Now that Nexstar has signed a definitive agreement to absorb Media General for $4.6 billion, Nexstar joins Sinclair in having hit the FCC ceiling on station ownership. The groups CEOs — Perry Sook and David Smith, respectively — have a lot in common, but their post-consolidation strategies are diverging. Smith wants Sinclair to be a national programmer; Sook simply wants to get the most out of what he's got.
At 39%, Sook, Smith Set Different Courses
I have a tendency to think of the Nexstar Broadcasting Group and the Sinclair Broadcast Group as two sides of the same OTA coin. They are publicly traded consolidators of TV stations in mostly medium and small markets led by broadcasting’s two great entrepreneurs, Perry Sook and David Smith, respectively.
Sook and Smith enjoy great reputations as cost-conscious asset managers who put shareholders and the bottom line first.
They have been leaders in going after retransmission consent fees from cable and satellite operators. Over the past 10 years or so, retrans revenue has sustained broadcasting as the No. 1 TV medium. Sook calls the revenue the “life blood” of the industry.
And now that Nexstar has signed a definitive agreement to absorb Media General for $4.6 billion, Nexstar joins Sinclair in having hit the FCC ceiling on station ownership. With stations covering around 39% of the nation’s TV homes, neither can enter new markets unless they exit others first.
But as I look and listen to the companies, I see their post-consolidation strategies diverging. The big difference is in their attitudes toward TV programming.
Sinclair has decided to invest heavily in national programming, seeing it as a complementary way to grow its business and, perhaps, as a long-term hedge against its over-reliance on the broadcast networks.
On the same day (Wednesday) that Nexstar and Media General announced their deal, Sinclair said it had acquired Tennis Channel for $350 million. (That deal, by the way, has two interesting facets. First, Sinclair would use the cable network’s losses to cut its tax bill by $65 million, and, second, it has already used its retrans leverage to boost the network’s cable carriage from 30 million to 50 million and almost immediately enhance its value. Skimpy distribution had been holding the network back.)
“We REALLY like [Sinclair’s] continued investment in content,” said Marci Ryvicker and her team of securities analysts at Wells Fargo, who don’t indulge in all-caps lightly. “We believe the company’s diversification into other types of TV networks via this cable deal, and its previously announced digital networks of American Sports Network and Comet are great strategic moves for continued financial growth.”
Sinclair is also among the station groups that are developing original entertainment programming for broadcast as an alternative to what Hollywood is offering — or, these days, not offering — in syndication.
Arthur Hasson, Sinclair’s programming chief, told us last November to watch for shows from Sinclair in unscripted genres like talk, court and game. “It really has just started,” he said. “We have what I would call a slate of various shows for daytime or early fringe or access.”
Sinclair has a production deal with Michael Eisner’s The Tornante Co. and it just wrapped up testing of a show from East 86th Street Productions on personal and household security, The Security Brief with Paul Viollis.
By contrast, Sook has shown no interest in diversifying into cable programming or competing with the Hollywood syndicators.
In an interview with me yesterday, Sook amplified remarks he made at NATPE last week, saying he is going to stay focused on local programming, the thing that sets broadcasting apart from all the other TV media.
“I feel our strength, both in television and in digital, is in providing content and services locally, that everything we air in Salt Lake City originates in Salt Lake City.”
As Nexstar stations increase their local news programming, their need for national programming diminishes, he says. And to the extent they need it, they get “the cream of the crop” because Nexstar is often the biggest group owner in town.
“So, I don’t have an unmet need to develop a low-cost version of a program that exists or a derivative of something that’s already on the air.”
Such comments don’t bode well for Media General’s nascent original programming operation headed by Tony Optican. It has one show on the air, Hollywood Today Live, and was hoping to line up other station groups to carry it into a second season. The operation’s fate now rests with Sook.
From what I can gather from Sook’s session with securities analysts after the merger announcement and my interview, he doesn’t have a strong sense of how to grow his company now that it can no longer grow from acquisition. By that I mean he doesn’t have plans for entering new businesses like national programming, although, like Smith, he is high on the potential for the next-gen broadcast standard, ATSC 3.0.
His intentions are to integrate Media General’s digital enterprises into a coherent and profitable whole, to continue to invest in local new operations and facilities and to keep the pressure on the MVPDs until Nexstar’s share of the billions the MVPDs spend on programming is equal to the audiences that it delivers. He believes Nexstar and other broadcasters are only a third of the way toward parity.
“I would say if you go look at the financials of virtually any [broadcasting] company, that a lot of their growth is coming from the growth in distribution revenue,” Sook says. “That is the industry as it is at this moment.”
And expanding retrans revenue is no cinch. It involves tough negotiations. Nexstar’s retrans feud with Cox Communications flared up this week with the sixth largest MVPD publicly urging its customers to protest the Media General merger at the FCC if Nexstar doesn’t back off its retrans demands.
Over the past 20 years, starting with a single station in Scranton, Pa. (WYOU), Sook has built Nexstar into a giant. Once Media General is on board, Nexstar’s 171 full-power stations in 100 markets will generate $2.3 billion in annual revenue with more than $800 million in EBITDA and $500 million in free cash flow.
Asking Sook “What’s next?” these days may be a little unfair. He has been consumed by Media General for the past several months and he will continue to be consumed by it. “I bought myself two years of hard labor on the back end of this [the Media General] announcement, ” he says.
“First of all, we have regulatory filings, we have proxy filings, we have shareholder votes and then we have to go through the [incentive] auction process and then seek regulatory approval and financing to close the transaction as set up.
“That’s the better part of this year, and then once we close on the transaction, we have got a good year of introducing ourselves to our new partners, the new members of the Nexstar nation and discussing and instructing them in our way of doing business and then putting the companies together so that we can have one company and not a company with disparate parts.”
That sounds daunting. Perhaps when all that is done, Sook will have the luxury to dabble in new programming businesses like his Baltimore doppleganger.
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Do not fret. Perry Sook has not done his last station deal. In fact, before he can close on Media General, he is going to have to spin off either the Nexstar or Media General stations in six “overlap” markets to comply with the FCC’s local ownership limits. The six markets: Green Bay, Wisc.; Roanoke, Va.; Davenport, Iowa; Lafayette, La.; and Terre Haute and Fort Wayne, Ind.
Sook says that as part of the break-up arrangement with Meredith, that group will get the “first look” at buying the station in two of the markets. He wouldn’t say which ones. “We are not obligated to sell them [Meredith] anything, but they have a 30-day head start.”
And that’s not all. Sook says the combined company would actually exceed the 39% national ownership cap by seven-tenths of a percent. So, he says, he has identified four other stations to be sold. He would not identify them either, saying that the employees at the stations had not yet been informed that the ground beneath them is about to shift.
Because of the ownership rules, he says, “everything we sell will be to an out-of-market buyer.”
Sook may even have an opportunity to buy some stations. If Nexstar or Media General sells stations in the FCC’s incentive auction, they can clear some headroom under the cap. For instance, if Media General sells independent KRON San Francisco, it would open up 2% of cap space. That’s enough to buy three or four stations in decent-size markets.