The Baltimore super group grows dramatically in size and industry influence. With the great expansion, Sinclair has moved to the top ranks of TV broadcasting and earned its recognition as TVNewsCheck’s Station Group of the Year for 2014. This story originally appeared in TVNewsCheck’s Executive Outlook magazine in January. (Photo by Jonathan Hanson)
The last five years have been a heckuva stretch for the Sinclair Broadcast Group.
After nearly collapsing under the weight of the economic downturn in 2009, the Baltimore-based station group has roared back, leading a consolidation surge that’s restored local TV broadcasting’s luster on Wall Street even as it reshapes the industry.
In the last two years, it has invested $3.2 billion in station acquisitions, amassing the single largest share of the industry’s nearly $10 billion in deals.
Sinclair has strengthened not only itself — its stock price has shot up 220% in the two years since Dec. 15, 2011 — but the rest of TV broadcasting as well.
“The industry always benefits from a consolidator,” says Bishop Cheen, an independent analyst and SNL Kagan consultant. “It proves asset liquidity, proves asset value.”
With the great expansion, Sinclair has moved to the top ranks of TV broadcasting and earned its recognition as TVNewsCheck’s Station Group of the Year for 2014.
Regardless of the yardstick, Sinclair is big.
By number of stations (owned or operated), it ranks first with 162 stations in 77 markets, assuming all pending deals close. By TV homes reached, it is second with coverage of 38.7% of the U.S. And by 2012 revenue, it is sixth with nearly $1.3 billion, behind only Fox, CBS, Gannett, NBC and Tribune.
But Sinclair’s impact goes beyond its sheer size.
Sinclair’s visionary CEO David Smith eschews the broadcasting establishment, but leads, nonetheless, if not by what he says, but by what his company does.
Sinclair emerged early as a prospector of retransmission revenues and has played a pivotal role in developing what’s become an essential second revenue stream for broadcasters.
It has pushed the boundaries of the FCC ownership rules to operate multiple stations in a single market, benefiting itself and providing a model for others to follow.
Lately, it has begun leading the charge for a new broadcast standard that it believes will open up new business opportunities and provide broadcasters with the tools to mine a rich future.
HITTING ITS STRIDE
Sinclair’s role as a leading industry consolidator has come to the forefront over the last two years, although the group has been building its station portfolio steadily since the late 1980s.
In the past two years, Sinclair has acquired 107 television stations, starting in 2011 with the Four Points Media and Freedom Communications buys for $585 million.
It hit its buying stride in 2013 with six deals: Cox stations for $99 million, Barrington stations for $370 million, Fisher for $373 million, TTBG for $115 million, Allbritton for $985 million and New Age for $90 million.
Sinclair’s financial engineering makes the buying binge even more impressive: More than $600 million in financial upside including $478 million in new EBITDA from the acquired stations.
During the 1990s, Sinclair discovered loopholes in the FCC’s local ownership rules that have allowed it to operate at least one more station, per market, than the rules dictate. Enhanced economies of scale boosted the finances of Sinclair and of broadcasters that followed its lead.
Through operational allies — so-called sidecar companies like Cunningham Broadcasting — that technically own the stations, Sinclair achieves the financial benefit of multiple properties without violating FCC rules.
Now, of the 77 markets Sinclair is in, it has multiple stations in 49, or more than 60%.
The consolidation — locally and nationally — has given Sinclair tremendous clout in its dealings with the Hollywood syndicators. After all, with Sinclair, a syndicator can clear nearly 40% of TV homes.
In the mid-2000s, Sinclair was among the handful of broadcasters that risked losing viewers and revenue to aggressively pursue retransmission consent payments from cable and satellite operators. Retrans payments have revitalized the broadcast sector and helped it compete for professional sports and other costly programming.
Sinclair’s hardball approach in retrans disputes with Suddenlink, Mediacom, Time Warner and Comcast, among others, set the tone for the rest of the industry.
“They played a tough game, stared down their broadband opponents and won every match,” Cheen says.
“It goes to the issue of what’s our value as far as consumers are concerned, what are we entitled to,” Smith says. “Les Moonves [the CBS CEO] and Time Warner [Cable] — that’s the tip of the iceberg of what should be coming to us on a relative basis.”
In a landmark case in August 2013, CBS stared down Time Warner Cable and ended up getting what it wanted. According to various reports, that’s $2 a subscriber per month, plus retention of its digital content rights.
Retrans is a key element in Sinclair’s growth formula. When it buys stations, it gets an immediate uptick in revenues from the newly acquired properties by locking in its most-favored-nation status on retrans payments. If the acquired group was receiving 35 cents a sub and Sinclair gets 70 cents, for example, that’s an immediate 100% increase.
Sinclair has been a critic of the current digital broadcast standard since the late 1990s when then chief technologist Nat Ostroff went against the grain of the industry in arguing that the standard wasn’t up to the task before it.
Now, Sinclair is leading the charge for a new one. Its perspective is that ATSC 3.0, as it’s called, opens capacity for new innovative services while enabling antenna-free delivery of reliable signals to big screen TVs as well as smartphones and tablets.
But without spectrum, a new standard is useless.
When the FCC announced plans to buy back spectrum from broadcasters, Smith quickly staked out Sinclair’s strategy: Hang onto the electromagnetic beachfront property, calculating it will eventually be worth far more than the FCC will pay.
In a 2011 study Sinclair commissioned, the company makes the case that with ATSC 3.0 broadcasters could use excess transmission capacity to offer various point-to-multipoint IP services.
“I think there’s a general acknowledgement now in the industry that with the proliferation of portable devices in the marketplace and the general failure of our platform to be able to communicate with those devices, we have no choice but to change if we want to compete in that marketplace,” Smith says.
