Forget About Profits, Just Do Deals!
One of the marvels of the accounting rules for mergers and acquisitions is how easily they can be used to help a company that has been losing money seem profitable. That is, as long as the company keeps doing deals.
A case in point: Media General Inc., which has been aggressively rolling up local television stations. Today the Richmond, Virginia-based company said it had agreed to buy LIN Media LLC, another owner of TV stations, for $1.6 billion in cash and stock. But this story isn't about the latest deal. It's about the acquisition Media General completed last quarter, when it swallowed closely held TV-station owner New Young Broadcasting Holding Co., based in Nashville, Tennessee.
Let's start with a few fun facts. Last year when Media General reported 2012 results, it showed a net loss of $193.4 million, which was its fifth consecutive annual loss. The company also showed a shareholder deficit of $176.2 million as of Dec. 31, 2012, meaning liabilities were that much greater than assets. Now compare those numbers with the 2012 results that appear in Media General's latest annual report, filed this month. In that report, Media General posted $36 million of net income for 2012. And instead of a deficit, the company showed shareholder equity of $287 million as of Dec. 31, 2012.
Neat trick, huh? Here's what happened. When Media General bought New Young in November for $434 million in stock, it treated the transaction as a reverse merger for accounting purposes. In all other respects, Media General was the acquirer, even though New Young shareholders received most of the surviving company's shares. The company kept the Media General name and headquarters, for instance.
So now when investors look at Media General's financial statements, the historical results they see for prior periods are those of New Young -- not Media General. Unlike Media General, which had been showing losses before the deal, New Young had been earning money. And just like that, history was rewritten, and Media General's string of losses disappeared.
The New Young transaction also gave Media General the opportunity, in effect, to write up the values of its own assets. So, for example, Media General's balance sheet showed $198.9 million of Federal Communications Commission licenses and other intangible assets as of Sept. 30, 2013. As part of the purchase-price allocation for the New Young deal, the FCC licenses were deemed to be worth $359.4 million, while other intangibles were assigned a value of $214.1 million.
Likewise, thanks to the New Young deal, Media General's balance sheet showed shareholder equity of $735.2 million as of the end of 2013. That surely looks prettier than the $217.2 million deficit Media General showed as of Sept. 30, only three months earlier, before the transaction was completed.
It's too soon to know what accounting benefits Media General might reap from its deal to buy Austin, Texas-based LIN Media. It said it's forming a new company that will retain the Media General name and remain headquartered in Richmond. This time, however, Media General said its shareholders will own 64 percent of the combined company. With the transaction, expected to close in 2015, Media General said it would own 74 TV stations in 46 media markets, making it the "second-largest pure-play television broadcasting company" in the U.S.
Media General has demonstrated it can grow through acquisitions. The question is whether it can show profits without them. Someday the shopping spree must come to an end.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)
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