Sook: Improved Leverage May Mean M&A

Nexstar Broadcasting used solid free-cash flow in 2010 to reduce its debt-to-cash flow ratio to 5.65 times, close to the lowest in company history, said Perry Sook, president-CEO of the station group, in an earnings conference this morning following release of its fourth quarter 2010 financial figures.

The balance sheet retooling dropped Nexstar’s leverage ratio a full percentage point from 6.6 times in 2009 and puts it well under the covenanted cap of eight times.

“If we’re leveraged in the fours in an even year and around five times in an odd year, it’s where we want to be,” Sook said during the call.

While he acknowledged that Nexstar likely never will be investment grade, he allowed that lower leverage coupled with easing credit markets could put Nexstar in the hunt for strategic acquisitions. But only under the right circumstances.

“The environment is more conducive to M&A,” Sook noted. “We have consistently said that … we would consider only those transactions that were leverage neutral” or deleveraging.

Sook observed that deal talks have increased and predicted that will continue. If such talks lead to deals and sector consolidation, particularly in the mid-size market arena, which includes station groups such as Nexstar, it’s a positive, Sook said.

“I continue to believe that several mid-market broadcasters in this space should consolidate,” he said. “Size matters when dealing with networks and MPVDs. I think the intersection of where we are today and the art of the possible is coming closer. The dialog has increased.”

On the directly related issues of retrans, reverse compensation and affiliation agreements, Sook was neutral to cautiously optimistic. Nexstar projects retrans revenues will double “over the next couple years,” Sook said.

That doubling would boost retrans revenues to around $15 million compared to $7.6 million in 2010.

While recognizing that networks are pushing to carve out a bigger slice of the retrans pie, Sook indicated that growth in Nexstar’s e-media revenues and an improving ad climate will help replace much of what’s lost to the networks.

On the regulatory side, Sook noted that there’s a strong push for a full inventory of spectrum held by broadcasters, wireless and others before a spectrum incentive auction occurs. He also observed that the FCC is limited in its oversight of retrans talks.  “I do not expect any movement there that would deleterious” for broadcasters, he said.

He also noted that, heated rhetoric between some networks and affiliates notwithstanding, it’s a mutually beneficial relationship. “Our position is we provide eyeballs to the networks,” he said. “If they don’t have an affiliation in a local market, they don’t have those eyeballs.

“It’s unfortunate that certain elements of the discussion have spilled over into the public domain,” he said. “We talk about these things all the time. If one party becomes irrational or illogical, that would be newsworthy. But since I started this company 15 years ago, that has not been my experience.

“My experience is people find a way to work it out.”