Berkshire Hathaway gave network television broadcaster Media General (NYSE: MEG) a new lease on life last year, buying the vast majority of its community-based newspapers and financing a $400 million term loan with warrants. The funds allowed Media General to refinance its other debt obligations and focus operations on the local television broadcasting business. While the network broadcasting industry has generated limited growth lately, with data provider IBISWorld estimating a 1.1% year-over-year sales decline as of Aug. 2013, network affiliates have engineered growth primarily by negotiating higher transmission rates from cable and satellite TV providers. So, should investors bet on this small cap?
What's the value?
Media General's transaction with Berkshire Hathaway turned it into a pure play on local broadcasting, with a network of roughly 31 stations concentrated in the southeast region of the U.S. Like its peers, the company owns network affiliates in less-populous, lower-tier markets, in contrast to the broadcast networks themselves, which have concentrated their affiliate ownership positions in the major population centers. While the local broadcasting business was left for dead only a couple of years ago, the industry's fortunes have generally bounced back, due to loyal local viewership that's coveted by commercial and political advertisers.
In fiscal 2013, Media General's sales and profit levels have slipped compared to the prior-year period, due to a poor comparison against last year's politically supercharged advertising spending levels. Despite the overall top-line decrease, though, the company has enjoyed a double-digit sales increase from its retransmission segment, indicating strong demand for local content from the cable and satellite TV industry. In addition, Media General generated double-digit growth in its digital initiatives, as it has found success migrating consumers from television to the online sphere.
Looking for more diversification
In the local broadcasting arena, success is dependent on maintaining diversification in both network representation and geographic footprints. In that regard, Media General is a bit risky, given its concentration of affiliates in the southeast U.S. As such, investors might find a better risk/reward ratio with more diversified competitors, like Gray Television (GTN 2.04%).
While Gray has a lower overall domestic market share of U.S. households than Media General -- roughly 7% versus 14% for its competitor -- it has a much better geographic dispersion of properties, operating a wide-ranging network around the country that is concentrated in university towns and state capitals. Like Media General, Gray has been in acquisition mode lately, capped by its recent purchase of 15 stations in seven markets from competitor Hoak Media.
Not surprisingly, Gray has also posted negative year-over-year financial comparisons in 2013, due to the dearth of political ad spending in the current year. On the upside, the company posted growth in its local advertising segment, the source of more than half its revenues, courtesy of higher ad spending from the automotive sector. More important, the strong pricing environment and demand from Gray's nonpolitical customer base has led to a continuation of excess cash flow, providing funds to improve its financial profile and pursue selective acquisitions.
An even more diversified bet would be Sinclair Broadcasting Group (SBGI +0.70%), owner of roughly 163 stations around the country that reach almost 39% of the U.S. population. From its roots as a small affiliate of the Fox network, Sinclair has built itself into one of the nation's largest local broadcasting companies, a position that was enhanced by its recent purchase of Fisher Communications, adding a valuable market presence in Seattle and Portland, Ore. Sinclair's growth through acquisitions may be approaching its limit, due to the federal government's media ownership rules. But the company is banking on innovative content development, like its "Your Voice, Your Future" town halls, to drive viewership and greater station productivity.
The bottom line
Media General is on a much better business trajectory than it was just two short years ago, having shed its loss-producing newspaper operations. Certainly, anything that Buffett and company is part of is likely to be a good long-term bet, providing additional credence to the company's story. However, Sinclair Broadcasting looks like the best-positioned sector play, with its diversified portfolio of properties, and it deserves a portfolio nod ahead of its competitors.
