What Smart Money Thinks about Media General as Nexstar Broadcasting Steps Up with a Bid?

Nexstar Broadcasting Group, Inc. (NASDAQ:NXST) shook some more ground in the lower realm of the U.S broadcast industry on Monday by offering $1.85 billion for the Richmond-based Media General Inc (NYSE:MEG), which represents a premium of 30% on the company’s last closing price on Friday. The offer is construed as an attempt to halt Media General’s own purchase of Meredith Corporation (NYSE:MDP). Since the Meredith deal failed to get much traction from Media General’s investors, the company’s stock slumped by more than 35% so far this month. However, Media General’s stock opened over 20% higher. A number of hedge funds have a risk arbitrage strategy in which they bet on the possibility of mergers like these, or even take positions after the announcement of a merger. It is interesting to see which one of them saw this marriage on the cards.

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Why do we pay attention to hedge fund sentiment. Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market by a large margin since 2008. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull environment. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 118% over the last 36 months and outperformed the S&P 500 Index by 60 percentage points (see the details here).

This is not the first time Nexstar Broadcasting Group, Inc. (NASDAQ:NXST) has bid for Media General. According to The Wall Street Journal‘s sources an earlier private bid was placed in August, valuing the company at $17  as opposed to the current offer of $14.5. The recent market sell-off and the unpopular Meredith move has reduced Media General’s negotiating power.

The hedge fund interest in Media General Inc (NYSE:MEG) considerably dropped during the June quarter as a total of 24 funds held an aggregate investment valued at $570.30 million in the company at the end of the second trimester as compared to 35 funds with $739.14 million held in shares at the end of the first quarter. The concentration of the total value of this investment in terms of Media General’s market cap at the end of June stood at 4.8%. While Mario Gabelli‘s GAMCO investors hiked its stake in Media General Inc (NYSE:MEG) by 6% during the second quarter to 6.44 million shares, Roystone Capital Partners, managed by Richard Barrera, cut its stake in the company by 2% to 4.77 million shares during the same period.

The unpopularity of Media General Inc (NYSE:MEG) and Meredith deal was grounded in the publishing business that Meredith owns. In an era when many media companies are separating their publishing segments, it doesn’t make a lot of sense for Media General to load such a declining business on its back, even though according to Meredith they drive viewership for the company’s 17 local TV stations.

On the other hand, among over 700 hedge funds that we track at Insider Monkey, a total of 27 had investments in Nexstar Broadcasting Group, Inc. (NASDAQ:NXST) at the end of June, down from 33 at March-end. The aggregate value of their holdings stood at $713.86 million and represented 40.8% of Nexstar. Marc Lisker, Glenn Fuhrman and John Phelan‘s MSDC Management is the largest stockholder of Nexstar Broadcasting Group, Inc. (NASDAQ:NXST) within our database holding 3.06 million shares valued at $171.18 million.

Disclosure: None