Tegna

Research Notes
TEGNA First Look
Date: November 23, 2016
Source: Loeb

Basic Shares Outstanding: 214.4

Stock Price $22.30
Market Cap: $4.78BN
Net Debt: $4.1BN
EV: $8.8BN

Executive Summary:
TEGNA is undergoing a highly value-creative restructuring, in which they are separating their Cars.com
subscription-based advertising business from their base broadcast TV business and exploring strategic
alternatives with their 53% stake in CareerBuilder. The entire business trades for ~8x EBITDA, but
Cars.com has grown revenues at a 19% CAGR from 2013-2015, and has more than doubled EBITDA
during the same timeframe. Cars.com is likely worth 33-50% of the current EV by itself as it is a quickly
growing online property and could be worth 15-20x EBITDA, which implies a sub-7x EBITDA multiple for
a steady if unspectacular broadcast business that has been actively repurchasing shares. This excludes
completely the 53% stake in CareerBuilder, which generated over $100MM EBITDA in 2015. On a SOTP
basis, the EV is worth between $10.0-13.5BN, representing upside of 25-96% upside over todays prices.

Description of Businesses
TEGNA has two divisons: TEGNA Media and TEGNA Digital.

TEGNA Media owns 46 television stations in 38 markets. They are the largest independent group of major
network affiliates in the top 25 markets, reaching 1/3 of all U.S. TV households. This business has very
steady predictable results, since most people with a TV watch their local news station regularly.

TEGNA Digital comprises Cars.com, a leading website where 30 million monthly visitors get information
related to their car buying experience. As a result, it is an attractive platform for dealers and OEMs to
market their vehicles through. Additionally, Digital includes a 53% stake in the Career Builder website,
which serves 60 markets worldwide. TEGNA has announced a plan to explore strategic alternatives for
Career Builder, and is spinning off Cars.com.

The reorganization will provide the businesses the opportunity to be valued separately. Since Media is a
mature and highly-leveraged asset with limited reinvestment opportunities, and Digital represents at
least one very rapidly growing asset that has substantial growth opportunities, there seems to be real
economic logic to splitting these businesses up. (Thanks Carl Icahn.)

Based on current commentary, TEGNA will likely be a leveraged repurchase vehicle that will be
accelerated by the sale of CareerBuilder, while Cars.com will plow back its earnings into growing its
business, and very likely will grow at very attractive rates, as the car buying process continues to start
online for more car buyers.

Note: For the purposes of the split, all existing debt will stay with TEGNA.
Valuation
Cars.com: $150MM FCF @ 25x multiple = $3.7BN
(per Form 10)
Career Builder: $100MM EBITDA @ 8x multiple = $800MM
(per below table and accounting for allocated corporate costs)
Broadcast: $644MM EBITDA @ 10x = 6.4BN
(per below table and accounting for allocated corporate costs)

EV: 10.9BN
Implied Market Cap: $6.8BN
Upside to current Market Cap: 42%
Tegna is an

Appendix:

Cars.com Business

Cars.com is clearly growing quite rapidly

with significant operating leverage

TEGNA Thesis
Date: January 23, 2017
Source: Loeb

TEGNA is a mish-mash of media assets, but its primary businesses are broadcast TV,
Cars.com, and a 53% stake in CareerBuilder. I believe there is significant hidden value in
TEGNA equity because the broadcast TV business, which makes up over 70% of EBITDA,
and is a slow-growing business that will experience secular decline along with the rest of
linear TV, hides the significant and growing value embedded in Cars.com.

