Nexstar Overcomes Core Deficiencies

Nexstar Chairman-President-CEO Perry Sook told analysts attending the company’s second quarter financial results conference call Wednesday morning that gains in retrans and political income more than made up for losses in core advertising. And he said that if it’s accretive, Nexstar ls interested in buying it.

According to the company’s financial chart, local core advertising was down 5.3% to $195.6 million and national core advertising was down 7.3% to $71.6 million, for a combined decrease of 5.8%. These losses were more than made up for by a better-than $26 million increase in political revenue, resulting in an overall gain of 3.2% to $301.8 million in television advertising. Retrans income grew 9.2%.

On the 2Q upside, according to Sook were the categories of attorneys, medical-health, home repair and infomercial paid programming. On the 2Q down side: auto, fast food, furniture, other media-cable and services.

Auto was down about 10%, he said, and stated his belief that the problems are situational, not secular. Among them: incentives are taking money out of advertising budgets; multiple dealers are consolidating in many markets and putting budgets on hold; and most car companies are changing management executives and ad agencies, also dampening spending. He also noted that increased spending from Ford has not nearly been enough to make up for the continuing absence of Dodge-Chrysler-Jeep.

Sook said that core is pacing better in 3Q and auto is a key improving category. Also on the upswing: attorneys, medical-health care, home repair, insurance, entertainment, utilities, real estate, lumber and hardware.

Nexstar earned $31.6 million in political revenue during 2Q benefitting from 24 statewide primaries, with significant results coming in from Nevada, South Carolina, West Virginia, Ohio and Indiana. It also raked in significant early general election revenue in Florida and Tennessee.

Sook said the company was well ahead of expectations for the category during the quarter, and has increased political guidance for the remainder of the year from the low-$200 millions to between $215 million and $220 million.

Discussing Nexstar’s focus on new business development, Sook said $3.2 million in revenue came from new-to-television advertisers, comprising 7.7% of the company’s total core revenue. This will get renewed focus in 2019 after the political frenzy is over. “We tell our GMs all the time that the quickest way to grow your share of market is to develop a piece of business your competitor doesn’t have.”

Regarding legalized sports betting. Sook said that Nexstar is not yet in a geographical position to benefit from it, but he sees it as a great opportunity as it spreads state-by-state.

M&A was a major topic during the session, and Sook said: “The most accretive deal is going to be the deal that we gravitate towards first and foremost. There are situational things. We could potentially acquire Cox today under the current rule and be under the 39% cap with the UHF discount.”

Nexstar operates duopolies in 66 of its 100 markets, noted Sook, and is definitely interested in consolidation in the non-duopolized third of its portfolio. “There may be some markets where there’s just not a willing dance partner or in the DOJ’s eyes it would provide undue market concentration … but we have conversations ongoing in any market where we only have a singleton station.”

Sook noted that the reinstatement of the UHF discount created an effective 78% national cap and provides FCC Chairman Ajit Pai with a strong base for further deregulation. However, Sook is aware that anything Pai does will likely be subject to court challenge, so rapid change is unlikely.

He expects that the Pai will move to raise the 39% national ownership cap while taking the UHF discount off the table, but said that replacing one particular arbitrary number with another arbitrary number will fall victim to the same sort of pitfalls to which the 39% cap is subject, and therefore favors no cap at all.

But the 39% cap will not prevent Nexstar from taking advantage of M&A opportunities. “We’re at about 26% and change against the 39% cap today so we have running room with the UHF cap in place, and more running room if the cap is raised substantially or eliminated.

Sook said that he believes the issues that have put the Sinclair-Tribune deal on hold are specific to that transaction and have no bearing on Nexstar’s own M&A activities.

In particular, Sook does not see the apparent regulatory troubles with Sinclair sidecar stations as a spillover problem for his own company. “All of our … sidecar arrangements … are with veteran broadcasters who have experience in the industry…. The FCC has had plenty of time to review them and we believe they have passed the inspection.”

Debt has been reduced $570 million in the six quarters since the Media General acquisition, said EVP-CFO Tom Carter. He said that the company is targeting a leverage level of mid- to high-3x by the end of the year. He said the company would be comfortable at 5x to fund the right large transaction.

Sook added that a taking on transaction that takes leverage to 5x would have to include a clear path to delevering.

Carter noted that the company’s focus on generating free cash flow, which among other things enabled it to fund its recent $19.45 million acquisition of stations in Springfield, Mo., and Huntsville, Ala., without incurring any new debt.

Carter said that the focus on the balance sheet is done partly with M&A in mind. “The appetite for leverage reduction is exactly so that we can participate in future consolidation of the space.”

He added that the upcoming political windfall will be part of this process. “The third and the fourth quarters are going to have multiples of the revenue that the second quarter had in terms of political, so we’re going to see a substantial turbocharging of debt reduction going forward.”