What If Sinclair And Nexstar Decide To Merge?

The wave of consolidation in broadcast television appears to be peaking. In the last two months, deals worth more than $5 billion have made headlines.

While the $2.73 billion Tribune-Local TV and $2.5 billion Gannett-Belo deals rank as the two biggest in the current round of M&A, Sinclair and Nexstar are steadily building their station portfolios.

For those of us who write about this, the latest deal often is less compelling than the next deal — the one that hasn’t happened yet. We scramble, and sometimes get tripped up, trying to report the news before it happens.

The station trading market is rife with speculation. There’s even talk that Sinclair and Nexstar will merge.

So, what if those two groups actually decided to combine forces?

What follows is an aprocryphal conversation between Sinclair boss David Smith and Perry Sook, head of Nexstar, discussing how that combination might come about and what it might look like.

And if, by some long-shot odds, this conversation just happens to be prescient, well, you read it here first.

David Smith: You know who this is?

Perry Sook: Indeed I do. Another day, another deal, eh?

DS: Maybe it seems like that but I think this whole consolidation thing, it’s moving too slowly. We need a big, bold move. A game changer.

PS: Great minds. What are you thinking?

DS: All these cable and phone companies with the wired and wireless broadband pipes, they’re beating us up in D.C. Broadband this, broadband that. Broadband’s the future. Blah blah blah. They’re in bed with the feds. Hell, they’re pleasuring the cyber spooks, giving ’em access to their networks, and don’t even expect them to call in the morning.

PS: I hear you. The friend of my enemy is the FCC. So what do you propose doing about it?

DS: Go big or go home.

PS: Go on. What’s big?

DS: When our deal for TTBG closes, we’ll have just shy of 140 stations in 72 markets. We’ve got a couple more deals in the pipeline that’ll push us well past 150. Our reach, before the UHF discount, is 43%. Your deal for CCA and White Knight boosted you to 91 stations in 48 markets. Your reach is right around 14%, pre discount. I know you’re bidding on some other properties, too. We get the same books.

PS: Your point?

DS: We’re big and we’re gonna get bigger. Thanks to the FCC’s UHF discount, I can grow like Topsy. There’s north of 115 million U.S. TV households now. The 39% cap is effectively a 78% cap. We get married, we’re a little under 57%. Still lots of room. 

PS: Uh, you said married. Are you proposing?

DS: Call it what you want. I like to think of it as aligning economic interests. A marriage of convenience. You of all people understand that this consolidation isn’t just about television. It’s about spectrum. All we do right now is use it to transmit television signals. But the spectrum doesn’t care what we do with it. What if we decided to, say, get into the telecommunications business? Spectrum doesn’t care. What about our own pay-per-view video-on-demand business? Spectrum doesn’t care. Bits are bits and spectrum doesn’t care.

PS: There are a lot of opportunities out there. Why should the broadband guys have all the fun, get all the profit? The current administration should like the multi-use idea.

DS: The current administration likes anything new and shiny. We’ll have to take some of these concepts and sex them up a bit for public and political consumption. But that shouldn’t be too hard. It’s something we’re good at.

PS: OK, we’re on the same page on that. But if you’re talking, what, a merger? There are some practical issues. What about overlaps? I mean, I’ve got some duops, you’ve got some quadrops. Sounds like something out of Jurassic Park.

DS: Glad you brought that up. Let’s go down the list, starting with the biggest. That’s Salt Lake City. I have two, you have two. It’s your ABC and my CBS bumping up against each other. We might have to sell off one of those. Here are some other sale scenarios, although I think there might be alternatives:

• Rochester: You have a CBS, I have an ABC and a Fox.
• Champaign: You have a CBS and a My Network, I have a CW, Fox and ABC.
• Syracuse: You have an ABC, I have an NBC and a My Network TV.
• Harlingen: NBC for you, CBS for me.
• El Paso: Your NBC, my Fox.
• Johnstown is a CBS for you, NBC for me.
• Peoria: Your CBS, my ABC.
• Bakersfield is an NBC for you, CBS and FOX for me.
• Finally, Amarillo, where it’s an NBC for you, ABC for me.

PS: I count 10 total. That’s a lot. Salt Lake, that’s DMA 33, shouldn’t be too hard. Maybe Hearst or Gannett or Scripps would want the ABC. Maybe Rochester, too, though it’s starting to get a little small at DMA 78. Somebody like LIN might be interested in those smaller markets.

