Sinclair Buying Freedom For $385 Million

Sinclair Broadcasting is buying Freedom Communications’ eight-station broadcast TV division to Sinclair Broadcasting for $385 million, Sinclair announced this morning.

The deal gives Sinclair two more duopolies, one in the West Palm Beach-Fort Pierce, Fla., market (DMA 38), another in Albany-Schenectady-Troy, N.Y. (DMA 58).

The Freedom acquisition is Sinclair’s second major buy in just over two months: In early September, the company announced it was buying Four Points Media’s seven stations in four markets for $200 million.

Sinclair executives emphasized the importance of doubling up where possible and hinted at more acquisitions.

“It is our intent to continue evaluating television station transactions which are accretive and where we can use our expertise and presence to improve profitability and competitive position,” David Smith, Sinclair president/CEO said in the earnings press release announcing the Freedom acquisition (see separate story here).

One such deal could be announced as soon as tomorrow. A source said the company is poised to announce that it is buying LIN Television’s WWHO, a CW affiliate, in Columbus, Ohio (DMA 34) for an estimated $7 million.

In Wednesday morning’s earnings conference call, Smith provided additional context to the company’s acquisitions.

“The benefits for us are scale and leverage,” Smith said. “Looking at the structures in those markets…we honestly believe we’ll put deals together to get better efficiencies in those markets. We’ll try to bring as much scale as we can to help these people grow their businesses.”

The reference to deals is multi-faceted. With the Freedom and Four Points deals, Sinclair boosts its station count to more than 60, in the process becoming the nation’s largest station group in terms of number of stations. Such size gives Sinclair significant leverage in negotiating retransmission contracts with cable and satellite companies, as well as network and syndicated programming providers.

In addition, owning multiple stations in a single DMA enables Sinclair to improve operational efficiencies with the market.

“For these guys there are some real synergies,” said a source in the financial sector. “The big gem in this [Freedom] deal is West Palm…. It also gives them a little balance in being so heavily Fox and CW.”

Current regulations permit duopolies only if there are at least eight other different owners of full power stations in the DMA and one of the stations in the duopoly is not among the top-4 ranked stations. Freedom’s WPEC, a CBS affiliate, consistently ranks among the top stations in West Palm but Four Points’ WTVX, a CW affiliate, does not.

Sinclair executives pegged the Freedom deal multiples this way: 6.6 times EBITDA for Sinclair, 9 times for Freedom.

“We like SBGI’s recent acquisitions of Freedom and Four Points stations for several reasons,” Marci Ryvicker, Wells Fargo analyst, wrote following the conference call. “Freedom was purchased at a buyer’s multiple of 6.6x 2012-13 blended EBITDA (9x seller’s 2010-11); Freedom’s station in West Palm Beach will create a duopoly for Sinclair (with a Four Points station); combined, the acquisitions would add [about] $59 million a year ($65 million in political years, $53 million in non-political) of free cash flow (FCF); and leverage is expected to only climb 0.5x (currently 3.83x) incorporating both acquisitions. Lastly on the acquisitions, while a tax shield will be created by the Freedom acquisition, it will be outweighed by the additional FCF; thus we still expect SBGI to become a federal cash tax payer in 2012.”

Sinclair executives anticipate the multiple will improve as Sinclair achieves increased efficiencies.

“It isn’t so much what the multiple from the seller’s perspective is, it’s what we can do when we’re done,” said Steve Marks, vice president and COO of the television division. “6.6 times is conservative. A few years from now, we’ll tell you the real number.”

Ryvicker also noted that the Freedom acquisition allows Sinclair to diversify from its heavy concentration of Fox affiliates.

The Freedom group includes five CBS affiliates, two ABCs and one CW. Sinclair has 15 Fox affiliates.

The Freedom stations are:

• WPEC (CBS) West Palm Beach, Fla. (DMA 38)
• WWMT (CBS) Grand Rapids-Kalamazoo-Battle Creek, Mich. (DMA 42)
• WRGB (CBS)-WCWN (CW) Albany, N.Y. (DMA 58)
• WTVC (ABC) Chattanooga, Tenn. (DMA 86)
• WLAJ (ABC) Lansing, Mich. (DMA 115)
• KTVL (CBS) Medford-Klamath Falls, Ore. (DMA 140)
• KFDM (CBS) Beaumont-Port Arthur-Orange, Texas (DMA 141)

Sinclair had all but rejected a deal with Freedom based on the sales prospectus asking price of $400 million to $500 million.

“We were originally not interested, based on valuations,” said David Amy, Sinclair executive vice president/CFO. “But Freedom approached us.”

Amy projected the Freedom and Four Points acquisitions boost Sinclair’s annual free cash flow roughly 40%. 

Smith said he expects the deal to close in 2012’s first quarter or early second quarter, pending regulatory approvals. Until then, Sinclair will operate the Freedom stations under a local marketing agreement, he said.

People familiar with the broadcast TV M&A market had mentioned several possible candidates to acquire Freedom’s station group. Along with Sinclair, they include Belo, Gannett, LIN, Nexstar, Gray and Raycom. However, several of those potential buyers were constrained by debt, challenges in accessing financing or, in Nexstar’s case, proposed sale of one owner’s stake in the company.

Sinclair, on the other hand, has consistently topped the list of likely buyers for Freedom. Sources in the financial sector note that Sinclair is among the few groups with either financial resources on hand or access to them and little debt to constrain it.

Freedom began shopping its geographically diverse station group last fall for $400 million to $500 million, according to sources who had seen the sales prospectus. The asking price translated into somewhere around 8-10 times 2010 cash flow. The asking price multiple was higher for estimated 2010-11 blended cash flow — roughly 9-11 times — due to minimal, at best, political revenues this year.

As the $385 million purchase indicates, the multiple — based on projected 2010-11 cash flows of $45 million — was lower.

The Freedom sale originally was couched as stock sale, primarily because Freedom’s owners wanted to avoid the tax burden of an asset sale.

That Freedom opted for an asset sale of its broadcast properties suggests that Freedom’s owners were heartened by the recent McGraw-Hill station group sale to E.W. Scripps for $212 million, the equivalent of a 10x seller multiple and an 8x buyer multiple.