Cars.com is a digital advertising presence with exceptional operating leverage and strong
cash flow margins with a long runway. Implicitly, Cars.com trades for a double-digit free
cash flow yield as part of Tegna. I believe that similar companies trade for 5% or lower FCF
yields today. At a 5% FCF yield, Cars.com EV would be worth roughly $3BN, about 1/3 of
TGNA's EV, and roughly 50% of the market cap. Alternatively, direct competitors to
Cars.com have been acquired at approximately 6x revenue. Cars.com has 70% of the
revenue of this competitor, and if valued on my 2017 revenue estimates of$700MM at 6x,
the business would be worth $4.2BN.
NXST/MEG SBGI GTN TGNA TGNA Pro-Forma
2015 FCF 168 309 81 557 407
2016E FCF (NXST) 190 350 100 575
2017E FCF 320 110 580
2016/2017 Average 565 335 105 578 428

EV 7,865 7,144 2,287 8,844 5,844

Market Cap 3,175 3,061 762 4,713 2,713
Avg. FCF/EV 7.18% 4.69% 4.59% 6.53% 7.32%
Avg. FCF/Mkt. Cap 17.8% 10.9% 13.8% 12.3% 15.8%
Net Debt/FCF 8.30 12.19 14.53 7.15 7.32
* Per Company Estimates

Assuming TGNA will keep the lion's share of debt, the TGNA equity stub, which generates
about $300MM of FCF, would trade at about a 15% FCF yield. Comparable companies trade
at 10-15% FCF yields, which values these businesses as melting ice cubes. In my opinion, the
broadcast TV business is more immune to cable cord-cutting pressures, and its financial
stability is insulated from those pressures by an under-monetized retransmission revenue
stream which should actually mean these businesses continue to grow for the next five
years. In other words, if you only purchase TGNA to get the Cars.com asset, there is a good
margin of safety in owning TGNA pre-spin.

Company History
Most corporate managers prefer to build empires than to break them down. Gracia Martore
as CFO, then COO, and finally CEO over the period from 2005 to the present, has pursued
the latter path. She has carefully dismantled an over-leveraged, old media empire mostly
comprised of newspaper and broadcast TV assets. But the company also owns more
attractive "new media" assets such as Career Builder (53% stake in JV with Tribune) and
Cars.com. The newspaper business was spun off, Career Builder is exploring strategic
alternatives, and Cars.com will also spin off. Cars.com (and to a lesser extent Career
Builder) are the hidden sources of value here.

The path to today's current state of relative stability was not easy. During 2008-2009, the
company made difficult decisions as it realized the newspaper business' ad and subscription
dollars weren't coming back at the same time it had a huge debt+pension load of $4.6BN as
of December 2008. To the company's credit, it aggressively paid down $2.1BN of debt in
2009-2011 out of cash flow.

Then in 2013 and 2014, the company spent $3.5BN on 3 transactions. First, they purchased
Belo Corp and Sandler Media, both broadcasters in what were very accretive transactions.
The deals brought then-Gannett into 30% of households, just short of the 39% FCC limit.
Since the advent of retransmission fees, broadcasters have been racing to consolidate. The
introduction of retransmission fees into the broadcast business model is a recent
phenomena and added a second revenue stream to a previously ad-driven model with
significant volatility due to political advertising. While the advertising volatility has not gone
away, broadcasters are significantly more profitable than they used to be.

Secondly, in 2014 they purchased the remaining 73% Cars.com they did not own for $1.8BN
at a $2.5BN valuation. Let's look at that more closely.

Cars.com Market Opportunity

Almost any dominant franchise in digital advertising should be worth a premium multiple,
because there are long-term tailwinds that will drive advertising dollars increasingly
towards digital outlets. As the below tables show, digital auto ad spending has been growing
at a mid-teens rate since the Great Recession. Importantly, in the second chart, auto as a %
of digital ad spend has actually remained relatively constant. This implies digital ad
spending as a whole is growing at around 15% per year, and more importantly that the auto
ad spending shift is not an outlier in the broader ad spend migration to digital.
What is also important to note about any advertising platform gaining increasing
acceptance is the high operating leverage embedded in the business. At 44%, the
incremental margins shown in 2014 are very attractive. Management has said they believe
EBITDA margins will end up in the 40-41% range, but they could trend higher over time.

