Jessell | Musings About Apollo-Cox-Northwest-Nexstar

Harry Jessell

I am looking forward to hearing from David Sambur. He is the Apollo Global Management executive who is engineering the construction of a big new TV station group by fitting together all the TV stations of Cox Media Group and Northwest Broadcasting with a bunch being spun off from the Nexstar Media-Tribune merger.

Reuters, which broke the news of the station rollup last Monday, said the deal values Cox at “around $3 billion.” One of my sources says it is in excess of that with a “spectacularly high” cash flow multiple. These days, that would mean 10 or more.

We’ll have to wait for the FCC filings to get the exact terms.

What I want to know from Sambur is how he intends to pay a premium and still provide the hefty return over the next several years that he’s promised Apollo’s private equity investors.

I think I know part of the answer.

It’s Northwest Broadcasting, a group of 10 small-market stations assembled over the past two decades by battling Brian Brady. The markets range from Spokane, Wash. (DMA 77), to Eureka, Calif. (DMA 195).

The group doesn’t look like much, but Brady is well known as a hard-nosed retrans negotiator and I’m told that he has managed to cut some of the most lucrative deals in the nation.

According to multiple sources, Apollo is going to use the “after-acquired” clauses in its retrans contracts to immediately boost retrans fees for all the Cox stations.

Such after-acquired provisions and the immediate cash flow infusion they generate is what has allowed Sinclair and Nexstar to outbid other buyers for stations. Nexstar said that it would derive an extra $75 million a year when it applies its superior retrans contracts to Tribune.

So, what Apollo is really buying from Northwest is not TV stations or Brady’s genius at running TV stations; it’s buying Brady’s retrans contracts.

I should say that none of the principals of Apollo-Cox-Northwest spoke to me last week, but I heard the retrans scenario from several people, including former Media General owner Soo Kim, who was working on a deal to buy Northwest and its retrans contracts until Apollo showed up with a better offer.

A retrans bonus is often part of the “synergy” that buyers talk about when they explain why the multiple is really not as high as it seems.

The other big part is cost-cutting. This comes from eliminating duplicative corporate staff, but also from tightening the operating budget of every station.

I can tell you from personal experience that when the new guy comes in and tells you how wonderful you are and says not to worry, then it’s time to worry. Sooner or later, jobs and perks will disappear and high-priced talent will give way to lesser-priced talent.

This will likely be the job of new management, which as of this writing in unknown. New management will not suffer the personal constraints of old management when the hard decisions have to be made.

The Cox family intends to retain a substantial minority stake in the Apollo station group. By doing so, family members can enjoy big paydays while keeping a hand in broadcasting’s upside. (It’s nice to know they still think broadcasting has an upside.)

But that doesn’t mean any Cox people will be sticking around to run things after the closing.

Scott Jones at FTV Live posted the memos that Cox Enterprises CEO Alex Taylor and Cox Media Group (CMG) President Kim Guthrie sent to the troops after the announcement of the deal.

Neither said much about who would be running things. Here’s as close as Guthrie came: “Over the next few months, Apollo will be focused on assessing what the leadership and corporate support team will look like in the new venture and we will do the same for CMG.”

The other tidbit from the employee memos was that Cox believes the deal will close in six months. That should be doable, although Cox has a duopoly that may catch the eye of the antitrust regulators at the Department of Justice.

In Jacksonville, Fla., Cox owns Fox affiliate WFOX and operates CBS affiliate WJAX through joint sales and shared services agreements. From what I understand, the two stations are, for all practical purposes, one.

WJAX is owned by Bill Hoffman, the former president of Cox Media Group and, typical of these sidecar arrangements, Cox has an option to buy WJAX.

The antitrust lawyers at DOJ have essentially said that they will not allow any new combos between top-4 stations. Whether that policy extends to the transfer of old ones remains to be seen.

Another possible problem for Apollo may be Boston. There is speculation that Fox may use this opportunity to recapture WFXT there.

Recall that in 2014, Fox more or less forced Cox to swap Fox affiliate KTVU San Francisco for WFXT and WHBQ Memphis.

Since then, Fox has adopted an NFL-centric strategy that calls for acquiring stations in as many NFL markets as it can. You may have heard that Boston has a team of some note.

With regard to the Nexstar deal, the assumption is that Apollo will be picking up one of the two stations in the 10 markets with overlapping top-4 stations. Such combos are impermissible under the FCC’s local ownership rules as well as current DOJ policy, although Nexstar said it will ask for a waiver to keep the top-4 duopoly in Indianapolis.

But that assumption may only be partially right. Apollo may also be buying stations that Nexstar has said it needs to dump to comply with the national ownership cap. As things now stand, Nexstar-Tribune’s coverage is 47.1% of TV homes, way over the 39% cap.

Apollo is not the only potential buyer of excess Nexstar stations. When Sinclair was engaged to Tribune, Fox stepped in to buy seven stations for $910 million.

As a buyer, Fox cannot be ignored. It is not shy about using affiliations agreements to push itself to the front of the line.

FTV Live had a report that Nexstar plans to sell CW affiliate WPIX New York. By doing so, Nexstar would shed 6.4% of coverage and go a long way toward getting under the cap. But giving up New York would wreck Nexstar’s ability to become a major player in program syndication as one of five launch groups. Having stations in New York, L.A. and Chicago has been one of the great charms of Tribune.

There is also the possibility that the FCC may save Nexstar the trouble of having to sell any stations because of the national cap by raising it. A rulemaking to do so is ripe for action, and broadcasters have coalesced around a proposal that would give Nexstar all the headroom it would need.

Another thing I don’t know is the extent of Apollo’s broadcasting ambitions.

It’s a mammoth publicly traded concern, claiming to have $280 billion of assets under management, including $69 billion through the private equity funds it manages. It can get as big in broadcasting as the law allows.

Apollo is new to broadcasting and its interest in the medium is a welcome endorsement of the industry’s prospects. It will be interesting to see the assumptions and calculations that endorsement is based on.

Harry A. Jessell is editor of TVNewsCheck. He can be contacted at 973-701-1067 or here.