DS: Where there’s a will there’s a way. With a few exceptions, I don’t see big issues with the market overlaps. We sort of pioneered the sidecar thing with Cunningham, GOCOM, Roberts and others. And there’s always Steve Mumblow. Your Mission subsidiary should come as part of the deal. It’s one more place we could park something problematic, like your Rochester station, for instance.

I’m more concerned about our brethren joining forces. LIN and Meredith, for instance. Or Hearst and Gannett or Hearst and Scripps. Who knows? Everybody’s in play. I’m not interested in eating anybody’s dust. I want to be one of the half dozen left standing, preferably the biggest, when the dust clears in a couple years.

PS: I like the way you think.

DS: Twin sons of different mothers. We led the charge on retrans. But this is bigger.

PS: Makes sense. There’s something else we need to talk about.

DS: Valuations, of course.

PS: You’ve been getting these big spreads between buyer and seller multiples.

DS: You have, too.

PS: Yeah, I know. Synergies are a snap when there’s fat and inefficiencies. You’re not going to get that with us.

DS: You’re a hell of an operator. Those Four Points stations I bought, including Salt Lake, they were so well run we adopted some of your best practices. But you can’t match our size and scale. We’re still able to achieve synergies on things like retrans, programming and equipment that nobody else can. So I think there’ll still be a gap but the multiples are going to be a lot closer in this case than with anything else we’ve acquired.

PS: Give me a number.

DS: Your stock just keeps hitting new 52-week highs. Your market cap’s around $1.16 billion. Total debt’s just shy of a $1 billion. You’re pretty tight on total cash, only about $23 million. Enterprise value’s roughly $2.03 billion. You give me a number.

PS: Local/Foxco fetched. $2.73 billion. I think we’re worth that, anyway.

DS: (Inaudible, coughing sound.) Let’s be realistic. Tribune’s Local/Foxco deal included great stations, some in top 25 markets. Gannett gave Belo what, a 28% premium on its stock? Just for the sake of argument, let’s say I give you a 30% premium. Based on your recent $39 per share price, that’s roughly $51 a share. You have just under 30 million shares outstanding. You do the math.

PS: That’s a hair over $1.5 billion, not counting debt and cash. We’re worth more than that.

DS: I wouldn’t call $21 million a hair. And fasten your seat belt when news of the deal hits our stock prices. As for what you’re worth, maybe it’s more than that, maybe not. Again, just for the sake of argument, let’s say we go to a buck and a half. We’ll have to do due diligence, of course. But $1.5 billion plus debt puts the overall valuation around $2.5 billion. Maybe not the biggest in history but right up there. That’s quite a legacy.

PS: It’s a starting point. You’re talking about a stock for stock acquisition, I assume.

DS: You know Section 368 of the IRS code as well as I do. Maybe better. I’m loath to have anybody pay taxes on a deal this size. There’s some potential downside for us in a “B” reorganization. We have to exchange our voting stock for your shares so control’s going to be diluted. Stock’s the only consideration. And some minority shareholders will remain although I imagine that’s an issue we can resolve over time.

PS: OK. That all sounds reasonable. Theoretically speaking, of course. But why shouldn’t I just go to auction, for sale to the highest bidder?

DS: Three reasons: First, don’t look a gift horse in the mouth. I can pretty much guarantee my offer is the best you’re going to get. Second, all those costs involved in going to auction — brokers, lawyers, advisers, more lawyers. That’s millions going out that’s not going to your shareholders. Third, time. The clock is ticking. Maybe you remember 2007? You put up the for-sale sign and a month later, the economy headed south for a three-year winter.

PS: Good points. But even with a fairness opinion, the lawyers will get their pound of flesh when shareholders sue because we didn’t go to auction.

DS: There’ll be some of that, sure. Maybe we can leave a little wiggle room in the numbers to take some wind out of their sails. As long as we’re just theorizing, maybe I can sweeten the deal for you in another way.

PS: I’m listening.

DS: There’d be a place for you with us.

PS: Not sure I’m interested in a ‘place.’ I’ve grown accustomed to being the lead dog. You know the saying …”

DS: Yeah, ‘If you’re not the lead dog, the view never changes.’ But look. If we do this, we’ll be the biggest of the big. I’m damn good at what I do but a company that size — what, 250-plus stations or thereabouts? — is big even for me. Might be better off with two of us sharing the load.

PS: You and I both know that at the end of the day only one guy runs the show. Plus, there’s that whole Baltimore thing. I’m a Steelers fan. Can’t stand the Ravens.

DS: (Laughter.) OK, OK. Anyway, think about it.

PS: I will.

DS: Oh, and junk your phone. You’ll get a new one.