Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Cheer up, Media General investors -- you actually got good news today.

The TV-station operator on Monday agreed to enter talks with Nexstar Broadcasting, even as it rebuffed the company's current offer as too low. This should please Media General investors including activist firm Starboard. They consider a combination with fellow broadcaster Nexstar preferable to Media General's existing agreement to acquire magazine publisher Meredith. So talks are good, right?

And yet, the stock fell more than 2 percent at one point, and was still down in afternoon trading.

Shareholders seem to be zeroing in on this statement from Nexstar CEO Perry Sook:

“We are eager to move forward with discussions with Media General regarding our proposal, while at the same time maintaining our financial discipline.''

If Nexstar is going to be financially disciplined, it may be less inclined to boost its cash-and-stock bid, which was valued at about $15.70 based on Friday's closing price, or more than $4 billion including debt. No bump to the current offer probably means no deal, and no deal means Media General could lose the roughly $550 million in market value that it's gained since Nexstar proposed a takeover.

Takeover Gains at Stake
Media General has climbed almost 40 percent on the prospect of a deal with Nexstar.
Source: Bloomberg

But just because Nexstar isn't going to get crazy with raising its bid doesn’t mean there won't be any boost at all. The company originally offered $17 to Media General before lowering its proposal amid the industry's selloff, according to people familiar with the matter. There's good reason to think that price could still be on the table.

Sure, the outlook for media companies has undoubtedly dimmed. Shrinking demand for TV packages could mean lower ratings, lower advertising sales and lower affiliate fees. Even sports programming isn't drawing the kind of viewership it once did. After Disney cut its forecast for cable-TV profit in August, analysts started slashing their projections for Media General's adjusted earnings per share. They now expect the company to make about 8 cents per share this year, about a 75 percent reduction.  

Buying Spree
TV station operators have announced a flurry of deals to help boost their bargaining power
Source: Bloomberg

The tougher things get in the media industry, though, the more Nexstar needs Media General. TV station operators have spent roughly $80 billion on takeovers since the start of 2013 in an effort to acquire scale and gain more bargaining power with pay-TV providers and programmers. A Media General purchase is one of Nexstar's last options to reach the 39 percent maximum geographic coverage allowed by U.S. regulators.

The other big reason to do the deal is spectrum. Media General has licenses to a decent-sized chunk of the airwaves, which could be sold at a U.S. auction held by the Federal Communications Commission in 2016. Media General's spectrum holdings -- and those that it acquired through the takeover of LIN Media -- were valued at about $2.8 billion as of about a year ago, according to Bloomberg Intelligence. 

The value of those assets has likely only gone up as demand increases from wireless providers seeking to manage an onslaught of data across their networks.

This isn't a takeover target that Nexstar should want to let slip from its grasp, and adding a few bucks to its offer makes sense. There's also a chance that Meredith decides to counter with a proposal of its own -- this time with the magazine publisher as an acquirer.

All of this bodes well for Media General.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net