M&A Announcement

Jan 29, 2020

Press Release

to the Lee Enterprises Lee Berkshire Hathaway Transaction Webcast and Conference Call. The call is being recorded and will be available for replay beginning later this morning at lee.net. At the close of the planned remarks, there will be an opportunity for questions. Participants assessing this call by webcast may submit written questions through the website, and they will be answered during the call if time permits. Otherwise, you will receive a response later. A link to the live webcast can be found at www.lee.net. I will now turn the call over to your host, Jamie Sourac, Corporate Controller. Good morning. Thank you for joining us on Shore Cove. Speaking on this morning's call will be Lee's Chairman, Barry Chong President and Chief Executive Officer, Kevin Beaumaray and Vice President, Chief Financial Officer and Treasurer, Tim Dilich. They will all be available for questions. Earlier today, we issued a news release announcing our transaction with Berkshire Hathaway. It is available at we.net as well as at major financial websites. We also filed details regarding this transaction with the SEC. Before we begin, I want to remind participants that some of our comments will include forward looking statements that are based on our current expectations. These statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially. Such factors are described in this morning's news release and also in our SEC filings. During the call, we make reference to certain non GAAP financial measures, which are defined in our news release. Reconciliations to the relevant GAAP measures are included in tables accompanying the release. Now, I'll turn the call over to our Chairman, Mary Jones. Thank you, Jamie, and thank you to everyone for joining us this morning. We're excited to discuss the transaction with Berkshire Berkshire Hathaway we announced earlier this morning. It's a compelling transaction that positions me for success, and we are confident it will create value for our readers, our advertisers, and our shareholders. It also deepens our strong and long term relationship with Berkshire Hathaway, a valuable partner that shares our business goals and commitment to local news. As outlined in our press release, Lee is acquiring 30 local daily news publications from BH Media Group and the Buffalo News, Berkshire Berkshire Hathaway's separately owned newspaper. Berkshire Hathaway is financing the acquisition and refinancing all of our existing debt at an attractive rate. The transaction has multiple benefits. It provides new revenue opportunities and achievable operational synergies across an expanded and fully integrated portfolio. It addresses our maturing long term debt at attractive terms, and it deepens a long relationship with Berkshire Hathaway, which has been a significant investor across our capital structure for years. We will have a single long term lender who knows us well and is committed to our success. We are honored that Warren Buffett has again endorsed Lee for our track record of innovation and deep rooted commitment to local news. Importantly, BH Media Group's properties are ones we know inside and out, having managed all of the Buffalo news for the past eighteen months under the management agreement that we announced in 02/2018. Before turning the call over to Kevin, I want to share our view of the market for local news and our strategy to grow and create value. Lee's focus is on delivering valuable, intensely local, original news and information. Clearly, the media landscape is evolving rapidly, and that evolution will continue as audiences and advertising dollars shift shift from print to digital. But we know that our readers will continue to demand local news and information, and they continue to look to us for it. We have proven ourselves to be flexible and nimble at rethinking, repositioning, and redeveloping our business with a digital first mindset. Digital has been fully integrated into our strategy, and today, Lee captures more than twice the industry average in digital market share according to third party research. And we have the highest programmatic digital rates in the industry. BH Media Group's publications and the Buffalo News play a vital role in the communities they serve and are a perfect fit for our portfolio. That's why we're very excited about the opportunities we have for Lee in capturing the value for readers, advertisers, and shareholders created by this transaction. With that, I'll turn it over over to Kevin to discuss the operational benefits of this transaction. Thanks, Mary. We look forward to reading these outstanding publications as owner and delivering on the opportunities through having a much larger, fully integrated portfolio. Our acquisition of BH Media's 30,000,000 newspapers in the Buffalo new provide significant size and scale to our operations, bringing our portfolio of daily newspapers to 81 from 50 and nearly doubling our audience size. This transaction significantly enhances our financial profile. It's expected to be immediately accretive to earnings and will enable us to accelerate our digital growth. For context, Media Group had 2019 revenue to EUR $373,000,000 and adjusted EBITDA of EUR 47,400,000.0. With the addition of Beach Media Group and the Buffalo News, revenue would be 87% higher and adjusted EBITDA would increase 40%. Having managed the Beach Media properties for the past eighteen months, we already have deep knowledge into their operations. Using these insights, we've identified approximately 20,000,000 to $25,000,000 of achievable synergies, including approximately $5,000,000 in revenue synergies and $20,000,000 in cost synergies. Our success in digital was a recent Berkshire half of the selectively the management newspapers and digital operations in 2018. And as Norm has said in today's press release, our management of these publications has delivered terrific results. We expect to realize the revenue synergies through the continued application of the digital advertising and subscriber programs we already have underway through the management agreement. For example, in the first year of the management agreement, we increased