Sinclair Ponders Creating Separate Digital Unit

Sinclair Broadcast Group has plans “on the drawing board” to create a separate entity encompassing its digital businesses, executives said during Wednesday’s fourth-quarter financial results conference call.

Overall, the company reported record results, with revenues from digital operations up 70.7% in the fourth quarter. The company did not break out actual numbers for digital in its press release.

The disconnect between the thriving digital business and Sinclair’s stock price has CEO David Smith aggravated. “If we were just to take out our Web business — just the websites in cities where we have stations — and compare that to websites that have $2 billion valuation, we’re fundamentally no different than Buzzfeed or Gawker or anything else,” Smith said. “We produce news every day on the Internet and we’re not getting credit for it.

“You should assume that someday we’ll enter that space just to get the right valuation for it,” he added.

Sinclair shares were trading around $28 at midday today. That’s more than $4 above Sinclair’s 52-week low of $23.88 but well below the 52-week high of $36.14.

Broadcast stocks have struggled with investor concerns about slow growth in core advertising revenues.

Smith acknowledged that Sinclair, and the broadcast sector in general, is a relatively new player in the digital space.

“The broadcast industry in general got kind of late to the party,” Smith said. “But in the end we’re really the ultimate delivery medium in terms of eyeballs. You have to give us time to catch up.”

Expanding the digital business is closely tied to development of a next-generation broadcast standard, colloquially known as ATSC 3.0, which would enable broadcasters to transmit over the air to mobile devices as well as screens in the home.

ONE Media, the joint venture between Sinclair and Coherent Logix, recently conducted a successful system test of an enabling standard, sending over-the-air signals to laptops and mobile devices, said David Amy, Sinclair SVP-COO.

Reiterating that development and deployment of a new standard is essential to level the playing field with telephone and cable companies, Smith voiced optimism that it could be “up and running inside three years.”

“There is an evolving belief that the ATSC process that’s underway could end up at the end of this year tossing out a candidate standard, which would mean the broadcast industry has what it wants and we’re done,” he said.

Conversations with lawmakers and regulators suggest they have no particular issue with a standard change, Smith said.

“Our view is we’d like to get it done tomorrow, because the faster we get it done, the faster we can start building devices.”

Smith noted that Congress is beginning a rewrite of the Communications Act and he’s optimistic that, given competition from telephone and cable companies, lawmakers are open to some broadcast deregulation.

“Just let us do what everybody else does and we’ll be fine,” he said.

On another issue near and dear to Sinclair — the upcoming FCC spectrum auction — Sinclair CFO Chris Ripley opened the door to participating. That contrasts with past signals from the company that it would stay away.

“When you do the math on median prices, it comes to a pretax valuation of $4.4 billion [for Sinclair stations],” Ripley said, compared to an overall enterprise value of more than $6 billion.

“That doesn’t mean we’re not open to the auction and maximizing shareholder value and participating where it makes sense,” he added. “We’re keeping an eye on it.”