Deals

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

The drama over a $2 billion TV-station owner is stretching into yet another episode. 

First, a recap: Four months ago, Media General, operator of stations in markets including the U.S. Southeast, agreed to acquire magazine publisher Meredith. It then received an offer of its own from another TV-station owner, Nexstar Broadcasting Group.

After months of back-and-forth between Media General and Nexstar (and some noise from activist investor Starboard), the two appeared to be closing in on a deal this week. Media General tried to terminate its agreement with Meredith, but Meredith had other ideas. On Thursday, it countered with a proposal for a merger of equals with Media General. 

How will the story end? If we were to write the conclusion, Media General would choose Nexstar, and Meredith would bow out. Shareholders ought to root for that outcome as well. 

Nexstar is the more logical partner for Media General, strategically speaking. The fellow broadcasters would have greater scale and stronger bargaining power with pay-TV providers and programmers if combined -- a big advantage as things get tougher across the media industry. Meredith also has TV stations, but the bulk of its revenue comes from businesses related to magazines like Better Homes and Gardens and Fit Pregnancy. What is Media General going to do with those? Media General investors weren't pumped about the takeover even before they knew a deal with Nexstar was an alternate possibility. 

The Nexstar Effect
Media General has climbed 45 percent since Nexstar disclosed its takeover interest.
Source: Bloomberg

There's also the question of price. Nexstar is offering Media General holders $10.55 in cash and 0.1249 of a Nexstar share, for a total value of $17.66 a share. The broadcaster may also pay a contingent value right to account for proceeds Media General receives in an upcoming Federal Communications Commission auction of airwave rights.

Meredith is also offering a CVR, $3.90 in cash, and one share in the combined company. Meredith says that's worth about $18.84 per Media General share, not including the CVR. Whether you believe that or not depends on how you value the prospects for a conjoined Meredith-Media General, whose shares aren't yet publicly traded. Some investors may take a dimmer view.  Meredith holders would receive $14.95 a share in cash and and 2.8244 shares in the new combined company as part of the deal.  

That's messy and it's hard to see why Media General shareholders are going to go for that over the Nexstar bid, which includes more cash.

So what is Meredith thinking? The company gets a $60 million breakup fee if it lets Media General terminate the transaction and strike a deal with Nexstar instead. If Meredith doesn't back down, the deal will go to a vote among Media General shareholders. Remember, those are the same shareholders that haven't really liked the idea of a Meredith-Media General combination from the beginning. Oh, and the breakup fee drops to just $15 million if Meredith loses the vote. 

Losing Enthusiasm
Meredith shares are down 15 percent since it first struck a deal with Media General.
Source: Bloomberg

Perhaps Meredith is betting that Media General will sweeten its termination package just to make it go away. Before it came out with this amended proposal, Meredith offered to break off the deal in exchange for three TV stations at a discounted price, an additional breakup fee and two digital businesses, people familiar with the matter told Bloomberg's Paul Barbagallo and Alex Sherman. Media General made a counter offer that Meredith rejected, the people said.

There is a time element affecting the Nexstar deal that could work in Meredith's favor. The FCC imposes a quiet period in connection with the upcoming airwave auction that would prolong the processing of a Nexstar-Media General merger agreement, unless they opt not to participate.  That quiet period begins Jan. 12 -- next week. So if Meredith drags things out, that could mean a big delay for Nexstar and for Media General shareholders awaiting their payout. Some investors may prefer a quick exit with Meredith -- and Nexstar may be willing to give up a little more to Meredith to avoid that situation. 

But Meredith might be overestimating how much speed is worth to Nexstar. The broadcaster will have to divest TV stations to secure regulatory approval for the takeover. It's already committed to doing that, but it will take time to set up buyers, especially with many possibilities tied up in the spectrum auction themselves. The deal will already be delayed, so what's a few more months?

Either way, the plotline still needs to be resolved. Whether sooner or later, Meredith should move on to another program. 

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