June 13, 2013

Few paid much attention to the blandly worded announcement a week ago of a merger between Media General and New Young Broadcasting. That was no surprise — an agreement between two midsize local broadcasting companies isn’t nearly as big a deal as, say, Gannett’s $2.2 billion acquisition of Belo today.

But there were at least three spicy stories lurking beneath the corporate-speak:

Warren Buffett’s Berkshire Hathaway cashed in big

In May 2012 Buffett and Berkshire Hathaway bought all of Media General’s newspapers except the Tampa Tribune.

That deal included two related transactions.

First, Berkshire Hathaway loaned Media General $445 million to refinance a crushing debt load coming due. The initial interest rate was an eye-popping 10.5 percent.

Second, as thanks for saving Media General from that life-threatening financial distress, BH received penny-a-share warrants to acquire 19.9 percent of the company — 4.6 million shares in all.

One benefit of the merger, Media General said last week, is that it will be able to refinance its debt at a considerable savings of interest expense. BH will reportedly be paid “a $44 million premium” as part of the refinancing.

In addition, Media General’s shares jumped more than 30 percent the day the merger was announced and have roughly doubled in value since Buffett’s three-legged investment just over a year ago. That’s a tidy appreciation — to the tune of $25 million — on stock that didn’t cost Berkshire Hathaway much of anything.

Plus BH acquired 63 dailies and weeklies for a bargain price of $142 million and has used them as the base for building a bigger chain, subsequently buying papers in Tulsa, Greensboro and Roanoke.

So, consider the sweet deal a quick demonstration — on a modest scale for giant Berkshire Hathaway — of how Buffett got to be one of the five richest men in the world.

A mystery — who’s in charge here? 

The merged company will retain the Media General name, stay in its Richmond, Va., headquarters, and keep its top executives in place. Of the two companies, Media General has more stations, higher revenue and higher earnings, so it would appear to be the acquiring company or first among equals.

However, privately-held New Young comes to the party with just $164 million in debt compared with Media General’s $601 million, so it is the stronger of the two financially. New Young shareholders will end up with 67.5 percent of the new stock.

And in a phased transition to a new board of directors, New Young will ultimately control six of the new company’s 11 seats.

Both companies should benefit. They gain the mass of a bigger footprint with 30 stations, reaching nearly 15 percent of TV households, and more clout to negotiate lucrative retransmission fees from cable operators. They may turn out to be happy partners, working hand-in-hand indefinitely. But if not, it looks to me as if New Young would be in control.

So why call the company Media General? New Young is a confusing name on its surface. The name has nothing to do with youth — it’s derived from the founder’s name. The “New” part makes a distinction from old Young, whose flagship KRON-TV in San Francisco lost its NBC affiliation a decade ago and whose financial troubles festered for years before the bankruptcy.

There are precedents in the corporate world for the stronger partner keeping the weaker one’s name. When NationsBank acquired Bank of America in 1998, it opted to call the new company Bank of America.

End of an era of family control

Media General’s roots go back to the merger of Richmond’s two papers in 1940. When Media General went public in 1966 and acquired the Tampa Tribune and Winston-Salem Journal three years later, the Bryan family created two classes of stock, giving themselves a majority of the voting shares.

That’s the same structure that keeps the Grahams in control of The Washington Post and Sulzbergers at The New York Times (and prevails at E.W. Scripps and McClatchy).

The two-class arrangement held up until last week when Chairman J. Stewart Bryan III, a young man when he joined the company but now 75, said separate family voting shares would come to an end as part of the merger and that he and the family trust were voting for it.

Long story short, Media General has had ups and downs through those 70-plus years, but was always an able TV operator, with a top-rated station in Tampa and other markets.

It turned out not to be as nimble an operator in the digital era. Its showpiece converged newsroom, launched with fanfare in Tampa in 2000, was a modest success at best, while various digital acquisitions and startups fizzled.

Combine that with its purchase of several TV stations at premium prices in 2006 and deteriorating results from its newspaper division, and the company was on the brink of collapse by late 2011.

In an astonishing earnings conference call that October, analysts (who are typically gentle questioners) seemed to scoff at management’s profit projections and assurances that debt obligations could be met. Mario Gabelli, whose investment funds had held a big minority stake in Media General for several decades, got on the call and bluntly asked whether auditors would certify the company as a going concern.

The sequel was the transaction with Buffett six months later and the separate sale of the Tampa Tribune, which had been losing as much as $2 million a month, to a Los Angeles investment firm.

Through it all, Bryan and the executive team scrambled to avoid bankruptcy at all costs. They won that battle, but until last week the corporation continued floundering in debt.

I’ve had a front-row seat for the company’s fortunes — first as en employee, then as a competitor, and now as analyst — and my impression of Bryan and his team is one of proud Virgina gentlemen, unfailingly polite, sensitive to family honor and appearances.

A more ruthless operator would have cut losses much earlier at the newspapers — The Tampa Tribune especially — and perhaps would have seen the advantages of entering and coming out of bankruptcy protection for a fresh start with little debt. Even with Buffett as the buyer, I’m sure it was painful for Bryan to walk away from the flagship Richmond Times-Dispatch.

In that respect, the merger had another modest benefit: Media General didn’t have a Richmond-based TV station, but New Young brought one to the deal. So the company will regain a journalism foothold in its hometown.

Correction: This story originally misstated where New Young Broadcasting got its name from.

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Rick Edmonds is media business analyst for the Poynter Institute where he has done research and writing for the last fifteen years. His commentary on…
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