The New Sinclair: 72% Coverage + WGNA

Reports late Sunday and early Monday that Sinclair Broadcast Group would win its bid to buy Tribune Media Co. proved correct.

The two companies this morning announced that they have entered into a definitive agreement under which Sinclair will acquire 100% of the issued and outstanding shares of Tribune for $43.50 per share, for an aggregate purchase price of approximately $3.9 billion, plus the assumption of approximately $2.7 billion in net debt.

The resulting group will cover 72% of the U.S. with stations in 39 of the top 50 markets.

Calling the deal “historic” and “transformative,” Sinclair CEO Chris Ripley told analysts in a a post-announcement call that the best way to think of the deal is that Sinclair is paying $6.5 billion when the debt is factored in, but that there is between $2 billion and $2.5 billion in “non-core” assets (like Tribune’s 32% interest in the Food Network and real estate) that when subtracted brings down the price for the core assets (the stations and WGN America) to between $4 billion and $4.5 billion or around seven times EBITDA.

Under the terms of the agreement, Tribune stockholders will receive $35.00 in cash and 0.23 shares of Sinclair Class A common stock for each share of Tribune Class A common stock and Class B common stock they own. The total $43.50 per share consideration represents a premium of approximately 26% over Tribune’s unaffected closing share price on Feb. 28, the day prior to media speculation regarding a possible transaction; approximately 14% over Tribune’s 30-day volume weighted average closing stock price; and approximately 8% over Tribune’s closing share price on May 5, the last trading day prior to today’s announcement.

Tribune owns or operates 42 television stations in 33 markets, cable network WGN America, digital multicast network Antenna TV, minority stakes in the TV Food Network and CareerBuilder, and a variety of real estate assets. Tribune’s stations consist of 14 Fox, 12 CW, 6 CBS, 3 ABC, 2 NBC, 3 MyNetworkTV affiliates and 2 independent stations. The group includes stations in the top three DMAs in the country, seven in the top 10 and 34 in the top 50 DMAs.

“The Tribune stations are highly complementary to Sinclair’s existing footprint and will create a leading nationwide media platform that includes our country’s largest markets. The acquisition will enable Sinclair to build ATSC 3.0 (Next Generation Broadcast Platform) advanced services, scale emerging networks and national sales, and integrate content verticals. The acquisition will also create substantial synergistic value through operating efficiencies, revenue streams, programming strategies and digital platforms.”

Ripley said there are 14 markets where Tribune has stations that overlap with Sinclair’s and that he didn’t think any of them would run afoul of the FCC ownership limits or cause Justice Department objections.

Sinclair ownership of stations in those markets will have “no impact on overall competition,” he said. “We hope the regulators agree with us.”

However, he also said that three markets are “most likely” to trigger concern from the regulators: Wilkes-Barre/Scranton, Pa.; St. Louis; and Salt Lake City.

Ripley said that if it has to sell any stations, he believes that they will be “highly sought” by other broadcasters. He added that Sinclair is open to swapping stations so that it could expand into new markets as it comes into compliance with the regulators.

Ripley said that he believes Sinclair can turn WGN America is a big money maker for Sinclair by cutting back on the “high-cost” original programming and relying more on low-budget originals and “reruns.”

“We think that is the right path for WGNA,” he said. “WGNA does not have a revenue problem. It’s got lots of revenues. It’s got a nice contractual ramp of affiliates over the next couple of years and a nice base of advertising revenue.

“If you take a look at the ratings that WGNA generates, it doesn’t justify the type of spending they do or the original programming side. We believe quite firmly that that channel could be run much more profitably; just re-racking a fraction of what they spend on programming [could] return [it] to profitability.”

Ripley also acknowledged that the Tribune’s 14 Fox affiliates are scheduled to “step up to market level” reverse retrans to the network starting midway in 2018. “So, 2019 is when you feel the full-year impact of that.”

The deal dovetails with Sinclair plans to aggressively exploit ATSC 3.0, the new broadcast standard the FCC is expected to authorize by the end of the year. By bringing Sinclair “that much closer” to having a national footprint, Ripley said, the Tribune deal brings Sinclair closer to realizing the full power of the standard.

“It’s that sort of [national] network that opens up all the incremental revenue that are beyond core broadcasting. “

The national “advanced services” include  providing a “wireless MVPD” service and datacasting to connected car and autonomous cars, he said.

That’s not to say ATSC 3.0 will not benefit each station in its market, he added. “It reaches more devices, it allows targeted advertising, it allows subscription based models, its IP end to end, it allows for four or five [times] the capacity you have now to deliver more content, more channels.”

“This will be the largest acquisition in our company’s history, and I want to thank everyone from the Sinclair team, as well as our advisors and bankers who made this possible,” added David Smith, executive chairman of Sinclair. “Television broadcasting is even more relevant today, especially when it comes to serving our local communities. Tribune’s stations allow Sinclair to strengthen our commitment to serving local communities and to advance the next generation broadcast platform. This acquisition will be a turning point for Sinclair, allowing us to better serve our viewers and advertisers while creating value for our shareholders.”

“Today’s announcement is the culmination of an extensive strategic review, which has delivered significant value to our stockholders,” said Peter Kern, Tribune’s CEO. “Since we announced the strategic review 15 months ago, we have streamlined the business, monetized non-core assets, strengthened our balance sheet and returned more than $800 million to stockholders — all of which has resulted in a 50% increase in stockholder value. We are extremely proud to join Sinclair, and we’re excited that Tribune stockholders and employees will have the opportunity to participate in the long-term growth of the combined company.”

The transaction has been unanimously approved by the boards of directors of both companies and is anticipated to close and fund in the fourth quarter of 2017. Completion of the transaction is subject to approval by Tribune’s stockholders, as well as customary closing conditions, including approval by the FCC, and antitrust clearance.

Sinclair said it expects to fund the purchase price at closing through a combination of cash on hand, fully committed debt financing to be provided by JPMorgan Chase Bank, N.A., Royal Bank of Canada, Deutsche Bank AG New York Branch and Deutsche Bank Securities Inc. and by accessing the capital markets.

In order to comply with FCC ownership requirements and antitrust regulations, Sinclair may sell certain stations in markets where it currently owns stations. Such divestitures, it said, will be determined through the regulatory approval process.

Including the Tribune acquisition (before any related divestitures), all previously announced pending transactions, and pro forma for expected synergies, Sinclair’s 2015 and 2016 media revenues would have been $4.070 billion and $4.603 billion, respectively. The $6.6 billion enterprise value represents an average pro forma EBITDA multiple of less than 7.0x on the core television and entertainment business and is expected to add over 40% pro forma 2016/2017 free cash flow per share accretion.

Wells Fargo analyst Marci Ryvicker commented: “We like this deal for Sinclair — it is clearly accretive in terms of [free cash flow] FCF and was done at a very attractive multiple of less than 7x. Just applying Sinclair’s current tax-adjusted FCF multiple (8.2x) to a PF FCF/share number of $6.65 … gets us a “fair market value” price of approximately $55/share for SBGI’s stock.”