Media General Building

The Media General Building in downtown Richmond.

Shareholders of Richmond-based Media General Inc. will vote this week on a proposed merger that will greatly expand the company’s size as a television broadcaster, but also add substantially to its debt level and shake up its top management ranks.

Media General’s planned acquisition of Austin, Texas-based LIN Media LLC in a deal valued at $2.6 billion would make it one of the largest owners of television stations in the nation, reaching about 26.5 million, or 23 percent, of U.S. TV households.

If approved, the merger would more than double the company’s current size, creating a national broadcasting and digital media business that will own and operate or provide services for 74 television stations nationwide. Media General owns WRIC-Channel 8 in Richmond.



The combined company would generate about $1.2 billion in annual revenue. Sinclair Broadcast Group Inc., the nation’s largest TV operator and owner of WWBT in Richmond, had $1.36 billion in revenue in 2013.

Shareholders of Media General and LIN Media will vote Wednesday at separate meetings on proposals to make the merger possible. The deal also must still pass the scrutiny of federal regulators, but the companies have said they expect to complete the merger early in 2015.

The combination of the two companies means that some Media General executives will depart, including current CEO George Mahoney, who will step down after the merger is completed.

While the merger will give Media General a lot more influence and power in the broadcasting industry — it would become the nation’s third-largest group of broadcast television stations — the combined company would have about $2.7 billion in debt.

Being a highly leveraged company is among the risk factors that Media General and LIN Media have warned investors in regulatory filings could have an impact on the combined company’s business after the merger.

The total includes the large amount of debt already on the books of both companies — Media General’s long-term debt was $849 million as of June 30 while LIN Media’s was $910.7 million — as well as debt taken on to pay for the deal.

Among the limitations imposed by the debt covenants: The combined company will not be able to pay cash dividends on its voting common stock, meaning that any return on investment in its stock will come only from price appreciation of the stock, at least for the near term.

Debt has contributed to financial concerns for Media General in the past.

Company leaders have conceded that its decision in 2006 to buy four television stations from NBC Universal for $600 million resulted in a debt load that affected its results during the economic recession.

At the time of the acquisition of those stations, company executives thought the debt could be paid off in a few years, but that was before the recession hurt advertising revenue and cash flow.

Yet several analysts said they think the debt load with the LIN Media merger is manageable as long as the company is able to achieve the business efficiencies it expects from the deal, and if the U.S. economy remains on a recovery path and advertising spending remains healthy.

Bill Davis, chief executive officer and portfolio manager for Thompson Davis Asset Management in Richmond, called the merger “a good thing” for both companies.

“The only negative is they are taking on more debt,” he said. “But in the low interest rate environment we are in now, I think they have the cash flow to pay that down.”

Achieving cost efficiencies by combining the two companies is one of the keys to making the merger work, said Jess T. Ellington III, senior vice president and chief investment officer for Union First Market Bank in Richmond.

Media General, he said, “has a good track record of that.” He said the company has produced more cost efficiencies than expected from its merger last year with New Young Broadcasting Co. of Tennessee.

For instance, the company was able to substantially lower the amount of its annual interest payments on its long-term debt.

With this latest merger, the combined company expects to implement additional cost-saving measures. It is expecting about $70 million in “synergies” from corporate overhead savings and other initiatives.

Several top executives of Media General are expected to depart as the planned merger approaches or when it is completed — even though the combined company’s headquarters will remain on East Franklin Street in downtown Richmond.

Mahoney, 62, will leave after more than 20 years with the company. He joined Media General in 1993 as its general counsel and corporate secretary. He was named corporate vice president in 2006 and became CEO early in 2013.

“The downside — as with any merger — is that there are going to be some casualties,” in the administrative ranks, said Larry Patrick, managing partner of Patrick Communications, a Maryland-based media brokerage firm that represents sellers and buyers of radio and TV stations.

The proxy statement sent to investors lists severance packages for the top five Media General executives, three of whom are known to be departing.

Mahoney’s severance agreement includes a package of cash and stock totaling $3.99 million, according to documents filed with the Securities and Exchange Commission.

Two key broadcast vice presidents — John Cottingham and James Conschafter — are leaving the company at the end of November and December, respectively, as the company had previously disclosed. Conschafter’s sever-ance calls for him to receive about $1.4 million and Cottingham would get about $1.26 million.

The regulatory filings also show what the severance package would be for James Woodward, Media General’s chief financial officer, and Deborah McDermott, the company’s senior vice president of broadcast markets. Their fates are unclear.

