BELO CORP -SER A COM BLC
September 17, 2013 - 9:22am EST by
Ray Palmer
2013 2014
Price: 13.90 EPS $0.00 $0.00
Shares Out. (in M): 104 P/E 0.0x 0.0x
Market Cap (in M): 1,440 P/FCF 0.0x 0.0x
Net Debt (in M): 720 EBIT 0 0
TEV: 2,160 TEV/EBIT 0.0x 0.0x

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  • Merger Arbitrage
 

Description

Belo Corp (BLC) is getting acquired by Gannett (GCI) for $13.75 a share. At today's price of $13.90, I think there's substantial upside from an increased bid with limited downside backed by Belo's standalone value, the Gannett bid providing a floor, and several other bidders who would be interested if the deal were to fall through.
 
The thesis here is simple- to win approval for the deal, Gannett needs 2/3 of Belo's stock to vote in favor. Hedge fund opposition to the deal is lining up. Approval is still likely but by no means a sure thing. Gannett's stock ran up more than $5 per share (from just under $20 to over $25) on deal announcement, creating ~$1.2B in additional value for themselves. Given the total cost to buy Belo (including debt) is under $2.2B, that gives Gannett a substantial amount of money to raise their bid to secure a deal and still capture plenty of value for shareholders. A deal at $15.75 would increase the deal cost by $200m, secure the deal, and leave Gannett with $1B in surplus value. But the bottom line is that, now that Gannett has seen the market's reaction to the deal, they will be absolutely loathe to walk away from a deal that has created so much value for shareholders.
 
There's also an outside possibility of an outside bidder. Belo's proxy revealed there was another broadcaster who showed preliminary interest in acquiring them at prices around the deal price, and the deal is cheap compared to past deals (see, for examply, VIC favorite Fisher) at just 9.4x EBITDA pre-synergies and 5.4x w/ synergies.
 
The only big risk here is that the deal is scuttled by regulatory review. I don't think it's an issue here: even if the deal was scuttled, Belo would be scooped up by another competitor in no time now that they're "on the block". But Gannett would likely agree to a small divesture or two to ensure regulatory approval if it came to that, but I doubt even that will be necessary.
 
Overall, I like the deal for it's outsized risk-reward. Worst case scenario is Gannett risks the deal falling through by going to the vote and ends up winning the bid without a bump. In that case, you're basically flat. Base case is Gannett gives a small bump (10-15%) to secure the deal and you make an outstanding IRR in a short time frame. Best case (and admittedly a long shot, but still a possiblity) is another strategic (Sinclair has been super active, but is digesting two acquisitions, but there are plenty of other) comes in with a higher bid and we get a bidding war.
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Higher bid, either from GCI or another strategic.
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    Description

    Belo Corp (BLC) is getting acquired by Gannett (GCI) for $13.75 a share. At today's price of $13.90, I think there's substantial upside from an increased bid with limited downside backed by Belo's standalone value, the Gannett bid providing a floor, and several other bidders who would be interested if the deal were to fall through.
     
    The thesis here is simple- to win approval for the deal, Gannett needs 2/3 of Belo's stock to vote in favor. Hedge fund opposition to the deal is lining up. Approval is still likely but by no means a sure thing. Gannett's stock ran up more than $5 per share (from just under $20 to over $25) on deal announcement, creating ~$1.2B in additional value for themselves. Given the total cost to buy Belo (including debt) is under $2.2B, that gives Gannett a substantial amount of money to raise their bid to secure a deal and still capture plenty of value for shareholders. A deal at $15.75 would increase the deal cost by $200m, secure the deal, and leave Gannett with $1B in surplus value. But the bottom line is that, now that Gannett has seen the market's reaction to the deal, they will be absolutely loathe to walk away from a deal that has created so much value for shareholders.
     
    There's also an outside possibility of an outside bidder. Belo's proxy revealed there was another broadcaster who showed preliminary interest in acquiring them at prices around the deal price, and the deal is cheap compared to past deals (see, for examply, VIC favorite Fisher) at just 9.4x EBITDA pre-synergies and 5.4x w/ synergies.
     
    The only big risk here is that the deal is scuttled by regulatory review. I don't think it's an issue here: even if the deal was scuttled, Belo would be scooped up by another competitor in no time now that they're "on the block". But Gannett would likely agree to a small divesture or two to ensure regulatory approval if it came to that, but I doubt even that will be necessary.
     
    Overall, I like the deal for it's outsized risk-reward. Worst case scenario is Gannett risks the deal falling through by going to the vote and ends up winning the bid without a bump. In that case, you're basically flat. Base case is Gannett gives a small bump (10-15%) to secure the deal and you make an outstanding IRR in a short time frame. Best case (and admittedly a long shot, but still a possiblity) is another strategic (Sinclair has been super active, but is digesting two acquisitions, but there are plenty of other) comes in with a higher bid and we get a bidding war.
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Higher bid, either from GCI or another strategic.

    Messages


    SubjectRE: week to go and proxy firms voting for the deal
    Entry09/17/2013 11:10 AM
    MemberRay Palmer
    Thanks for the question.
     
    The B super voting shares count 10 to 1 in voting power, which gives B shares just under 50% of the vote and A shares just over 50%.
     
    I do think the odds are they have enough votes to get the deal through. Given the super voting control, it's tough but not impossible to vote the deal down. But the key question in my mind is if it's worth Gannett risking all of that shareholder value when a small bump could guarantee they get the deal done. If I were them, I'd rather bump to $15.75 (increase purchase by $200m) and guarantee $1B in shareholder value then risk losing $1.2B in shareholder value by having the deal fall through.
     
    Also remember that non-votes count against, which is a huge boost against this deal. The WSJ article notes that 17% of Belo's voting powers are in hedge funds who acquired stakes post deal announcement. Add in shares not voted and your somewhere between 20-25% of shares against the merger. Again, it's difficult, but not impossible, to get to 1/3 of votes against from that math. It's likely to be a close race, and the question is if GCI is willing to risk that or not. My bet is they're not, and I'm confident making that since my downside is well protected and the upside is pretty large.
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