With its purchase of McGraw-Hill’s stations in Denver, Indianapolis, San Diego and Bakersfield, Scripps is benefiting three constituencies: Itself, the viewers in those markets and the industry at large. Itself and viewers because its plan to boost the new stations’ value stems from investing in news to raise ratings (and ad rates), giving viewers better news options; and the industry because the deal finally sets a price for stations that could get the station trading market rolling again. A lot of potential sellers have been sitting on the sidelines because they don't know what their stations are worth. Now they do.
Many Winners In The Scripps Station Buy
The good citizens of Denver, Indianapolis, San Diego and Bakersfield, Calif., are in for a nice surprise.
Sometime next year, Scripps will take over the McGraw-Hill ABC affiliates in those four markets and re-energize their underperforming newscasts. In an interview we posted Monday, Scripps TV chief Brian Lawlor promised news with more consistency, better storytelling, “more feet on the street” and stories that get people talking.
I don’t know exactly what that all means, but I suspect every viewer who gives the newscasts a chance will notice a big difference. Right now, the newscasts are foundering in at least three of the markets, the big ones — Denver, Indianapolis and San Diego — where they’re all running third.
If any broadcaster can turn them around, it’s Scripps. The company has a strong news legacy that goes back to 1878 when mass media meant newspapers and only newspapers. It began carrying that legacy over into broadcasting in the 1930s.
In the May book, seven of Scripps’ nine TV stations ranked No. 1 or No. 2 in their markets in the evening news. Seven of 10 also won or placed in the late news, too.
And Scripps is highly motivated. It’s paying McGraw-Hill $212 million for the stations (along with five low-power Spanish-language outlets) and, according to Lawlor, making the newscasts more competitive is key to making a return on the investment. Bigger ratings, bigger revenue. It’s just that simple.
The prospect of better newscasts in 3% of U.S. TV homes is not the only encouraging takeaway from the Scripp-McGraw-Hill deal.
The deal is transformative for E.W. Scripps, which has always been seen primarily as a newspaper publisher, even though it built and spun off an extraordinarily successful cable programming division (now the Scripps Networks) and even though it has the long history in broadcasting.
On a conference call with securities analysts after the announcement of the deal, I thought that CEO Rich Boehne was being too defensive when he led off with an explanation of why Scripps will doubling down in broadcasting. It suggested that something was wrong with the business.
But I was later persuaded by Lawlor that Boehne wasn’t defending broadcasting. Rather, Lawlor said, Boehne was signaling that investors should start thinking of Scripps in a different way. It “sends the statement that for the first time television will be a big part of the future of this company.”
That may be an understatement. Given current revenue trends (newspaper heading steadily down, broadcasting moving slowly up) and given the extra revenue the McGraw-Hill stations will bring (nearly $100 million a year), it’s appears that broadcasting will soon surpass newspapers as the company’s chief revenue generator, possibly as early as next year.
That Scripps acquisition is also good news for the broadcasting industry as it values stations at a decent level. Trying to impress investors, Scripps first said it is paying eight times 2012 cash flow. Lawlor conceded that if you subtract the tax benefit, the multiple is more like 9x. And I’m thinking that if you use blended 2011-12 cash flow as you probably should, the multiple is approaching 10x.
That confirms the 10x trailing 12 months cash flow that Sinclair appears to be paying for the similar, four-station Four Points Media group in a deal announced in September.
Now, 10x is not the 12-14x that stations were commanding pre-recession, but it ain’t bad.
The Scripps and Sinclair multiples sets a price for stations that could get the station trading market rolling again. A lot of potential sellers have been sitting on the sidelines because they don’t know what their stations are worth. Now they do.
What’s more, as broadcast analyst Marci Ryvicker points out, the Scripps deal suggests that the publicly traded station groups are badly undervalued.
Belo and Sinclair are currently trading at 5.6x and 6.2x blended estimated 2011-12 EBITDA, respectively, she says in a note sent to clients immediately after the deal was announced. Applying even an 8x multiple to these two companies would result in stock valuations of approximately $9.50 (+113%) for Belo and $12.75 for Sinclair (+83%).
Investors must be paying attention. Since the announcement of the Scripps-McGraw-Hill deal on Oct. 3, Sinclair stock has risen $2, from $6.95 to $8.94, a nifty 29% gain. Belo picked up a buck and a half and stood at $6.02 last evening, a 35% improvement. Scripps itself still hasn’t fully convinced Wall Street. Its stock has managed only a 6% gain to $7.14.
Assuming that Scripps can significantly improved the ratings of the ABC affiliates in Denver, Indianapolis and San Diego, this deal should work out just fine for the company. In addition to the added revenue and cash flow, it gives them a bigger footprint, which means more clout in dealing with syndicators and tech vendors. And the five low-power Azteca America affiliates in the three markets, kind of a throw-in on the deal, gives Scripps a chance to tap into growing Spanish-language market.
But it’s probably not the deal Scripps or any other broadcaster would have made. To a large degree, it was engineered in Washington.
FCC rules limit ownership of two or more stations in the same market. So, to acquire the kinds of stations it likes — news-producing, Big Four affiliates — Scripps has to shop outside the markets where it already has such stations. If given its druthers, I’m betting Scripps would not be buying stations in Denver and Bakersfield. It would be buying stations in Tampa and Phoenix.
By doubling up in a market, the efficiencies would be immediate and clear. Multiples and projected margins would be higher and so would stock prices. It may means one less voice in the market, but stronger financials would translate into stronger newscasts.
I asked Lawlor if Scripps would like to buy second stations in its markets. He said it’s something the company doesn’t even think about because of the rules. That’s too bad. When media executives meet to plot strategy or negotiate an acquisition, federal regulators shouldn’t be in the room.