Sinclair Broadcast Group Inc. (SBGI:US) plans to drive still more consolidation among television stations after propelling industry deals to their fastest pace in six years.
Sinclair, which spent almost $2 billion in the past two years to become the largest U.S. station owner, is looking for more takeovers after raising almost $500 million in a stock sale last month, Chief Financial Officer David Amy said in a telephone interview. Low borrowing costs and potential profit gains at stations, which are collecting more fees from cable systems, are an opportunity to bulk up, Amy said.
“We have significant potential in terms of additional acquisitions,” Amy said. “We don’t make any bones about what we’re after.”
U.S. TV and broadcast deals total $3.2 billion so far this quarter, almost double any period since 2007, according to data compiled by Bloomberg. As the takeovers continue, Nexstar Broadcasting Group Inc. (NXST:US), Lin TV Corp. (TVL:US) and Gray Television Inc. (GTN:US) are attractive targets, said Benchmark Co.’s Ed Atorino and Paul Sweeney, a Bloomberg Industries analyst. All three stocks are up more than 22 percent since June 12, the day before Gannett Co. announced its $1.5 billion purchase of station owner Belo Corp. (BLC:US)
“I’m stunned” by the flurry of deals, New York-based analyst Atorino said in a phone interview. “Sinclair started the dominoes and the result has been absolutely incredible.”
In its latest station purchase, Sinclair, based in Hunt Valley, Maryland, said on June 4 it will buy four outlets from Titan Broadcast Management for $115.4 million. Including pending deals, it has 140 stations, up from 58 two years ago. That accord was followed on June 6 by the $860 million merger of Media General Inc. (MEG:US), backed by Warren Buffett and Mario Gabelli, with New Young Broadcasting Holding Co.
During the mid-2000s, private-equity firms seeking rich cash flows drove up TV station prices to as much as 14 times earnings before interest, taxes, depreciation and amortization, Amy said. Since the recession ended in 2009, stations are selling for 8-to-10 times Ebitda, he said.
“Usually within 12 months, with the free cash flows that are coming off our deals, we’re able to bring our leverage back to where we started,” Amy said. “Our balance sheet (SBGI:US) continues to be strong through all these acquisitions.”
The purchase of Belo, at 8.5 times trailing 12-month Ebitda, according to data compiled by Bloomberg, will boost the outlets owned by Gannett, the McLean, Virginia-based publisher of USA Today, to 43 from 23, according to the companies.
Gannett shares surged 34 percent with the Belo deal, and are up 39 percent this year through yesterday. Today, Gannett fell 0.4 percent to $24.85 at 9:55 a.m. in New York. Sinclair rose 1.1 percent to $28.88 and has more than doubled in 2013.
Despite more competition from cable channels, business at local stations is improving. Political advertising is growing almost 40 percent every two-year election cycle, Bloomberg’s Sweeney said. Campaigns spent $2.9 billion on local TV commercials in 2012, more than any other outlet, according to the Television Bureau of Advertising.
“Political spending is huge,” Sweeney said. “It just gets bigger and bigger and bigger. And it all goes to local broadcast television.”
Since the end of the recession, local media have also benefited from rebounding real estate and auto advertising, said William Smead, chief executive officer of Smead Capital Management Inc., which holds 1.1 million shares of Gannett.
“We think local broadcast will be a good business because residential real estate and the auto business are coming back,” Smead said in an interview.
Station owners also cut costs during the recession, helping to stoke cash flows that came with the rebound. Belo and other TV groups were split from their newspaper operations, where advertising was crippled by competition with the Internet.
Bulking up lets station groups streamline even more, said Barry Lucas, senior vice president of research at Rye, New York-based Gabelli & Co. Its Gamco fund affiliate, which manages about $40 billion, holds (MEG:US) stakes in Sinclair, Richmond, Virginia-based Media General, Providence, Rhode Island-based Lin TV and Atlanta-based Gray, according to data compiled by Bloomberg.
“You can take costs out of back-office operations and there’s some savings on programming,” said Lucas. “You can create hub news staffs that work across stations, for example.”
Size also matters when negotiating with larger partners, including pay-TV operators who pay to rebroadcast local signals to subscribers, and television networks like CBS Corp. (CBS:US) that provide programming and want a slice of the money.