Extrapolating from data in the study, broadcasters’ potential take would be, in effect, a spectrum annuity versus an auction, ranging from $920 million to $1.24 trillion over 10 years.
NEW FOCUS ON NEWS
Over the years, Sinclair has irked liberals and upset the broadcasting establishment with periodic forays into conservative partisan politics.
Sinclair has also drawn fire for its sub-standard newscasts. But as the group has grown and moved into larger markets, it has cooled the political rhetoric and upgraded news operations, both technically and journalistically.
When Smith announced that Sinclair was buying Allbritton Communications last July, he surprised reporters and analysts with talk of using Allbritton’s regional cable news outlet in Washington, NewsChannel 8, as the foundation for a new national cable network that would draw on the resources of local stations, Sinclair’s and others.
The hybrid local-national channel would exploit the shortcomings of national cable news networks such as CNN, Fox News and CNBC, Smith says. “By virtue of a full-blown news operation in Washington, D.C., I can walk into my local politician’s office and go live,” he says. “I’m a news service to my own platform. That’s hard to do for a small broadcaster who has five or 10 stations.”
Damian Riordan of Peloton Media Advisors, a boutique M&A advisory firm, says: “If you’re producing news segments that may have regional or national interest, with scale, it would be relatively easy to provide that news product across all markets and then potentially distribute it to other groups.”
Smith notes local TV newscasts routinely beat the national cable networks in a market. “The practical question I ask myself, and this is the reason I think about the possibility of what NewsChannel 8 could be, if I move only 2,800 of my 39,000 viewers to my local news channel [in Columbus, Ohio], am I worth what CNN is worth?”
Sinclair’s programming ambitions do not stop with news. “The natural extension of what we do now is go into the content creation business,” Smith says.
Sinclair already owns the Ring of Honor wrestling franchise, which it acquired in May 2011, and has been airing on its CW and MyNetworkTV affiliates since September of that year.
Smith is quick to note that, based on its ratings, Ring of Honor has considerable retrans potential. “In 55 of our markets, we have 109,000 people watching Ring of Honor for one hour,” he said. “CNBC, in its total day across the entire country, has 38,000 viewers.”
Followers of Sinclair in the financial markets see programming as a logical next step.
“With this larger footprint come opportunities for expansion of entertainment programming and news and information programming,” says Riordan. “Given the scale, it follows that a company like Sinclair would look to develop into those dimensions.”
It speaks to Sinclair’s corporate culture, where Smith clearly sets the tone, that the people who work there are fired up to do their jobs.
“I’ve never worked with anyone who was in the office before me and after me, especially the CEO of a multibillion dollar corporation,” says Steve Pruett, head of Sinclair’s small market initiative Chesapeake TV. “I have to work very hard to keep up with him.
“There are two things going on here: One is David’s presence, being a leader and leading the hours at the job. The other is, the people who work here, they’re about getting things done.”
Smith, the chief strategist at Sinclair, has built a crack team of executives to implement his vision.
While Sinclair’s executive officers number 26, the core team includes David Amy, EVP-CFO; Steven Marks, VP-COO; Lucy Rutishauser, SVP-corporate finance/treasurer; Mark Aitken, VP-advanced technology; Bill Butler, VP of programming and promotion; and Pruett.
Marks has the longest tenure, starting as general sales manager at WTTE Columbus, Ohio, in 1986. He’s been COO since 2007.
Amy has spent his entire broadcast career with Sinclair, having joined in 1984 as business manager at WPMY Pittsburgh. He’s been CFO since 2001.
Rutishauser has been VP-corporate finance/treasurer since 2002 until she added the SVP stripe last month. She joined Sinclair in 1998.
Aitken, like Smith a broadcast engineer, has held his current title since 2011, having joined Sinclair in 1999 (see story, page 12). Also like Smith, he’s considered one of the savvier, visionary engineers in the business.
Butler joined Sinclair in 1997 as VP, group program director and moved into his current position in July 1999 (see related story). His pre-Sinclair career includes programming and marketing posts at KCAL Los Angeles, WTXF Philadelphia and WLVI Boston.
Pruett is the new kid on the block, having joined the team in 2013. His more than 30-year broadcasting career includes stints as the top guy at Communications Corp. of America, strategic adviser at DirecTV, and managing director at Communications Equity Associates.
Sinclair looks unstoppable, but speed bumps loom.
By the FCC’s current reckoning, Sinclair reaches just 18.7% of U.S. TV homes, well below the 39% cap. That’s because the FCC discounts the coverage of UHF stations by half.
The FCC is now considering eliminating that discount. Absent the discount, Sinclair’s reach would jump to 38.7%. It would essentially be blocked from entering new markets unless it figures out ways around the national cap as it has the local cap.
Sinclair’s acquisitiveness has also caught the eye of the federal government’s trust busters. The U.S. Justice Department made a relatively rare second request for information in its antitrust review of Sinclair’s Allbritton buy, prompting some speculation that the transaction may be in trouble.
Smith rejects the notion that the deal won’t go through.
“I don’t know why it shouldn’t,” he says. “What it presents is a huge opportunity for us as a broadcaster to greater serve the public interest in the local marketplace.”
Smith’s perspective and efforts may be self-serving. He makes no bones about being in broadcasting for the money — his and Sinclair’s shareholders.
But if Sinclair shareholders have profited handsomely, so have other broadcast TV owners.
The current consolidation surge will spawn carve-out and fill-in deals. Expect Sinclair to be in the thick of them.
This story originally appeared in TVNewsCheck’s Executive Outlook, a quarterly print publication devoted to the future of broadcasting. Subscribe here.