The above charts deserve some explanation. Cars.com used to be owned by several
newspaper partners, and Cars.com provided them a digital outlet to offer dealers
advertising. Cars.com offered lower wholesale rates to these affiliates as a way to generate
revenue elsewhere in the newspaper businesses. When Tegna purchased Cars.com outright,
they instituted a huge price increase in late 2014. As evidence, in Q3 2015, Cars.coms
affiliate revenue was up 53%. This will likely not recur, but importantly the Adjusted
EBITDA figures in the prior chart are sustainable and should grow from there.
True, Cars.com is tied at the hip with the auto industry, and SAAR is currently at all-time
highs. It is certainly possible Cars.com will experience a down year in the next five years
if(when) car sales dip from current levels. However, in my research on ad spending, the
Great Recession was a critical blow to legacy advertising media such as newspapers. The ad
revenue they had been earning up until 2007 was disrupted by the Great Recession, and the
ad dollars never came back to newspapers even after the economy recovered. Any temporary
decline in auto ad spending would likely hasten the long-term shift to digital ad spending.
Broadcast TV Market Opportunity

While my primary interest in TGNA is because of Cars.com, the Broadcast TV segment is no

slouch, primarily because of the advent of retransmission fees. The story with advertising
revenue is not great. As the chart below shows, broadcast TV ad revenues have been and will
continue to be essentially flat.

If these estimates are significantly off, it is likely to be to the downside. Broadcast TV is not
immune to the pressures facing all TV channels, and as I noted in the previous section on
permanent shifts in newspaper advertising spend, a recession could very well hasten any
advertising shifts away from Broadcast TV. With all the doom and gloom aside, broadcast
TV has advantages that other providers do not. Like truly local newspapers, broadcast TV
delivers local news stories that the community wants to hear. Advertising dollars have
increasingly shifted towards the times when most eyeballs are watching, i.e. the local news.
This type of local journalism is unique to broadcasters and provides some insulation to the
broader TV ecosystem worries.
Broadcast TV seems like a business in secular decline. However, in the mid-2000's Les
Moonves of CBS came up with the idea of broadcasters charging cable providers to
retransmit their signals. Up until this time, local broadcast TV was highly dependent on
political advertising to generate free cash flow. After they began charging retransmission
fees, their business models became significantly more stable.

The primary reason why broadcast TV has been playing catch-up with retrans fees is
interesting. To cite a great summary of the issue:

"Ultimately, Congresss concern that new entrants might be categorically denied the
opportunity to negotiate for retransmission rights turned out to be
unfounded...Broadcasters had long been wary of local cable monopolies and, far from
refusing to negotiate, TV stations welcomed the new entrants (satellite TV operators) with
open arms. It turned out to be a good approach, as the concerted refusal by the cable TV
industry to pay to retransmit broadcast programming collapsed a few years later when the
addition of local TV programming made satellite TV an effective competitor to cable."
Retrans Legislation

Basically, satellite TV operators had not been allowed to retransmit local broadcast TV
networks, which were considered extremely valuable even in 1999, when these regulations
were drafted. Because cable TV systems had a monopoly on the broadcast content, they had
refused to pay for it. When the FCC allowed satellite operators to negotiate, it soon allowed
the broadcasters to have leverage over their distributors, and they soon began to charge
retransmission fees. In short, there is a completely logical basis for retransmission fees to
continue to rise higher for a number of years. As the chart from Pew Research Center shows,
retransmission fees will likely grow 33% by 2021. This is a highly profitable revenue stream
for broadcasters, and one that is more stable than ad revenue. Keep in mind, NBC, ABC, and
CBS won't just give away their content to broadcasters now. They are also charging fees back
to the affiliates for the right to their content. So, this new revenue stream has not been 100%
profit, but it has nonetheless been a huge boost to the broadcasters and should cushion
some of the impact from any decline in ad revenues.
Capital Allocation

While I believe Tegna is most immediately attractive because of Cars.com's hidden value,
longer term I believe post-spin Tegna should focus on three areas to use their capital:

additional M&A under FCC limits

o would be highly accretive especially if target has worse retrans contracts
debt reduction
buybacks at mid-teens FCF yields
dividends

In fact, outside of additional acquisitions in the broadcast TV segment, it seems very likely
Tegna will buy back stock. Since the end of 2011, shares outstanding have declined from
241.7MM shares to 220.5MM, a 9% reduction. After the Cars.com spin-off and any potential
proceeds from CareerBuilder, Tegna should be able to retire shares outstanding at a very
healthy pace. Based on TTM FCF ex-Cars.com, TGNA will have over $300MM per year to
use towards buybacks or debt reduction. Depending on what value is assigned to Cars.com,
Tegna equity will likely be worth $2.5-3.0BN, $12-14 per share. In other words, TGNA could
reduce shares outstanding by 21-25MM shares (10-12% of shares outstanding) in 2017.

