EARNINGS CALL

Tegna Dealmakers Waiting Out ‘Rain Delay’

Once ownership questions get settled at the FCC, Tegna says it is ready to look at any and all types of M&A transactions.

Discussing the impact of a troubled “notable transaction” on in-market deal-making, Tegna President-CEO Dave Lougee said in its 2Q earnings call with analysts Tuesday: “The opportunity remains the same. The starting line has been pushed back — it’s kind of like a baseball game rain delay.”

Without ever mentioning Sinclair, Lougee said that problems associated with “a large transaction in our industry” are specific to that transaction and “are irrelevant to Tegna’s potential M&A opportunities.”

Adding that the dismissal of a challenge to the FCC’s UHF discount was a positive for the industry, Lougee said: “Incremental regulatory clarity along with the fact that additional assets have and are likely to come to market should make the environment more conducive to vertical acquisitions.” He said Tegna is ready to look at any and all types of transactions.

In fact, in answer to a question as to whether Tegna was looking at large, mid or small markets, Lougee simply said: “Yes.” Mentioning Tegna’s acquisition of the small-market London group, he said: “We don’t foreclose small markets if we see some unique opportunities with perhaps synergies because they’re right next to one of our Big Four markets in the state … there’s a lot of different criteria we would look at.”

However, there are a number of factors inhibiting the M&A market right now, Lougee said. He suggested that Mom and Pop television owners thinking of selling may be waiting to collect their 2018 political windfall before putting their assets on the market.

More importantly, however, is the need for the dust to settle around the currently under-review major transaction and, generally, the achievement of regulatory clarity on ownership cap levels and market definitions.

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“The challenge,” he said, “is that the DOJ is still using a definition of the market that has not changed. They haven’t really evolved that almost since the ’80s.”

But there is a ray of hope, he noted. “The FCC … has another quadrennial review next year, so they will get a chance to redefine the market.”

EVP/CFO Victoria Harker said that M&A is woven into the company’s overall financial strategy. “Our priorities continue to be maintaining operating a strong balance, enabling organic growth, acquiring attractively priced strategic assets and returning capital to shareholders in the form of dividends and opportunistic share repurchases.”

She said the company was prepared to take on debt to do a large deal, but would do so with the intention of deleveraging as quickly as possible.

Lougee declined to make any specific comments regarding the possible availability of Tribune and Cox stations.

In the meantime, Tegna is getting ready to bank the increased income that will be driven by strong gains in political advertising along with steady increases in subscription revenue. Those two categories just drove a 7% gain in 2Q revenue and promise to grow the company’s revenue by mid-double digits in 3Q.

According to Harker, during 2Q advertising minus political was down 3% pro forma and 5% as reported, in part due to the move of NCAA playoff action to cable and soccer’s World Cup to Fox, which comprises a tiny portion of the company’s network affiliate portfolio.

Regarding core, Harker said the company experienced 2Q declines in auto, restaurant and retail while registering increases in services, medical and entertainment.

Lougee added some core color. He said that auto was down just over mid-single digits in 2Q but doing better — “I’m not saying robust in third quarter, but significantly stronger.” He said it is currently flat and improving.

He noted that auto results continue to be dampened by the absence of Dodge-Jeep-Chrysler. He credited foreign manufacturers for what improvement there is, noting that it was coming primarily from Japan rather than Germany. But at the end of the day, he had no neat tidy answer as to what is driving ups and downs in the category.

Categories seen picking up steam in 3Q included some of the 2Q bright spots. Lougee mentioned medical-dental-optical, entertainment and home improvement. However, he warned that displacement will begin to affect results during the third quarter.

Lougee is expecting a banner political year, and said the company is already on pace to set a new mid-term record. The company’s footprint is strong, he noted. It includes 25 competitive House races, 17 of which are located in its top 25 markets; it has 25 Senate races, seven of which are highly competitive, including Florida, Arizona, Minnesota, Missouri, Tennessee and Ohio; and there are seven competition gubernatorials, including Florida, Colorado, Ohio and Minnesota.

2020 redistricting will be a particular shot in the arm to gubernatorial spending. “A lot is at stake and a lot will be spent,” he said.

Subscriptions are strong and reliable source of revenue, and according to Lougee, increases in OTT subscribers have more than made up for losses from cord-cutting in the traditional MVPD column. He added that the growth in OTT subscribers remains a large- and mid-market phenomenon which has not started to take hold in markets 100 and smaller.

Lougee declined to comment on CBS’s prediction that it will be earning two-thirds of local station retransmission consent funds, noting that he’s heard that one before, and assured the questioner that Tegna would be able to continue to grow its net retrans income.

That said, he added that he would rather have 45% of $350 million than 55% of $250 million. (TVN has done the math: $350 million times 45% equals $157.5 million; $250 million times 55% equals $137.5 million.)

Harker underscored that subscriptions will remain a major growth category, with 15% of its subscriber base up for renewal this year and another 50% coming due in 2019.

Premion, Tegna’s entry into the digital marketing universe, was expected to bank $60 million by year’s end. That number has been bumped up to $75 million. And despite Harker’s claim that most of the profit generated by the growing service is being plowed back into the business, it is expected to finish 2018 with a 10% profit margin.

Tegna reports all political revenue generated by the company as a separate category, so the Premion numbers do not include any revenue from that stream. As yet, said Lougee, the company has no idea what how much political will be spent with Premion, but he suspects the number will increase as activity gets hot and heavy at the end of the campaign period.

As for the advertising collusion case brought by Clayton, Massey & Associates against Tegna, Sinclair, Nexstar, Tribune, Gray and Hearst, Lougee said: “The allegations in that complaint are completely meritless and we will defend ourselves vigorously.”


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