Spectrum Auction Hold Promise For Nexstar

Nexstar Broadcasting Group President-CEO Perry Sook told analysts that the next time he reports financial results, he hopes to have the soon-to-be-acquired stations of Media General in the fold. Meanwhile, EVP-CFO Tom Carter provided a bit more than the usual amount of color on the spectrum auction.

The Media General closing will require an FCC waiver in the event that the spectrum auction is still in progress, and Sook said they will open discussions with the commission on that topic as early as Monday, Aug. 15.

Leverage will be a key factor after the Media General deal closes. Carter said that Nexstar’s leverage stands at 3.99x at the moment, well below its 6.75x cap. It was down from 4.22x as of March 31. This is expected to increase to 5.5x upon closing of the Media General acquisition.

Asked about what the company will be comfortable with post-closing, Carter said: “We have no aspirations to be an investment-grade company.” Based on many variables, he pegged the comfort zone in the 3.5x-4x range.

The Media General acquisition is the key to the company’s allocation of capital going forward. De-leveraging will be the primary focus, particularly, noted Carter, during the first nine to 18 months. He said dividend payments will continue, and eventually, consideration of accretive acquisitions will be entertained.

Carter said the company’s current assumptions include no income from the spectrum auction. “To the degree there are proceeds,” he said, “those will be dedicated and basically turbo-charge our debt reduction and our leverage reduction, which could accelerate our ability to participate in M&A going forward.”

Carter added that sales of stations in the auction could also result in a decrease in the company’s national household coverage, which is just under the FCC’s 39% cap. “If we sold spectrum and exited markets as a result of that spectrum sale, then we would have the opportunity to enter into accretive new market M&A.”

Nexstar’s second quarter results reported this morning included a gain of 0.5% in core advertising, a 40.8% gain in retransmission consent income and a 17.4% gain in digital.

Carter provided pro forma stats, which included a 3% loss in core, tied to displacement from political and weak national business. Also on a pro forma basis, retrans was up 33% and digital was up 10%.

The group is expected to bank $100 million in political for the year. Sook said that political income is 67% greater than at this point in the 2014 election cycle. States where there has been significant activity include Nevada, West Virginia, Pennsylvania, Indiana, New York, Wisconsin, North Dakota, Texas, California and Missouri.

There was news on the presidential front, in which thus far most of the spending has come from the Clinton camp. Sook said: “I do want to note that we did receive an avail request Friday [Aug. 5] from the Trump campaign for 17 states nationwide, 13 of which are states in which Nexstar operates.”

Sook likes the company’s political footprint. It is in 11 of 13 presidential swing states; it’s in 21 of 34 states with a senate seat on the ballot; and of 12 races for governor up for grabs, it’s in eight states, six of which feature open seats and four of which are currently closely contested.

On the retransmission consent front, Nexstar negotiated contracts for 45% of its subscriber base in 2015 and with another 45% on the table this year.

Sook touted the group’s position in mid-size markets in regard to marketing its full package of services, including digital content management, agency services, and mobile and programmatic services. When the Media General stations are added, said Sook, “we will be a profitable digital company without peer in this space … as we target the mid-size markets where the number of local content producers are not as great as they are in the major markets.”

The Olympics are a net positive, for the group, said Sook, which has NBC affiliates in 21 markets and is in competition with NBC in 33 others.

MVPD subscriber totals have been stagnant, noted Sook, largely due to the loss of out-of-market viewers, and the catalyst for that loss is not MSOs — it’s the networks. “Most new network affiliation agreements do not permit out-of-market carriage,” Sook explained.

But in-market subscriber totals have held up, and there has been no diminution which can be attributed to OTTs. Sook expressed confidence that his stations would be a key part on “… even the skinniest of bundles because we’re a foundational element of the bundle.” That said, Sook sees no evidence of OTTs becoming a major force in the distribution marketplace.