Saga Communications Stock: A Takeover Target? (NASDAQ:SGA) | Panda Anku

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Saga Communication (NASDAQ:SGA) is an owner-managed small radio station. The stock has long been considered “cheap” given its real estate assets, free cash flow generation, and high cash balance. Nevertheless, the historical stock performance leaves a lot to be desired:

SGA vs. S&P 500

Alpha wanted

However, due to the recent death of their CEO, Ed Christian, the company appears positioned for a value-releasing event. The groundbreaking CEO held voting rights over the company and as a result of his death, here’s what has changed newer 8-K:

At the time of his death on August 19, 2022, Edward K. Christian held approximately 65% ​​of the combined voting rights of the Company’s common stock based on Class B common stock, generally entitled to ten votes per share. As a result, Mr. Christian was generally able to control the voting on most matters put to the shareholders’ vote and was therefore able to direct our management and policies, with the exception of (i) the election of the two Class A directors, (ii) those matters on which the shares of our Class B common stock are entitled to only one vote per share, and (iii) other matters requiring a group vote as provided in our memorandum of association, articles of incorporation or applicable law require.

The death of Mr. Christian and the consequent transfer of his Class B Shares into an estate planning trust will result in an automatic conversion of any Class B Shares he held into a fully paid up and non-taxable Class A Share. Upon Settlement of Mr. Christian’s estate, on December 29, 1998, the Edward K. Christian Trust u/a/d/ will own 965,149 Class A common shares, representing approximately 15.95% of the Company’s outstanding common shares at accounting for the conversion of Class B Shares into Class A Shares Michael Dallaire, Esquire (Mr. Christian’s nephew) and Judith A. Christian (Mr. Christian’s wife) are co-trustees of the Trust.

As previously mentioned, the voting dynamics at SGA will change drastically. The Super Voting Class B shares will convert to Class A shares, leaving a single class totaling 6.0 million shares. Major shareholders have a new voice in the company’s operations:

  • TowerView – 19.4% of pro forma Class A (and ~15% of Daniel Tisch’s holdings)

  • T. Rowe Price, Dimensional & FMR – 26.6% of Pro Forma Class A

  • Gate City – 5.2% of the pro forma Class A

This is particularly unique given that public service peer radio companies are closely held and voting rights are not evenly distributed – inclusive City Square Media (TSQ) and audacity (CHF). That crease appears to be discouraging investment in the space and depressing valuations. With Saga now open to activist participation, I suspect a step is being taken to unlock the value.

With that in mind, TowerView has already submitted an updated Form 13, with cryptic comments not present on their previous Form 13:

TowerView may in the future have discussions with members of the Board of Directors, senior management of the company or others about the future direction of the company.

rating structure

saga has earned $22.2 million in EBITDA in the last 12 months (I include “non-cash” compensation compared to the $23.5 million reported by SGA). They also grew EBITDA for the first six months of FY22 by about 15% over FY21, a good sign that the business isn’t too much of a melting ice cube.

Adjusted for $2 million in cash taxes and $5 million in maintenance investments, Saga in its current form is an approximately $15 million FCF business. There’s about $10 million in SG&A that also rolls through the income statement, of which $3.2 million in FY21 alone was CEO compensation (clearly inflated since CFO and Ops President are in Compare both earned ~$500,000). We anticipate most of this corporate spending could be a synergy in a transaction.

Also real estate. According to 10-K:

  • As of December 31, 2021, the studios and offices of 25 of our 28 operating locations, including our corporate headquarters in Michigan, are located in facilities we own. The remaining studios and offices are located in rented premises with terms of 0.7 to 2.9 years. We own or lease our transmitter and antenna sites with terms ranging from 1 to 69 years.”

Owned PP&E was recorded on the June 22nd balance sheet at $54.3 million, net of depreciation and amortization, and the gross book value of the land, buildings and towers exceeds $75 million. There has only been a recent sale of real estate:

  • “During the first quarter of 2020, we sold land and a building on one of our high-rise locations in our Bellingham, Washington market to Talbot Real Estate, LLC for approximately $1,700,000 resulting in a $1,400,000 gain on the sale of assets.”

This is notable as tower locations are quite valuable and SGA still owns quite a few. I don’t think all of SGA’s properties could be sold for a profit of 400% of book value, but I believe they are worth at least their listed book value and could be valued in excess of $100 million.