I prefer M&A as a first priority because it can be highly accretive. After that, a balanced
approach to debt reduction and share buybacks makes the most sense to me. Newspaper
operators got into severe financial distress by ignoring their deteriorating business models
while layering on additional debt. Managements at all broadcasting companies would be
wise to heed that message, and at the very least, only pursue capital returns out of FCF, not
incremental debt offerings.

Valuation

Valuation for TGNA is truly reflected by the sum of the parts. However, as a frame of
reference, I've included the other publicly-traded broadcasters to demonstrate their relative
valuations compared to TGNA. Free cash flow in 2015 represents cyclical lows because it
was a non-election year, so the true average FCF yields for all companies are higher. Even
on these measures, TGNA is trading at a relative discount to peers, which as a group seem to
be priced for secular declines in FCF.
 NXST/MEG SBGI GTN TGNA TGNA Pro-Forma
2015 FCF 168 309 81 557 407
2016E FCF (NXST) 190 350 100 575
2017E FCF 320 110 580
2016/2017 Average 565 335 105 578 428

EV 7,865 7,144 2,287 8,844 5,844

Market Cap 3,175 3,061 762 4,713 2,713
Avg. FCF/EV 7.18% 4.69% 4.59% 6.53% 7.32%
Avg. FCF/Mkt. Cap 17.8% 10.9% 13.8% 12.3% 15.8%
Net Debt/FCF 8.30 12.19 14.53 7.15 7.32
* Per Company Estimates

I have previously stated that Cars.com EV might be worth $3BN when it is spun out. Tegna
has said that Cars.com will assume some debt in the spin, which could be over $1BN. Pro-
forma for the spin-off, broadcast Tegna could trade at a 16% FCF yield. I believe a 10-12%
FCF yield would be closer to fair value, in line with peers. That implies a $15.50-18.50 share
price for TGNA, and $3.50-6.00 per share stub value for Cars.com.

Cars.com Comparable

AutoTrader Corporation, owned by privately-held Cox Enterprises, is the most direct

competitor to Cars.com, and should be a good comparable. Cox acquired 25% of AutoTrader
that it did not own from Providence Equity Partner for $1.8BN in January 2014, an implied
valuation of $7.2BN. Auto Trader listed to go public in 2012, with $1BN in revenue for full
year 2011. Assuming revenue has grown at a 10% CAGR from 2012 to 2014, when Cox
acquired the business, Cox paid roughly 6x revenue for AutoTrader.

Cars.com would be worth $4.2BN if given a similar multiple to AutoTrader. This implies a
$5BN EV for the Tegna Broadcast TV segment which generates about $400MM in FCF.
Since I estimate debt remaining at Tegna of $3.5BN post-spin, TGNA equity would be
$1.5BN. How could TGNA trade for a 27% FCF yield when its business is not under
imminent threat?

Career Builder

Risks

Conclusion

In short, Im having a difficult time reconciling how consolidated Tegna can continue to
trade at a $9BN EV given the value inherent in its Cars.com business. The answer to me is
that Tegna is likely undervalued as a whole, and that both parts of the business will likely be
undervalued post-spin. I believe Tegna broadcasting equity is worth $4BN ($18 per share),
Cars.com equity is worth $2BN ($9 per share), and CareerBuilder proceeds will be worth
$500MM after-tax ($2 per share). In total, TGNA is worth $29 per share. From todays
value of $21.50, shares would appreciate 36% to fair value, a value which can compound
from here due to Cars.coms operating leverage.