“If you wanted a decent seat at the table talking to those guys, you had to have scale,” Lucas said. “Otherwise you were irrelevant and got pushed around.”
Licensing fees from cable and satellite operators are estimated to rise 28 percent this year to $3.02 billion industrywide, according to SNL Kagan. That amount will double to $6.05 billion in 2018, the researcher estimates.
The merger activity, robust advertising and fee revenue have fed share gains at station owners.
Lin TV, with 43 stations, was up 29 percent through yesterday since the Belo deal, helping the stock to more than quadruple in the past year and mark the fourth-biggest gain in the Russell 2000 Index. That lifted the company’s market value to $800 million, the highest since 2007.
Gray, with 41 stations, climbed (GTN:US) 31 percent in four days to a market value of $413.5 million. Even at its highest stock price in five years, Gray had an enterprise value (GTN:US) yesterday that was 7.2 times Ebitda. That’s more affordable than the median 9.4 times for U.S. broadcasters with market values greater than $100 million, data compiled by Bloomberg show. Lin TV was also cheaper than the median at 8.1 times Ebitda.
Today, Lin TV shares fell 1.5 percent to $14.65, while Gray gained 0.8 percent to $7.21.
Bob Prather, president and chief operating officer of Gray Television, couldn’t immediately be reached for comment. Courtney Guertin, a spokeswoman for Lin TV, didn’t respond to requests for comment.
Including a 23 percent gain in the last four days, Irving, Texas-based Nexstar more than quintupled in a year to lead the Russell 2000. That’s given Nexstar a stronger currency for deals with its Ebitda multiple at the highest among comparable U.S. broadcast companies, the data show.
The $1.1 billion company has announced five acquisitions since July. Joseph Jaffoni, a Nexstar spokesman, said the company is always looking for station acquisitions and would consider any offer in the best interests of shareholders.
Today, Nexstar shares fell 1.8 percent to $32.75.
“We expect more industry consolidation,” Lucas said. “There will be a handful of players with stations that reach 30 percent or more of U.S. households.”
The Federal Communications Commission bars companies from owning stations that cover more than 39 percent of the country. Sinclair’s operations, including UHF outlets discounted in FCC computations, reach about 20 percent, Amy said.
Bloomberg Industries’ Sweeney also cited Raycom Media Inc., based in Montgomery, Alabama, as a potential target. The company owns or provides services for 53 stations and is owned by employees. Rebecca Bryan, a spokeswoman for Raycom, didn’t respond to a request for comment.
The biggest opportunity for station owners may be finding new uses for additional spectrum gained when the industry converted in 2009 to digital transmissions.
Station owners have used the extra capacity to create or carry new digital outlets, called subchannels, such as Bounce TV, tailored for African-American audiences, and Me-TV, which offers vintage shows such as “The Beverly Hillbillies.”
Weigel Broadcasting Co.’s Me-TV is averaging 340,000 prime-time viewers a night since September, according to Nielsen data. The audience for Bounce TV, whose founders include Martin Luther King III and former U.S. Ambassador Andrew Young, averaged 140,000.
“They are starting to show up,” Amy said. “Me-TV has really impressed a lot of us in terms of the viewing numbers.”
Sinclair has 90 or so such channels, including ones offering country music and films from Metro-Goldwyn-Mayer Studios (MGMB:US), Amy said. The company has also acquired technology to gain a role in the development of mobile TV, including the purchase this week of the largest U.S. manufacturer of antennas, transmission lines and radio-frequency systems.
Wireless communications companies including AT&T Inc. (T:US) and Verizon Communications Inc. (VZ:US) are advocating a federal auction of unused spectrum to bolster wireless systems that can’t keep up with mobile demand, Sweeney said. If that were to occur, station owners might not get what they expect, he said.
“One of the real concerns, the bear case, is that the government will come in and take that spectrum from you and not pay you enough for that,” Sweeney said. “And that’s why a lot of TV operators are saying, ‘I have no visibility on the value of my spectrum and I’m not willing to see what happens, so I’m going to sell my spectrum now, to someone like Sinclair.’”
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