What does activist investor Mario Gabelli want from E.W. Scripps Co.?

Three board seats, better BCF
Posted at 8:49 AM, Apr 23, 2018

CINCINNATI -- The E.W. Scripps Co. expects to spend $3 million on a proxy contest in which activist investor Mario Gabelli is trying to claim three board seats.

The contest heated up this month as Gabelli’s GAMCO Asset Management Inc. told shareholders that Scripps trails its peers in the profitability of its broadcast properties while Scripps countered that GAMCO lacks “a coherent thesis for company change.”

Cincinnati-based Scripps is WCPO's parent company.

The battle began in February, when GAMCO, which owns 16.5 percent of Scripps’ Class A Common shares, nominated three directors to oppose Scripps nominees. The voting will end at the Scripps annual shareholders meeting in downtown Cincinnati May 10.

Whether he wins or loses, Gabelli is not likely force “a drastic strategy change” at Scripps, Benchmark Company analyst Daniel Kurnos told WCPO in February. But Gabelli has been effective at “keeping an idea on the agenda” in companies where he engaged in previous proxy contests, said Josh Black, editor in chief for Activist Insight.

Related: Gabelli targets two local companies

Gabelli’s big idea for Scripps? Improving BCF.

BCF stands for broadcast cash flow, a measure of profitability that tracks revenue minus operating expenses excluding corporate overhead.

In an April 3 filing, GAMCO said Scripps ranked far below the nation’s largest TV chains with broadcast cash flow of $157 million in 2017 and a BCF margin of 20.2 percent. Sinclair Broadcast Group achieved a 33.8 percent margin with $859 million in BCF, while Nexstar Media Group Inc. had a 37.3 percent margin on $906 million in BCF.

Gabelli argues Scripps would see a higher stock price if it boosted its BCF margin to 26 percent, closer to industry rivals.

But he won't say specifically how he'd make that happen, only that his board nominees are experienced broadcasters who can help Scripps CEO Adam Symson and Local Media President Brian Lawlor find the necessary improvements.

"I'm a money manager, not a broadcaster," Gabelli told WCPO. "Once these guys are on the board and they have access to the data that Brian Lawlor has, they can help him figure out how to improve revenue, how to look at the cost structure."

Symson said Gabelli's "notional approach" isn't needed because the company already has a plan that will achieve the margin improvements GAMCO is seeking.

"We have an actual plan developed over the course of the last year with our board of directors," Symson said. "There's no reason why we should waver from that plan when it is going to deliver results that are the same if not better than that which Mario is promising."

The plan includes the sale of 34 radio stations and a restructuring aimed at saving $30 million a year in operating expenses. Scripps is also pursuing the acquisition of TV stations aimed at creating two-station “duopoly” markets, reducing their combined operating costs while boosting advertising revenue. Those changes, plus the continued growth of national media brands like Katz Networks, Newsy and Midroll, are expected to improve cash flow by 40 percent from 2016 levels by 2020.

“We have gained significant momentum since implementing our strategy and are beginning to see the results,” Symson said in a letter to Scripps employees April 20. “In fact, we continue to receive positive reviews of our plan from the investment analyst community.”

One of those positive reviews came from Gabelli & Co. analyst Barry Lucas, who recommended purchase of the stock on April 10. Mario Gabelli is the executive chairman of Gabelli & Co.’s parent company, Associated Capital Group Inc., which spun off from GAMCO in 2015.

Lucas said Scripps will get a $75 million revenue boost from political spending in the next year and a $50 million profit boost from the expiration of unfriendly cable contracts in 2020.

GAMCO has nominated former Media General Inc. CEO Vincent Sadusky, Citadel Communications LLC President Raymond Cole and Colleen Birdnow Brown, founder of a reputation-management consulting firm, Marca Global LLC.

Scripps nominated Lauren Fine, Roger Ogden and Kim Williams for those board seats. Fine is a former Merrill Lynch analyst who was nominated by Scripps to replace retiring board member Marvin Quin. Ogden and Williams joined the Scripps board in 2008.

In an April 19 press release, GAMCO said its nominees are “three proven individuals with hands on knowledge of operations in the broadcast ecosystem.” Scripps asserts the GAMCO nominees are “less qualified than existing directors” and “do not enhance the skills already possessed by our current directors.”

Scripps revealed in a press release this morning that Symson tried to settle the proxy contest by offering Gabelli one board seat, but Gabelli "insisted that he wanted all three of his directors on the board or 'nothing at all.'"

The winning board slate would represent owners of 69.6 million Class A Common shares. That means Gabelli needs about 23 million shares to vote his way – in addition to the 11.7 million he controls. He’s not likely to get much support from the 12.1 million shares owned by Scripps family members, but he could win with support from the next four biggest shareholders: Blackrock Inc., J.P. Morgan Investment Management, Dimensional Fund Advisors and Vanguard Group.

These institutional investors are often influenced by proxy advisory firms, which have yet to weigh in on the Scripps proxy contest.