Assuming an 8% cap and using low, base and sell up values, the possible values ​​for SGA are as follows:

$ in M ​​except per share

Low

base

On the top

1. Cash

$52.3

$52.3

$52.3

2. Real estate

75.0

100.0

125.0

3. Free cash flow

15.0

15.0

15.0

3a. plus synergies

3.0

5.0

8.0

3b. Less rent (8% cap for 2)

6.0

8.0

10.0

4. Pro Forma FCF (3 +3a – 3b)

12.0

12.0

13.0

4a. Multiple times on FCF

5

8th

10

5. FCF value (4 * 4a)

60.0

96.0

130.0

6. Total (1+2+5)

187.3

248.3

307.3

7. Share Count

6.0m

6.0m

6.0m

8. Valuation/Share (6/7)

31.22

41.38

51.22

9. Upside vs $28 stock price

11.5%

47.8%

82.9%

Other possible benefits

Saga earns less than 10% of its revenue from digital advertising, despite growing nearly 100% digitally in FY21 over FY20 ($3.4M to $6.3M). YTD-22 Digital costs $4.0M vs. $2.6M (54% growth). Competitors like Townsquare have already done so converted half of their sales too digital (29% margin) versus their legacy broadcast revenues (18% margin). This is a nice growth industry to pursue from an acquirer that I didn’t attribute any value to above.

When Townsquare bought Cherry Creek Broadcasting This year, they found that they expect to convert revenue into more digitized, higher-margin content:

Last month we announced the value-added acquisition of Cherry Creek Broadcasting. While it may seem counterintuitive to some to invest in more local radio stations given radio is a mature cash cow business, our Digital First Local Media strategy makes this investment so worthwhile. We will bring our large-scale, sophisticated digital platform solutions and expertise to the markets and team at Cherry Creek, which today derives only 15% of its revenue from digital solutions, the majority of which is outsourced digital solutions, which is generally reduces profit margins. Based on our own experience, we know we can drive accelerated digital revenue growth with stronger and more profitable margins, so within a few years, the Cherry Creek markets will be approaching a 50% digital revenue contribution and 30% profit margin, which is what Townsquare has in digital today .

If you converted Saga to 30% margin, TTM gross profit would have been $6.5 million higher than the 24.1% margin they generated on $112.8 million. This would add $32.5-$65.0M to enterprise value in the above scenarios using my free cash flow multiples.

peer ratings

Townsquare and Audacy both carry significant debt burdens. TSQ has a market cap of $150 million and net debt of $500 million, while AUD has net debt of $1.8 billion and a market cap of $75 million, neither of which make a strong comparison for SGA. TSQ is trading at around 6x EV/EBITDA, close enough to SGA. Urban One (UONE) trades with a market cap of $200 million and net debt of $650 million, which again is a poor comparison, and Beasley Broadcasting Group (BBGI) has more than $200 million in net debt with a market cap of $35 million. The same issues exist at Cumulus Media (CMLS) with ~$600 million in net debt and Salem Media Group (SALM) with $150 million in net debt.

My multiples above are therefore derived under the assumption that 5x FCF is not unreasonable for a downgrade for a company that is growing in fiscal 22, and even heavily indebted peers are not trading below 5x EBITDA despite heavy interest burdens .

peer ratings

Alpha wanted

An interesting data point is that earlier in the year a group approached CMLS to solicit a buyout of between $15 and $17 per share. Implied valuation of $1.2bn is 7.2x TTM EBITDA of $166m (or 7.6x ex-political EBITDA of $159m). CMLS grew Q2 EBITDA by 23% Y/Y and digital revenue by 20% (up 16% of revenue vs. 7% in fiscal 2019), so its financial profile is broadly in line with Saga. CapEx at CMLS has also been ~$30 million in recent years, indicating similar FCF conversion.

CLMS basics

Cumulus Media Investor Presentation

risks

  • Due to high levels of debt from competitors, buyers for the Saga assets may be limited. Radio is viewed as a dying business, which may also limit buyout interest from non-radio companies.
  • In a recessionary environment, local advertising spending can come under pressure. Given SGA’s strong performance in 2020, we believe the company can effectively manage the reduced ad spend. A recent Value Investor’s Club article highlights this in more detail.
  • The Saga board may decide to take defensive action against an outside bid for its assets.

Conclusion

Saga Communications appears poised to unlock value, and I imagine the current stock price is a negative case for any type of sale. Without an immediate catalyst, you’d own a well-capitalized company in a field of heavily indebted competitors, but I believe the rebalanced shareholder voting dynamics leave Saga open to a takeover, which I expect to materialize at a value well above the current one Stock price will take place.

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