In February of last year, a private equity fund managed by Standard General announced that it would purchase Tegna (TGNA), which owns of television stations, digital media platforms, and marketing services, for $24 a share.

Private equity giant Apollo Global Management (APO) invested in the entity that Standard General created to buy Tegna, and Tegna shareholders have approved the deal.

The Justice Department made no comments during the period to contest the deal.

It looked like the deal was set to go through. And yet, a new hurdle has appeared.

And it’s created a very interesting profit opportunity…

The FCC has expressed no concerns in the year it has taken to review the deal. And yet it has now referred the deal to the Office of the Administrative Law Judges (OALJ) for hearings that will further delay the deal’s closing.

As a result, Standard General is suing the agency, saying in its filing that this is “…an unprecedented and legally improper maneuver.”

Those who believe that politics could play a role in an impartial legal decision such as this might point to the fact that some powerful politicians, including Nancy Pelosi, spoke against the deal based on their desire to protect the public from higher TV costs.

Those of us who understand the pureness of the hearts of duly elected legislative officials find the allegations that concerns about the deal appeared after Byron Allen—whose competing bid for Tegna fell short and who made donations to Pelosi and several campaign committees sponsored by the Democratic party—baseless in their entirety.

The agency cannot block the deal but it can block the license transfer of Tegna’s 61 TV stations.

We cannot bring ourselves to suggest that Federal Communications Commission chair Jessica Rosenworcel should be forced from her office for playing political favorites, no matter how compelling the evidence that is clearly exactly what has happened. After all, if we start holding bureaucrats accountable for their actions, who would want to be one?

This will end in one of two ways: either the lawsuit prevails and the deal goes through, or Standard General loses the suit and the FCC (likely) blocks the deal after the OALJ’s hearings.

If the deal goes through, investors will collect $25 per share for their Tegna shares, which would be a gain of almost 50% for anyone buying around the current price.

But if the agency winds up blocking the deal, what will happen to anyone who buys the stock today?

In the aftermath of the deal’s collapse, investors will still be left owning a media company that owns 64 television stations in major markets across the United States.

Tegna is the largest owner of the big-four television network stations in the U.S., and reaches almost 40% of the US population. It also owns multicast networks True Crime Network, Twist, and Quest, plus an advertising and marketing business.

At TGNA’s current price, you are paying less than five times free cash under a 6.5 enterprise value to earnings before interest and taxes (EV/EBIT) ratio for a profitable business. The enterprise value of Tegna, which is about $6.3 billion at the current stock price, assumes the value of any debt assumed as well as the company’s equity value.

A few months ago, the S&P Global Market Intelligence estimated the value of Tegna’s 64 broadcast stations and three low-powered TV stations at about $8.7 billion. In other words, if you invest in the company, you are paying 72% of what its assets are worth right now.

Now factor in the fact that we are nearing an election year that is going to be loud, contentious, and heavily contested—meaning a lot of money will be spent on the always annoying political ads.

Rather than being an annoyance, political ads can now be your best friend, driving earnings and the stock price of your Tegna shares higher.

If the deal goes through, shareholders will make about 50% plus any dividends collected before the close. If the deal does not close, you will own one of the most valuable collections of television stations in the United States at a massive discount to the value of the assets.

My decades of dealing with merger arbitrage and deal evaluation tell me the Tegna deal should close for $24 a share.

The realist in me says the politicians have gotten overly involved in this deal, introducing wildcards that render reason, logic, and the force of law irrelevant.

Fortunately, the only downside is becoming a patient, aggressive owner of attractive assets at a discounted valuation.

This is a very acceptable risk-reward ratio.

— Tim Melvin

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Source: Investors Alley