Scripps Buys McGraw-Hill Station Group

E.W. Scripps today agreed to buy the McGraw-Hill TV station group for $212 million in cash, saying that the mix of underperforming ABC affiliates in growing markets and Spanish-language low-power stations will provide plenty of upside and be “modestly accretive” to earnings in year one.

The transaction is subject to FCC approval.

The group comprises full-power ABC affiliates in Denver (KMGH); San Diego (KGTV); Bakersfield, Calif. (KERO); and Indianapolis (WRTV) and low-power Azteca America affiliates in Denver; Fort Collins, Colo.; Colorado Springs, Colo.; San Diego; and Bakersfield, Calif.

The nine stations, which reach approximately 3% of U.S. TV homes and generated revenue in 2010 of $97 million, have roughly 460 total employees. With the addition of the McGraw-Hill stations, the reach of the Scripps group will jump to 13% of TV homes.

According to Scripps, the deal is structured as a purchase of stock but will be treated as a purchase of assets for tax purposes, resulting in tax deductions that will be used to reduce the net cash cost of the acquisition to $190 million.

The $190 million price reflects a multiple of 8X 2012 EBITDA, said CFO Tim Wesolewski in a conference call with securities analysts shortly after the deal was announced. “But considering the future ramp up of retrans fees and a meaningful pickup in margin from the planned operating improvements…we expect a multiple at a normalize run rate that is significantly lower than eight times. In fact, we expect it to be several turns lower than eight.”

“We didn’t pay a great deal for these stations,” he said.

According to Wesolewski, Scripps will pay for the stations by borrowing the full amount because interest rates are low and because the company wants to perserve the $153 million in cash it now has on hand for new businesses or for additional buy backs of stock. The company is currently debt free, he noted.

The transaction is expected to be modestly accretive to earnings in the first full year of operation, the company said.

“We took advantage of an opportunity to make a smart investment in a business that we already know well and run successfully and at the same time enlarge our opportunity for new programming and digital businesses by entering some of the countries most attractive markets,” said CEO Rich Boehne on the conference call. “By acquiring the McGraw-Hill stations, we also gain an entry point into the growing Spanish-language marketplace.”

Boehne also explained why Scripps was doubling down on broadcasting. “First, it is a strong local media model that benefits from the larger TV eco-system around it,” he said. “With a license, a share of valuable spectrum, required carriage on cable systems and long-term programming partnerships, broadcast stations are good busnesses today with attractive options for creating more value in the future.”

The acquisition will extend Scripps’ relationship with ABC. With 10 ABC affiliates among its expanded roster of 19 stations, Scripps will be the country’s largest independent operator of ABC stations.

The new stations join a Scripps portfolio that includes six ABC affiliates (in Detroit, Tampa, Fla., Cleveland, Phoenix, Cincinnati, and Baltimore), three NBC affiliates (West Palm Beach, Fla., Kansas City, Mo., and Tulsa, Okla.) and one independent (Lawrence, Kan.).

“We have a lot of work to do in the months ahead on the operational side,” said Brian Lawlor, Scripps SVP of television, on the conference call. “But we are energized by the addition of good people at good stations in good markets and the knowledge that there are many ways in both the short and long term that we can make meaningful improvements in these operations.”

Lawlor suggested that his first order of business will be to boost the ratings of McGraw-Hill’s underpeforming newscasts. “That’s the biggest upside to drive revenue through the organization.”

“We believe that our approach to the distribution of news and information combined with the great investigative focus and strong news brands at the McGraw-Hill stations will differentiate these properties and help them enjoy the same momentum that the Scripps stations are experiencing.”

Lawlor also said Scripps managment can help with revenue next year. “We are excited to bring our political expertise to some of these markets in the 2012 political cycle, including the capital cities of Denver and Indianapolis.”

McGraw-Hill CEO Harold McGraw said the divestiture is part of the company’s plan to focus on core businesses.

“This divestiture will produce good value for a non-strategic asset as we work to create two focused operating companies, one centered on capital and commodities markets and the other on digital learning and education services,” he said in a statement.

“Our goal is to enhance strategic and financial flexibility and to establish two pure-play investment opportunities for shareholders. The growth and value plan also includes accelerated share repurchases and actions to increase efficiency and reduce overhead costs.

Because the FCC has to review and approve the deal, the closing will probably not close before the end of the year, Boehne said. But there are “no significant issues” involving ownership regulations that could cause a hang up, he said. “We should be able to get this one done pretty quick.”