicated potential interest in exploring an acquisition at about $7.50 per share, according to a prospectus on the merger sent to shareholders last month. The stock was trading at the time between $3.91 and $5.32. (Shares closed Friday at $15.32, near the 52-week high.)

Bryan indicated that his family’s trust did not favor such a transaction, the regulatory documents show. Discussions were not pursued with the investor because Bryan and the trust’s approval would be required to complete a deal, the documents show.

Discussions about a possible merger between New Young Broadcasting and Media General started in the fall of 2012 with meetings of the two company’s executives, the prospectus said.

The talks between the companies, which continued for several months, included the possibility of unwinding Media General’s dual-class stock.

Early in the process, Bryan had requested that the Class B shares, of which he controls 85 percent, be given a “special consideration” in any merger. He had suggested those shares get a 20 to 30 percent premium, in exchange for giving up the right to elect a majority of the board.

By early April, Media General’s board authorized management to proceed with a possible transaction. Bryan withdrew his request in late April as the discussions progressed. Bryan also asked, and later withdrew, that he receive a consulting agreement with the combined company.

The merger deal was announced in early June.

New Young Broadcasting traces its roots to Young Broadcasting, which was founded in 1986 as an outgrowth of the Adam Young Inc. ad representation firm.

It entered the broadcasting business that year by acquiring several television stations in the Midwest and Gulf Coast region. It acquired WRIC in Richmond in 1994, along with stations in Wisconsin and Tennessee.

Young Broadcasting filed for Chapter 11 bankruptcy protection in March 2009, emerging in June 2010 under the name New Young Broadcasting and with about $800 million in debts erased and under the ownership of its largest lenders.

The New York-based hedge fund Standard General became the majority owner of New Young in 2012. It will own 28 percent of Media General after the merger.

The merger has given Media General new financial flexibility by helping the company secure a new debt deal in August that substantially lowers the annual interest amount that Media General or New Young Broadcasting pays now, Mahoney said.

The company expects to pay about $39 million annually compared with the two companies’ current standalone annual interest expense of about $75 million.

The new financing provides for more cash flow, Mahoney said, while the combined company also expects to pick up other cost savings by combining back-office functions.

Media General has about 100 employees at its Richmond headquarters, where it has cut staff during the economic downturn and following the sale of its newspaper properties. Mahoney said he does not expect the size of the corporate staff to change dramatically.

Of the combined company’s top 11 executives, all but one is a current Media General officer. Deborah A. McDermott, the president and CEO New Young Broadcasting, will become senior vice president of broadcast markets of the combined company. Only one other executive from New Young Broadcasting will move to Richmond.

The company will make investments where it is most needed to gain audience, Mahoney said. That means investing where local broadcasters still enjoy an advantage, in local advertising and local news, especially investigative reporting, he said.

Media General also needs to invest in digital content for an audience that is increasingly reliant on mobile devices, he said.

In the media industry, “virtually all companies are being forced to change their business models,” said Steve Marascia, director of research at Capitol Securities Management Inc. in Henrico County.

“Broadcast is going through a mini-revolution, given that you now have Internet competing with traditional media outlets such as television,” Marascia said.

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