Woodward’s severance calls for him to get $1.8 million while McDermott’s package would be $1.26 million.

Taking over as Media General’s chief executive officer will be LIN Media CEO Vincent L. Sadusky, who has served in that role since 2006 and previously was the company’s chief financial officer for two years.

Sadusky, 49, also worked for 10 years as CFO and treasurer of Telemundo Communications Inc., the Hispanic broadcasting network and station group.

He owns 1.6 percent of LIN Media stock. Hicks, Muse & Co. Partners, a private equity firm based in Dallas that specializes in leveraged buyouts, is LIN Media’s largest shareholder, owning 35 percent of the stock.

Regulatory filings indicate that LIN Media representatives were firm about Sadusky becoming the top executive with the combined company as a condition of the merger.

At a Feb. 22 meeting, while the companies were still in discussions over the deal, a committee of LIN Media board members appointed to negotiate the transaction “came to a consensus that Mr. Sadusky serving as chief executive officer (of the merged company) was in the best interests of LIN and its shareholders.”

In part, they came to that conclusion because a significant portion of the merger consideration to be received by LIN shareholders consists of stock in the combined company.

As the top executive with Media General, Sadusky will be paid an annual base salary of $711,000 (his 2013 salary was $690,100, while Mahoney’s base salary last year was $625,000). Sadusky also will be eligible to receive a target annual bonus of $757,000 starting in 2015.

Sadusky cannot be terminated as president and CEO for a period of three years from the closing of the deal, other than for cause, without the approval of a majority of the board of directors, including at least one LIN designee to the board.

The merger also sets out a “golden parachute” package for Sadusky worth about $10.2 million, including about $2.7 million in cash and $7.5 million in stock.

The headquarters for Media General will remain at 333 E. Franklin St. in Richmond.

But the combined company will maintain “significant” administrative operations in Austin, Texas, where LIN Media is based, according to the SEC documents.

Media General has about 100 employees at its Richmond headquarters now, but that number will decrease to about 85 when the merger is completed. In April, Media General announced it would eliminate 45 jobs, or about 35 percent of the headquarters workforce, either then or by the time of the merger.

The company has downsized tremendously in recent years. And Media General’s building at 111 N. Fourth St. — one of its two downtown buildings — remains on the market to be sold or leased.

Industry analysts said it is difficult to predict whether the headquarters will remain in Richmond long term.

It is unclear, for instance, if Sadusky or other LIN Media executives will move to the Richmond area. It also is unknown how many employees work at LIN Media’s corporate headquarters.

LIN Media has declined interview requests about the merger since the deal was announced, and a spokeswoman did not return recent phone calls and emails seeking comment about the corporate headquarters.

J. Stewart Bryan III, Media General’s chairman since 1990 and CEO from 1990 to 2005, will keep his office in the company’s downtown Richmond building. Bryan, whose family started Media General, owned 1.1 percent of the company’s shares as of late February.

The deal comes on the heels of its merger last year with New Young Broadcasting, a deal that expanded the company’s television station holdings from 18 to 31.

That was the second step in a transformation process that started when Media General sold all of its newspapers, including the Richmond Times-Dispatch, in two separate deals in 2012.

The combination is part of a bigger trend in the media business, as media companies that once owned newspapers, television and radio stations have increasingly split up their print and broadcasting businesses, while also pursuing acquisitions and mergers to create bigger television companies.

For instance, McLean-based Gannett Co.’s acquired television operator Belo Corp. in 2013 for about $1.5 billion, almost doubling the number of TV stations the company controls. Gannett announced this month it will split its broadcast and publishing business in two.

In July, Journal Communications Inc. of Milwaukee and E.W. Scripps Co. of Cincinnati agreed to combine their broadcasting operations while spinning off their newspaper holdings into a separate company.

“What you see with LIN and Media General is consolidation that is sort of sweeping through the broadcast business,” said Patrick of Patrick Communications.

“Size does matter,” in the industry, he said. “It gives you more clout.”

Clout is important in broadcasting these days in part due to competition over the revenue generated by cable subscribers. Television station companies with more stations have more clout in negotiating with cable and satellite providers over the retransmission fees.

Size and scale also are important as station owners negotiate deals with TV networks and syndicated programming providers, Patrick said.

To remain competitive, broadcasters also are combining forces to make investments in technology and adapt their content offerings to consumers, who increasingly expect to access programming digitally — by cell phone or online — whenever they want it and wherever they want it.

“That is one of the major positives of putting together two large industry leaders — cost synergies, plus economies of scale and negotiating leverage,” Ellington said.

 
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