The Tegna (TGNA) Situation:
We started working on this Merger Arbitrage Mondays article before the news last Friday that the FCC has referred the acquisition of TEGNA by Standard General to its administrative law judge as you can see here. The FCC’s primary concerns include an artificial increase in prices for consumers, as the deal leads to consolidation of TV stations and the potential for job losses. The stock reacted sharply by dropping more than 25% after hours.
I believe the after hours reaction was overdone, especially considering two FCC Commissioners, Brendan Carr and Nathan Simington, issued a statement in opposition to the FCC’s decision. At any rate, this action by the FCC puts the deal at a significantly higher risk of falling apart. The $24 all cash deal was struck at a premium of just 11.52% (or 18% on a 30 day average price) because the deal was rumored long before the definitive merger agreement (DMA). The pre-rumor price was $16.61 and the after hours price last Friday dipped below that level.
Starting with analyst EPS estimates of $1.98 for 2023, assuming a very low earnings growth rate of 2% and not taking into account the earnings volatility/upside the company experiences during election cycles, I get an intrinsic value of $23.12 for the company using a 12% discount rate in a DCF model. This is close to the $24 Standard General is willing to pay for the company and does not take into account any breakup fees TEGNA would receive.
If the stock continues to trade at the Friday after hours price or drops due to forced selling by arbitrageurs in case of a deal break, TEGNA might present an interesting opportunity for long-term investors.