MEG - Media General

[writser]

I have enjoyed the VRX soap the past few days but let me try and post something useful for once. I saw a nice VIC writeup today of an idea I am currently invested in and wanted to write a small post about for a while. That got significantly easier today - I can mostly copy the VIC article :) . So here we go.

 

Media General was the target of a bidding war. Nexstar has won and is taking over MEG for:

 

- $10.55 in cash

- 0.1249 shares of NXST

- a CVR distributing results from the upcoming MEG spectrum auction.

 

The deal is expected to close in late Q3 / early Q4 (link). Media General expects the CVR to be worth $2 - $4 / share (see latest conference call or 2015 investor day slide deck). Expected value at current prices (keep in mind that NXST will probably pay $0.48 in dividends until the deal closes):

 

CVR $0: $15.86 (5% downside)

CVR $1: $16.86 (1% upside)

CVR $2: $17.86 (7% upside)

CVR $3: $18.86 (13% upside)

CVR $4: $19.86 (19% upside)

 

Assuming the deal closes by the end of October you are looking at a ~11% to 32% IRR if management is correct about the CVR's. You could buy MEG outright if you have a favourable view of the combined entity but I never bothered to look into that. I am short roughly 125 shares of NXST for every 1000 shares MEG long. No market risk and the borrow rate of NXST is very acceptable at the moment. I think both ways to play it are ok.

 

Unfortunately this deal is not as attractive anymore as it was a few weeks back. When I got in you basically got paid to own the CVR. That is no longer the case but I think it still is a decent idea in a diversified portfolio.

 

I tend to like CVR deals because I think they are unattractive for a wide range of market participants for multiple reasons. For example, in the SWY deal last year you could get CVR's for free by buying the common stock just a few days before the deal closing. A couple of forum members levered up greatly to make an easy profit. I did too, and I think it was one of the best opportunities of the year.

 

Another idea for the bottom scrapers: CTF expects to convert to an ETF in the 2nd quarter of 2016. Currently trades at a ~4% discount to NAV. I think you can sell it at a ~1% discount after the conversion. NAV is _relatively_ stable. I'm long a small chunk.

[writser]

NXST got financing, DoJ approved the deal, everything is set apart from FCC clearance. Though FCC clearance seems likely (as far as I've read they usually coordinate with the DoJ) the question is whether they will grant MEG / NXST a waiver to go through with the merger during the spectrum auctions. If the waiver is granted the merger could take place in a few weeks otherwise it will probably happen in Q1 2017. Starts to look like the latter case is more likely.

 

Market currently assigns a ~$1 value to the CVR. To be fair it seems like spectrum buyer interest in spectrum is not enormous so I'm not sure one should expect much more. On the other hand, there are rumours they are selling an expensive spectrum block in SF which alone could be worth over $1 per CVR.

 

Anyway at the current price you don't pay much for the optionality. Worst case you lose ~3% over a few months, best case MEG goes for a large spectrum cleanup and you make 10% or more. And maybe you can flip the shares somewhere down the road if the market gets overly optimistic.

 

p.s.: interesting read on the auction: http://current.org/2015/12/a-guide-to-the-fcc-spectrum-auction/.

p.p.s: I'm by no means an expert on the subject so feel free to ignore or berate me.

[writser]

The FCC finally approved the merger and also granted the waiver. The deal will probably close quickly now. MEG is now trading at ~$19.25 up from ~$16 in the beginning of 2016 (but mainly due to NXST appreciating). Buyer interest in the spectrum auction has been very lacklustre and the auction is still dragging along. Stage three ended with broadcasters asking $40b but bidders bidding $20b - still a big gap. Market now assigning a ~$0.60 valuation to the CVR which might be around fair value.

[Munger_Disciple]

Market now assigning a ~$0.60 valuation to the CVR which might be around fair value.

 

Why do you think that $0.60 is close to fair value? Thanks

[writser]

I have no special insights. Initial management estimates were $2-$4 per share for the CVR. The first FCC clearing target for the auction was around ~$88b but bidders are still not bidding more than ~$20b. Looks to me like the auction is a disaster so far. If you assume MEG spectrum bidders are eqally lacklustre and apply a similar discount to their bids I have a hard time seeing the proceeds to be more than $1. I'm no expert about their specific assets though.

[writser]

Deal closed. Did not turn out spectacular but got a little bit lucky. Last trading day the market valued CVR's at ~$0.30. I still own a few, curious to see what they will pay out in the end.

[writser]

From the latest Nexstar 8K (link):

 

Later in 2017, Nexstar is expected to receive an estimated $479.0 million of gross proceeds from the National Broadband Plan Spectrum Auction related to the disposition of Media General’s spectrum. None of the spectrum Nexstar offered was selected during the auction process because prices available in the auction fell below the value we ascribed to it.  Based on these factors, the value of each CVR is estimated to be worth between $1.70 and $2.10 calculated by using the estimated gross proceeds, less estimated transaction expenses, repacking expenses and taxes.

 

Positive surprise.

[Jurgis]

You da man, writser.  8)

[writser]

Payout hit my account today: $1.97 / CVR. Not bad at all. There is still a small amount in holdback so a little bit more might be coming.