digital programmatic revenue more than 90% by directly managing their programmatic campaigns. And in regards to subscription revenue, we applied new pricing methodology and increased subscription revenue by 6.5%. For these and other initiatives, each media group is not fully integrated with the lead structure, we believe we will achieve additional synergies in these areas. Cost synergies are primarily coming from reduction of administrative expenses. We expect the full run rate within twenty four months of closing, which is anticipated in 2020. Approximately 75% of the synergies should be achieved within the first twelve months of closing. Importantly, we developed a strong and positive relationship with B2B team and have a deep respect for their operators who have a similar culture and value, and most importantly, are aligning our mission to deliver high quality revenue, information and advertising. In short, this transaction is terrific for me, and we're excited about it what and we're excited about what it means for our future together. And now I'll turn it over to Tim Lynch to share more color on the refinancing balance sheet. Thanks, Kevin. Let me jump right into the details. Berkshire Hathaway will provide approximately $576,000,000 in financing. This includes approximately $140,000,000 to fund the acquisition of BH Media Group's properties in Buffalo News, approximately $400,000,000 to refinance all of these outstanding debt as of closing and provide enough balance sheet liquidity to allow for the termination of our revolving credit facility. Of note, the acquisition of BH BH Media Media Group excludes real estate, including permanently cash equipment and cash. We'll enter a ten year lease for their real estate and legal responsibility for maintenance and expense associated with each property. The refinancing has significant benefits and highly attractive terms. The debt will have a 9% renewal rate with a twenty five year maturity and will save approximately $5,000,000 in interest expense annually on these refinanced debt. As you know, all of our long term debt matures in 2022, and we have been actively exploring refinancing opportunities for some time. Compared to the terms we have seen in potential open market transactions, the financial benefits of this refinancing are even clearer. In addition, we avoid the tens of millions in fees and potential equity dilution associated with a traditional refinancing agreement. There are no performance covenants with the financing from Berkshire Hathaway. Share repurchases, dividends and other restricted gains are precluded under the terms of the financing. Under the Berkshire Capital debt agreement, strategic acquisitions can be made if agreed to by both me and Berkshire. The timing is also as I stated as the call protection on our note steps down on 03/15/2020. We expect to close the refinancing shortly thereafter, avoiding $8,500,000 in brokerage costs. Another significant benefit is that this financing is from a single long term partner who knows us well and is committed to our success. Subsequent to the deal closing, Berkshire Hathaway will be new sole vendor. With a stronger growth profile through the addition of BH Media Group and more flexible balance sheet, we will be able to delever more quickly over the long term with the goal of reaching our target leverage of under 2.0x. The acquisition of D. S. Media Group and the Buffalo Union immediately reduces leverage to 3.4x even before any synergies. Before we open the line for questions, we wanted to take care of one housekeeping item. As previously announced, we will release the first quarter fiscal twenty twenty results on Thursday, February 6, prior to market opening. The company will not hold another call on February 6, but the management team is available as usual to address any questions following the issuance of the release. Now I'll go ahead and take any questions. Jamie, back to you. Thank you, Tim. Our first question, will the existing lease first lien notes and second lien term loan be repaid at par? Yes. That's a good question. So the timing of the transaction is expected to close in mid March after the next step down of our call protection on our notes. And as I mentioned, this saves approximately $8,500,000 in breakage costs. So when we refinance our debt, it will all be prepayable all be payable at par. The second question, now that we have runway with the extended timeline on debt payments, what new initiatives will we be able to develop to reverse the revenue declines? Well, first off, as I mentioned on the call, we've done a really terrific job working with the operators in Berkshire halfway and we need to drive programmatic revenue. We think there's a lot of opportunity there. Secondly, we're really only into the first eighteen months of we've played with our circulation audience revenue strategies, and we've got two to three more years of pricing action and revenue growth there. As it relates to some of the new digital initiatives that we implemented in Meet, those would be launched Yeah. That's a good question. This is a term loan from Berkshire Hathaway. As we mentioned, the interest rate is an attractive 9% rate with a twenty five year maturity. There are no prepayment penalties. All of the debt is prepayable at par. However, there's an excess cash flow fleet that requires us to use our the proceeds are used all of our excess cash flow to prepay debt at par. There are no performance covenants. There are no financial covenants or maintenance covenants associated with this refinancing. And as you know, as we talked about, we've been exploring an opportunity to do financing for some time. And compared to what we've seen based on our discussions with vendors, benefits of this transaction, it's not really overstated, but it's a significant deal on the financing side, and we think it's good for the company. That's it for questions. I'll now turn the call back over to Kevin for a brief closing remarks. Well, thank you for joining on the call today. This is a terrific opportunity for Lee and our new employees at Capital A meeting and such a Capital Thank you. And ladies and gentlemen, this concludes our call.