Special Situation Investing

Wednesday, August 16, 2006

Triple Crown Media (TCMI) Post Spinoff Analysis

In a somewhat complicated transaction, TCMI separated from it's parent company Gray Television, last december, and shortly thereafter merged with Bull Run corporation. The company operates a disparate collection of businesses: newspapers, collegiate marketing, collegiate production services, a management services company and a wireless provider. I really don't do it justice but there is a fairly exhaustive summary here for those interested.

Usually the pupose of a spinoff is to allow the parent or the child company to receive a "purer" valuation (that means higher) due to the simplicity of valuation. In this case, only Gray Television would have received the benefit. Personally, I don't consider this an issue, this company is still less complicated than say GE, which still garners a very healthy valuation.

TCMI is interesting from a special situations perspective for a number of reasons:

1) It has a massive debt load for it's size. To put it into numbers, at current prices, TCMI has a market cap of $38 million, and long-term debt of $118 million. In total, TCMI, as of March 30, listed $168 Million in assets and $158 million in liabilities. Much of the assets are in the form of goodwill or intangibles. As such, the company has tangible assets of $-93 million. So the company is highly leveraged but this is counterbalanced by a very depressed stock price. Obviously not something you want to sink your whole portfolio into but that same reaction is probably keeping many fund managers away.

2) TCMI is small. Again, it has a market cap of $38 million. Most mutual funds cannot gain a meaningful piece of it, I doubt most would even look at it.

3) The whole TCMI situation is somewhat complicated. Long-term financials are not readily available, it was a complicated spinoff and their are several different types of businesses bundled as TCMI.

4) The company has incredible price appreciation potential. In the last quarterly results, the company listed $34 million in revenue ($136 million annualized) and $4.6 million operating income ($18.4 million annualized). To put this into perspective, Gannet Company, a large newspaper publisher and admittedly not a perfect comparison, is doing about $8 billion in revenue per year and has a market cap of $13 billion. To be fair though, Gannet does make a healthy profit.

5) The shares were originally tendered at ~$15 / share last December. Currently the company is sitting around $7.50. Management clearly thinks higher of the company than the market does.

6) Management has considerable interests in stock price appreciation. In a series of SEC filings on April 27, 3 senior executives received rights to large stock option blocks:

Cornwell Steven, Exec. VP Operations, 20000 shares, expire 2016, exercisable at $5.43 / share
Meikle Mark, Exec. V.P. & CFO, 25000 shares, exercisable at $5.43 / share
Tom Stultz, CEO, 100000 shares, expire 2016, exercisable at $5.43 / share


Company Outlook

This is all fairly meaningless of course, if the company does not survive. There is tremendous risk with the high debt the company carries. There appears to be little synergies between the businesses it manages (that is more speculation on my part than analysis). In spite of this, I think TCMI will survive. My reasons include the following:

1) In spite of it's huge debt load, despite recently merging Bull Run, and despite just recently spinning off as an independant company, Bull Run made a small profit of $464K in the quarter ended March 31, 2006. If you disclude amortization of intangibles (this is a paper expense only), they profit would have been closer to $1 million.

2) I anticipate that the company will be able to cut costs over the next couple years as recently merged companies tend to have at least some overlap.

3) I am repeating myself, but management has a strong interest in the company NOT going under.

Do your own research, and it would be very helpful if I could get some comments on the idea.

4 Comments:

  • I'd like to see more investor capitulation on this - given the high debt levels. Perhaps it will be a good year buy candidate on tax-loss selling.

    By Blogger wra22, at 11:25 AM  

  • Tax loss selling... I like the way you think. I agree that it needs to go lower but at this point am willing to (and have) put a small sum on it.

    By Blogger spinoff, at 6:41 PM  

  • Management options are at $5.43. When I saw that in the SEC filings I bought several 1,000 shares. I'm up 40%. I think management is very bullish on the prospects, especially the collegiate part of the business.

    By Blogger SpinMaster, at 11:26 AM  

  • Gray Television, GTN, the former parent, is also interesting and looks like it has huge upside. Looks like Gray is selling for around 9-10x free cash flow. Both co's are heavily owned by J Mack Robinson, a big player in Atlanta.

    Gray is a slow growth business and has been expanding primarily by purchasing more stations. Their organic revenue growth was 4% in the recent quarter, bearing in mind that it's an election year so ad revenue is higher.

    Like TCMI, they are very highly levered. With both I haven't seen any sign from management that they plan to reduce debt...in fact both co's keep making acquisitions. TCMI's borrowing rate went up 25 basis points this month when they bought the rights to University of Nebraska radio broadcasts. The price wasn't disclosed so there's no way to tell whether they are making smart purchasing decisions. We do know that they have a 2nd lien loan at 13.5%, and it's obscene to borrow at that sort of rate. I tend to avoid managements who are hooked on debt. It's so easy to create value and boost the share price simply by paying it down.

    That said, both GTN and TCMI have tremendous upside, but with fairly high risk.

    By Blogger HarperAssetMgmt, at 12:18 PM  

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