Tribune’s $2.7B Buy: More Like That Likely

One $2.725 billion deal down, more to come for Tribune?

Peter Liguori, Tribune Co.’s president-CEO, in announcing the broadcast television-newspaper owner’s cash deal to buy 19 Local TV LLC-FoxCo. stations, left a fairly obvious trail of breadcrumbs leading to that conclusion.

“M&A is our night job,” Liguori said during a conference call with analysts following the deal’s announcement today. “You know what our day job is.”

The day job, as Liguori pointed out several times during the call, is operating the company’s stable of stations, including superstation WGN America, developing new programming and running its newspaper group.

The additional stations pushes Tribune’s reach to 50 million TV homes, or just under 44% of the 114.2 million total. Fueling speculation that more acquisitions could come, another Tribune executive said during the call that the company is still well below the FCC cap.

With the addition of the new stations, Tribune will have $3.5 billion in consolidated pro-forma revenues in the current non-political year, noted Chandler Bigelow, Tribune’s CFO, during the call. That will yield $1.1 billion in EBITDA, $500 million in free cash flow and $100 million in incremental advertising from the Local TV stations, he said.

The deal will nudge Tribune’s debt-to cash flow leverage ratio to just under three times, Bigelow said. That, coupled with access to $4.1 billion in financing commitments from a consortium of investment banks, appears to give Tribune ample capacity for more deals.

The company has been cutting jobs in the newspaper division, including layoffs over the weekend at the Los Angeles Times, in what’s widely viewed as a precursor to selling all or part of the print division. The conservative political activist Koch brothers reportedly are potential buyers.

After emerging from a prolonged bankruptcy at the end of 2012 and starting this year with new management, including Liquori in the top spot and television veteran Larry Wert heading its local broadcasting division, Tribune clearly is roaring back into the thick of the broadcasting business.

With the acquisition of Local TV’s 19 stations in 16 markets, Tribune’s broadcast portfolio will swell from 23 to 42 stations — 14 CW affiliates, 14 Fox affiliates, five CBS affiliates, three ABC affiliates, two NBC affiliates and four independents.

Through the Local TV acquisition, Tribune becomes not only the largest Fox and CW affiliate owner, but the largest commercial station owner with 42, including 14 in top-20 markets. Those stations include news-producing independents in New York, Chicago, and Los Angeles.

The deal also pushes Tribune’s reach to more than 50 million U.S. television homes, according to Liguori. That works out to just under 44% of the total universe of 114.2 million U.S. television households.

With the deal, Tribune jumps from No. 8 to No. 4 in the TVNewsCheck-BIA/Kelsey Top 30 Station Groups list with estimated 2012 spot revenue of $1.4 billion.

The acquisition eclipses the previous 2013 M&A record of $2.5 billion achieved in Gannett’s acquisition of Belo. But there’s likely a good deal more activity to come, Marci Ryvicker, senior analyst at Wells Fargo Securities, wrote in a morning research update.

Noting there’s still about $4 billion in “low-hanging fruit” remaining (station groups with private equity owners or coming out of bankruptcy), Ryvicker wrote: “We continue to see the M&A pipeline as robust and anticipate (Sinclair) and (Nexstar) being participants over the next 12-18 months.”

Local TV is owned by Oak Hill Partners, a private equity firm. It announced in March its intention to sell the group, which it had assembled primarily by buying nine stations from the New York Times Co. for $575 million in 2007 and eight stations from Fox for approximately $1.1 billion in 2008.

For a time, Local TV and the Tribune-owned stations were under the same management, headed by former Tribune CEO Randy Michaels. Michaels, widely known for his controversial behavior, was asked to resign from his position in October of 2010. Bobby Lawrence, president of Local TV, and Pam Taylor, COO, subsequently assumed more autonomous leadership of the group.

Tribune also owns cable channel WGN America, Tribune Studios, Tribune Digital Ventures as well as the eight major-market newspapers.

Tribune anticipates the combination with Local TV will generate more than $100 million in annual run-rate synergies within five years. Three-quarters or more of that will come from new revenues, including retransmission fees, which will climb from roughly 10% of Tribune’s annual revenues currently to as much as 20%, according to Bigelow.

One of the key synergies: Tribune will pay no reverse compensation through 2018 to Fox for the seven Fox stations acquired in the deal.

Given those synergies and a step-up in the tax basis of the acquired assets, Tribune said it is paying seven times 2011-12 average EBITDA. The seller multiple works out to 9.4X Local TV’s blended 2011-12 EBITDA, Bigelow said.

Tribune will finance the transaction through a combination of debt financing and cash on hand.

Because most of Local TV’s stations are ranked No. 1 or No. 2 in revenue in their markets, the transaction will generate significant free cash flow and be immediately accretive to Tribune’s earnings, Tribune said.

“Since joining Tribune in early 2013, we have been setting the strategic foundation to transform Tribune and help chart the path forward — building our multimedia capabilities and asset portfolio to become the country’s leading independent content creator and distributor,” Liguori said in a statement.

“This is a transformational acquisition for Tribune. It makes us the No. 1 local TV affiliate group in America, expands the distribution platform for our high-quality video content, and extends the reach of our digital products to new audiences across the country,” he added.

Jonathan Friesel and Benjamin Diesbach, partners at Oak Hill Capital, jointly said: “We thank Bobby, president and COO Pam Taylor, and the entire Local TV family for their outstanding dedication and performance.”

In his statement, Bobby Lawrence said: “Our cultures and operating philosophies are very similar, and we share a strong commitment to news and local programming excellence. My management team will dearly miss working with some of the most talented and dedicated people in broadcasting, but we know we leave our employees in good hands. I am grateful to our partners at Oak Hill Capital, who acquired the finest stations in the industry and helped us build this great company.”

Tribune has received financing commitments of up to $4.1 billion from JPMorgan Chase, BofA Merrill Lynch, Citigroup, Deutsche Bank and Credit Suisse, including a new $300 million revolving credit facility and the capacity to allow Tribune to refinance its existing debt.

Guggenheim Securities acted as financial adviser to Tribune, and Debevoise & Plimpton and Covington & Burling acted as legal advisers to Tribune on the transaction. Moelis & Co. LLC; Wells Fargo Securities LLC; and Deutsche Bank Securities Inc. acted as financial advisers to Local TV, and Dow Lohnes PLLC acted as legal advisers to Local TV.

Merged Tribune-Local TV LLC Stations

(Local TV stations in boldface)