Sook Forecasts More ‘Rolling M&A Thunder’

The station trading market will remain hot through the end of next year and Nexstar will be right in the middle of it, Nexstar CEO Perry Sook told securities analysts yesterday.

“The kind of rolling M&A thunder … will probably continue through the balance of this year and 2014, probably at about the same kind of pace as you’ve seen over the last 18 to 24 months,” Sook said on the conference call following the release of his company’s first-quarter earnings.

Two groups have announced that they are on the block, Local TV LLC and Allbritton Communications, he said. “That’s almost $3 billion worth of assets in the marketplace. We think there’s more to come.”

Brokers are quietly and selectively shopping stations to Nexstar and others in a process that falls short of a full auction, he said. “And then there’s still the principal-to-principal contact that we have with people and non-broker deals that we’ve been trying to cultivate for some time.”

Some of the stations “fall into our sweet spot,” he said, cautioning that Nexstar is “very disciplined…. [I]t’s got to be a deal that is good for our shareholders or we won’t transact.”

During the two decades he has been trading stations, he said, the seller’s multiple of cash flow (the common means of evaluating stations) has ranged from 5.5 times to 13x, depending on the availability and cost of credit. “But it’s always kind of generally come into the 8x to 10x range.”

Today, he said, “virtually everything that’s been announced, with very few exceptions, has been in that kind of sellers’ multiple of 8x to 9x. There’s been very little done above that and a few done below that…. We’re involved in some of these processes, and we have not seen any kind of multiple creep.”

Sook said he expects broadcasting to continue to consolidate, with six groups emerging over the next three or four years as the second tier of station owners below the first tier of the Big Four networks with their O&Os, he said.

These second-tier groups “probably reach 20% of the U.S. or more and are $2 billion, $3 billion, $4 billion enterprises. There’s obviously industrial logic to the elimination of duplicate corporate overhead and duplicate functions and things like that. So I think it’s starting to be realized.”

The consolidators will not gobble up all the stations, he said. “I don’t think you’ll ever eliminate the local owner that owns two TV stations in two markets in Oklahoma or has a presence in the Northwest or whatever. It’s been in the family for generations…. Those will continue perhaps ad infinitum.”

Nexstar intends to be among the second-tier groups, he said. “But then again, if someone else is willing to pay a significant premium for our company, that’s obviously something that our board and Tom and I would consider because at the end of the day, we’re here to do what’s in the best interest of our shareholders.”

Asked about spot revenue, Sook said that on a same-station basis, core revenue excluding political spending was up in the low single digits in the first quarter with spending accelerating throughout the quarter and into the second quarter.

“Actually, Q2 looks a little more peppy … at this point,” he said. “We track 15 categories … and of the 15, more are up than down for both local and national. And the percentage increases are stronger in the second quarter on a pacing basis … than the finish in first quarter.”

The auto category, which accounts for nearly 25% of Nexstar’s spot revenue, should remain strong for the next two or three years as consumer seek to replace cars that they couldn’t during the recession, and annual vehicles sales settle in at between 15.5 million and 16 million. “[T]average age of the car on the road is 10 years, and things are just going to wear out.”

This story is based on a transcript provided by seekingalpha.com.