Longer Term Value

By 2020, I estimate Broadcast FCF will be more or less flat, with positive retrains impacts
offset by slowly falling ad revenues. In this time, Tegna will likely have generated about
$1.6BN in free cash flow, which should be used for a combination of M&A, debt paydown,
and share buybacks. Assuming shares are bought back at $22-25 per share, shares could be
reduced 29-33% to 148-157MM shares outstanding. Assuming 2020 FCF of $400MM, and
10% FCF yield, shares would be worth $25-27. At a 15% FCF yield, shares would be worth
$17-18 in 2020. If Tegna shares come out trading at $12, as I expect them to, then Tegna
could be up 50-100% in 4 years. Annualized returns would approximate 11-19%.

Cars.coms upside assumes 10% growth out to 2020, and EBITDA margins of 40%.
These assumptions yield revenues of $925MM and 370MM EBITDA by 2020. At 12x
EBITDA, Cars.com would be worth $4.4BN. If Cars.com EV is $3BN post-spin, then
investors could be owning an asset capable of growing 47% within 4 years. If the business
holds $1BN of debt at spin and in 2020, then returns could be even greater, roughly 70%,
roughly 14% annualized returns.

I prefer FCF, which was $180MM in 2015, exclusive of interest costs likely to be incurred
due to the spin. Assuming the company borrows at 6% on $1BN and pays a 33% tax rate,
FCF will fall to $140MM. ($60MM interest x (1-33%) = $40MM). A growing internet
property generating $140MM in cash could easily fetch a 20X FCF multiple, or a $2.8BN
equity valuation. My base case of $2BN equity value (and $3BN EV), however assumes a
much more conservative 7% FCF yield. Lets assume FCF stays flat in 2016 for simplicity.

After 4 years, EBITDA will have increased by $130MM pre-tax, $87MM after-tax. 2020
Cars.com FCF will have grown 62% from $140MM in 2016. Assuming no multiple
expansion, the equity would also have grown 62% to $3.2BN, a 13% CAGR.
TEGNA Follow-Up
Date: February 1, 2017
Source: Loeb

Political Advertising
Political advertising makes up 20% of TV advertising revenues.

80% of political fundraising goes to advertising.

About 1/3 of political advertising is presidential advertising.

Im seeing data points in articles suggesting Presidential advertising was down 60% from 2012. These
types of step changes are certainly not the norm in advertising, and they suggest something different
than a slow paradigm shift is occurring.

Tegna notes in their UBS conference slides that 2016 spending for Senate, House, and governors races
exceeded 2012 by 17%. They had $154MM 2016 political revenue

Guidance
2016E FCF $560-590MM, 2016E Adj. EBITDA >$1.2BN

2017E:
Media Segment up low-mid single digits
Digital Segment up high-single digits
I estimate $3.4-3.5BN in revenues
CapEx 110-115M
Depreciation 95-100MM
Amortization 115MM
34% Tax Rate

In short, with revenues up, FCF should be in the ballpark of 2016, with some negative offset from lower,
more profitable political ad spending

Per Sub Broadcast Fees

SNL Kagan estimated Gray Television earned $1.26 per sub, while the average broadcast station earned
$0.89 per sub.

The FCCs most recent report on cable prices shows that broadband prices increased 43% in 2014 to $1.07.
ESPNs per sub value is commonly estimated around $7 per sub.

SNL Kagan estimates avg. TV station per sub rates will increase from $1.40 in 2016 to $2.21 by 2022.BY
2019, SNL estimates $1.87 per sub, which will exceed all but three basic cable channels ( ESPN @ $9.17,
TNT @ $2.59, and Disney Channel @$1.88). Regional Sports Nets will be in the $5-7 range.

Reverse Retrans
SNL Kagan estimates that reverse retrans (the fees affiliates pay back to the networks) will increase as a
% of gross retrains from 44% in 2016 to 60% by 2022.

Other Risks
Loss of exclusivity that requires cable to carry broadcast channels. This might be bad, as people can still
get broadcast with antenna. It has not been acted on to date.