Kim Gets A Win In Tegna Buy, But Will Journalism Lose?

Soo Kim

After twice failing to take control of Tegna by sneaking in through the back door (proxy fights), hedge fund investor Soo Kim finally won the prize by walking through the front door (a cash offer).

As we reported yesterday, Kim’s Standard General, with the help of Apollo Global Management, is acquiring Tegna for $5.4 billion in cash and the assumption of $3.2 billion in debt. The cash component breaks down to $24 a share, a 39% premium to the price before news of Kim’s bid leaked to the press and an 11% premium over Tegna’s high since been spun off by Gannett in 2015.

But there are a few layers to the deal.

As you’ll recall, Apollo bought control of Cox Media Group in 2019. Before Standard General acquires the Tegna shares, it has to sell its group of four small-market affiliates to Cox and then turn around and buy Cox’s WFXT Boston. (The group comprises stations in Providence, R.I.; Cape Girardeau, Mo.; Lincoln, Neb.; and Paducah, Ky.)

And that’s not all. After it closes on Tegna, Standard General will spin off five Tegna stations in Texas — KVUE Austin, WFAA-KMPX Dallas and KHOU-KTBU Houston — to Cox. The five are among the 62 in 51 markets that Tegna operates today.

So, Standard General gets Boston (Fox), but gives up its tiny station group along with Austin (ABC), Dallas (ABC) and Houston (CBS).

Usually, these side deals are driven by the need to comply with the FCC’s local and national ownership caps. In this case, they apparently are primarily about finance.

I’m figuring that Standard General will get more than $1 billion from the sale of the Texas stations and the small-market group. That will go a long way in helping Kim pay for Tegna.

Why Standard General is acquiring Cox’s Boston Fox affiliate is a complete mystery to me. If you have any ideas, let me know.

Incidentally, according to my arithmetic, when all is said and done, the Standard General-controlled Tegna will cover around 36% of TV homes, 3% below the FCC current de facto cap of 39%. So, Kim and Deb McDermott will have a little M&A headroom to play with.

Nonetheless, the deal might still face some headwinds in Washington.

According to the Cox press release, Standard General will hold “substantially all of the voting, common equity” in Tegna, while Cox and Apollo funds will “hold securities … that will be non-voting and non-attributable.”

Take note of the word “non-attributable.” That’s Apollo telling the FCC that although it will have financial interest in both Tegna and Cox, it will have no say in the operation of Tegna so the groups’ coverages should not be combined for purposes of the national cap. If they were, the combined coverage would soar to more than 50%, way out of bounds.

The parties hope to close in the second half of this year. And that should be possible, if the FCC and the antitrust regulators at Justice buy what Cox and Tegna are selling — that the groups will be truly independent of each other.

If that turns out to be the case, the deal will not be an example of further industry consolidation. It will simply be a change in ownership and management and the privatization of a public company.

The deal is a big win for Kim, although he probably ended up paying more than he had wanted to. The negotiation leading to yesterday’s announcement was long and strained.

Basically a hedge fund guy, Kim got in the broadcasting biz by buying the 11-station Young Broadcasting out of Chapter 11 in 2010. (Young never recovered from purchasing KRON San Francisco for $750 million in 1999 and promptly losing its NBC affiliation.)

With Young’s McDermott staying on as his top broadcasting manager, Kim went on to buy LIN Media and Media General. After a failed attempt to merge with Meredith, he sold his holdings to Nexstar for $4.6 billion in 2017.

Kim made a killing in his first foray into broadcasting and immediately looked to make another.

He wanted to acquire more stations and began buying up Tegna stock. With about 10% of the shares, he tried to gain some control on the Tegna board starting in late 2019 by electing McDermott and two other friendly broadcasters to the board.

That attempt failed as independent analysts came in with reports that Lougee & Co. was doing a good job, at least as measured against the performance of its peers.

Kim tried again last year and things got nasty when he orchestrated a clumsy effort to portray Lougee as a racist. That charge didn’t stick and once again Kim was rebuffed. If Kim was going to obtain control of Tegna, he would have to do it the old-fashioned way with a big fat check.

It’s also good day for McDermott, who always seems to come out on top even as station groups melt away beneath her. She is to be the CEO of the new Tegna. She proved that she could handle such a job when Kim put her in charge of the Young-LIN-Media General roll up.

By the way, Tegna has always been a wonderful place for women going back to its Gannett days. When Tegna was split off from Gannett in 2015, Gracia Martore stepped up to be its first CEO. Lougee took over in 2017 upon her retirement, but his two chief lieutenants are women, COO Lynn Beall Trelstad and CFO Victoria Dux Harker.

That new Tegna will be run by a woman and controlled by an Asian-American (Kim was born in South Korea and emigrated to the U.S. as a child) will be selling points at the diversity-minded FCC.

This is not the way that Lougee wanted to go out, although he won’t be hurting in his forced retirement. He owns a good bit of stock and he’s been drawing a healthy $6 million-plus annual salary.

During his run as CEO, he spent $1.7 billion on a series of relatively small acquisitions that added some quality stations and heft to the P&L. He plunged deep into the diginet business and oversaw the successful roll out of Premion, an OTT ad platform that operates on a national scale. From what I can gather, its annual revenues are now approaching $200 million.

But Lougee wasn’t an aggressive consolidator like Nexstar, Gray and Sinclair. And while he always posted solid returns, paid the now almost requisite dividends and made regular stock buybacks, he was never able to convince investors that he could make the company grow at the brisk pace they like to see. In the end, the only thing that could lift the stock price above $20 was talk of takeovers.

If you drop to the bottom of Lougee’s resume, you discover that he is one of the few station group heads who rose from the ranks of the newsroom. That pedigree is reflected in the Tegna’s solid reputation for news and in a number of news initiatives, including Verify, a fact-checking service with a national footprint, and the Atticus investigative unit based at WXIA Atlanta.

My fear is that the new regime — essentially two New York investment firms for which broadcasting is just another asset play — won’t share Lougee’s personal interest in news.

Spending extra on news doesn’t produce measurable financial returns and so it is vulnerable to the cost cutters who inevitably show up soon after the early assurances of new ownership that they love, just love, what they old guys were doing and don’t want to change a thing.

And it not just news department that may get a trim. This is another deal that is going to load up Tegna’s balance sheet with more debt. Somebody has got to pay that down.