Saga Communications

Gate City owns 13.4%. Penned a letter to Saga earlier this year. Announced the sale of 22 towers for $10.7 million ten days ago. Buyback inbound!

Saga Communications is a radio broadcasting company that was founded in 1986. Headquartered in Grosse Pointe Farms, Michigan, SGA employs around eight hundred people and operates 82 FM stations, 31 AM stations, and 79 metro signals across 28 markets.

Revenue has tapered by fifteen percent over the decade and was $112.9 million last year. Their top five markets accounted for 37% of it – Milwaukee, Wisconsin (17%), Charleston, South Carolina (7%), Norfolk, Virginia (5%), Columbus, Ohio (5%), and Des Moines, Iowa (3%). SGA stays away from metropolises like NYC or LA and targets less populated areas where they can build deep relationships within communities.

“We’ve had people in our office and our markets that have been asked to run for mayor. Many of them serve on city council and are active in the local community, very active… We’re part of the fabric of the community and we get belly to belly with the advertisers.” said CEO Chris Forgy during a conference call two weeks ago.

88% of SGA’s revenues are from local advertising. Contracts generally run for just a few weeks, and historically, customers have returned, again and again. Free cash flow has been tremendous, totaling $57 million over the past five years. $140 million of dividends have been issued since 2012, with $62.3 million coming in the last three years. SGA’s market cap today is $78.0 million. Enterprise value is $65.4 million.

The dividend deluge follows the death of Ed Christian, radio fanatic and founder of Saga, who passed away on August 19, 2022. He left behind a fat balance sheet and big shoes to fill. A month later, SGA boosted the quarterly dividend to $0.25 per share and issued a special dividend of $2.00. Two months after that, Christopher Forgy, who’s worked at Saga for over two decades in a variety of roles, was announced as CEO. He is a unique individual. A sales guy.

SGA’s Q1 2024 earnings call opened with Forgy telling the operator (Matt) that Saga will find a place for him at the company because of the “docile tones” he has, and to wrap up the call, Forgy cited Benjamin Franklin’s famous declaration of independence quote “We must now hang together, or we most assuredly will hang separately” A beautiful quote. Forgy’s first annual letter to shareholders a few years ago also highlighted that 40% of employees have been with Saga for over a decade.

However, can you really trust Forgy after reading Gate City’s 1,277-word letter to SGA’s board of directors? The 13.4% shareholder noted that SGA owns a “Saga House” located at 1186 Westway Drive, Sarasota, Florida, under “Water Dragon LLC”, which Gate City considers to be a “failure in corporate governance”.

Board compensation increased by $500,000 from 2021 to 2023, and management was awarded bonuses after failing to hit performance targets. They’ve enjoyed perks, too, such as auto and home reimbursements, country club dues, and a private jet.

But perhaps the most agitating fact portfolio manager Michael Melby penned is that Forgy, Mister Hang Together, lives in Sarasota, Florida, while the rest of the team grinds in shivery Michigan. Plus, Saga is currently undergoing a “digital transformation”, a time when face-to-face, or “belly-to-belly” teamwork is essential for success.

Gate City thinks Saga is wasting dollars and that they should focus on radio, where they are competitively advantaged. Management remains married to digital, however, even after witnessing political ad revenue fall off a cliff from $6.9 million in 2020 to $3.3 million in 2024.

A glimmer of hope shone onto Saga shareholders last week when the company announced the sale of twenty-two tower sites. Proceeds totaled $10.7 million (13.4% of SGA’s market cap) and management stated that a “signifcant” portion will go towards share repurchases. Value trap no more!? Things are certainly trending in the right direction, potentially into a reflexive state.

Forgy owns $1.1 million of stock, so a $5 million buyback would shoot his stake up around 7%. And the stock may react positively. Seeing his net worth pop some, Forgy sells more towers and authorizes another buyback. “Man, those Gate City guys were right!” He says while sipping a mai tai at the Saga House (He bought the estate in cash from Water Dragon).

Jokes aside, SGA trades at 0.49x book value, and its return on net tangible equity last year was 12.4%. “We believe gross book value is likely a better way to value the land, buildings, and towers as these assets tend to appreciate over time,” says the militiaman (Gate City’s VIC account). So SGA actually trades closer to a third of book. Also, trailing free cash flow yield is 12.4%, dividend yield is 8%, and net cash position is $19.9 million. Finally, in 2022, Saga rejected a $181.6 million to $199.8 million bid from Connoisseur Media.

Other notable investors include Towerview (18%), the investment fund of the Tisch Family. Ed Christian’s Trust (13.8%), which could be sold into SGA’s buyback. Stanley Kesselman (4.9%) is an individual who has filed 13Gs with ESP and CVR as well. Hoak Public Equities (3.73%). Minerva Advisors (3.52%). Peapod Lane (3.17%), a fund that “focuses on the lost art of buying ‘net-net’ style stocks, Companies trading at a discount to their underlying asset value.” They’ve produced net annualized returns of 22.4% over the last five years.