Broadcast TV M&A: Year in Review

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Wells Fargo SecuritiesJ. Davis Hebert, Senior Analyst and Eric Fishel, Associate Analyst at Wells Fargo Securities, have compiled their annual Year in Review of Broadcast TV Mergers and Acquisitions. Here are highlights and excerpts from the report. Needless to say, 2013 was very busy year:
“The pace of broadcast M&A in the local TV broadcasting space was undoubtedly impressive in 2013, with transaction volume reaching 16 notable transactions, encompassing $8.4 billion in total deal value. In our June 26, 2013, publication Broadcasting M&A 101, we walked through the key attributes that have been driving the deal activity, including 1) increased size and scale for more favorable retransmission contracts and affiliation agreements; 2) diversification for groups that may have been more concentrated by affiliate or diversified media companies with newspaper risk; 3) immediate contractual synergies, primarily driven by retrans step-ups; 4) spectrum that provides long-term strategic value; and 5) attractive cost of capital available, combined with more comfortably leveraged balance sheets. We believe these focal points should continue to drive consolidation in the space in 2014.


The most active consolidators: While Sinclair has been the most active consolidator in the sector, having completed or announced six transactions in 2013, Nexstar announced or completed four transactions, whereas Gray TV was a newcomer to the M&A scene in Q4 2013 (announced three deals). Last, Tribune, via its $2.7 billion buy of Local TV, and Gannett, which is close to acquiring Belo for $2.2 billion, notched the two largest transactions of the year. The average seller multiple since 2010 has approached 9.0x and the synergies close to 2.5 turns per deal, on average.

What happens in 2014?
Of the 16 notable transactions, we would characterize only two as strategic combinations (Gannett-Belo and Media General/Young). Time will tell, but we believe 2014 could see more of these transactions, especially when there are still
eight sizable TV groups that reach between 10% and 20% of TV households. Combinations of any of these groups would still comply with the FCC household cap (39%), even with the loss of the 50% UHF discount. Speaking of the cap, the FCC has not finalized its rules around the UHF discount and could possibly either raise the cap to 45% (which would fully permit the Tribune and Univision station groups as opposed to using a “grandfather” clause) or institute a VHF discount (VHF signals are considered inferior in the digital broadcast world). We could also see the entrant of new buyers to the fray, with Meredith and Scripps both expressing an interest in acquiring more stations in 2014, while Hearst and Raycom are both privately-held companies that have not been public about their strategic intentions (e.g., could also be buyers as well).

Here are brief overviews of the key transactions in 2013:

Feb. 25, 2013: Sinclair acquires four stations from Cox Media
On Feb. 25, 2013, SBGI announced an agreement to acquire four TV stations from Cox Media Group for $94.7 million ($99 million purchase price less $4.3 million of working capital adjustments). Cox had announced in 2012 that it was seeking to sell the small market stations, which included a duopoly in Reno, Nev. The transaction closed on May 2, 2013.

Feb. 28: Sinclair acquires Barrington Broadcasting Group
On Feb. 28, 2013, SBGI announced an agreement to acquire Barrington Broadcasting Group, a private TV broadcasting company consisting of 24 stations in 15 markets across the United States for $370 million. Barrington was owned by Pilot Group from 2003 through 2013, and its top markets included Syracuse, Colorado Springs and Flint/Saginaw (Michigan). According to Sinclair, the purchase price multiple to the seller in this transaction was 7.8x two-year average cash flow and 5.2x to the buyer, including synergies. In conjunction with the Barrington announcement, Sinclair also announced plans to form a new restricted subsidiary, Chesapeake TV, to focus on small-market stations. Sinclair brought in Steve Pruett, former CEO of Communications Corp. of America to run the small-market group, while Steven Marks continues to oversee the mid-market group. Chesapeake intends to operate out of Chicago, so Sinclair expects to see a slight increase in corporate overhead on a run-rate basis. The transaction closed on Nov. 25, 2013.

April 11: Sinclair acquires Fisher Communications
On April 11, 2013, SBGI announced its third acquisition of the year, agreeing to acquire Fisher Communications, Inc. (FSCI), for $373.3 million ($41 per share). With the Fisher transaction, SBGI expects $26.4 million in synergies, including retrans step-ups, cost savings and corporate overhead savings (Fisher was itself a public company). Fisher owned and operated 13 full-power TV stations, seven low-power stations and three radio stations in four states (Washington, Oregon, California, and Idaho). The company’s flagship stations included ABC network affiliates in both Seattle and Portland, as well as CBS affiliates in Boise, Idaho, Eugene, Ore., Spokane, Wash., and CBS/FOX duopolies in Bakersfield, Calif., and Pocatello, Idaho. In 2012, Fisher generated $147.3 million in TV revenue (+15% YoY) and $21.1 million in radio revenue (-2% YoY), while on broadcast cash flow, TV contributed $49.0 million and radio $5.5 million (before corporate overhead). Fisher’s TV stations derived approximately 64% of revenue from local, 12% from national, 15% from retrans and 3% from Internet. Fisher’s stations reach approximately 4.5 million households. Assuming 90% of households are pay TV and using Fisher’s $22.2 million in retrans revenue in 2012, this would imply $0.46 per sub per month on retrans (clearly an average across all markets, large and small). The transaction closed on Aug. 8, 2013.

April 24: Nexstar Acquires Communications Corp. of America
On April 24, Nexstar Broadcasting Group, Inc. (NXST) announced its first acquisition of 2013, agreeing to acquire Communications Corporation of America and White Knight Broadcasting (CCA) for approximately $270 million. The CCA portfolio of stations consists of 19 stations in 10 markets, including five duopolies (Shreveport, Lafayette and Baton Rouge, La., and Waco and Longview, Texas). On the synergies side, Nexstar identified $12.5 million in operating synergies, but expects $1.5 million of additional corporate overhead to manage the larger company. Management said that most of the synergies are expense-related (rather than revenue, which has typically been the driving acquisition factor with retrans step-ups). We understand that CCA was not very far behind Nexstar on retrans rates, so this opportunity was more duopoly-driven. Nexstar expects the CCA stations to produce $100 million in revenue and $50 million in BCF the
first year of the transaction (essentially 2014). Nexstar estimates the seller multiple will be 7.9x based on 2012/2013 average EBITDA and the buyer multiple, with $12.5 million in synergies, to be 5.7x. The CCA stations are in mostly small markets (DMA size ranges from 83 to 179) located in Texas, Louisiana and Indiana, all three in which Nexstar already has a presence. For example, Nexstar has an existing presence in Shreveport (NBC affiliate) that fits nicely with the two stations being acquired from CCA. In addition, this transaction includes an interesting twist of fate for the Evansville, Ind., Fox affiliate.
Recall that Nexstar’s station WTVW lost its Fox affiliation in 2011, with CCA picking up the signal as a D-2 to pair with its CBS affiliate. Nexstar could potentially recast Fox as a full-power signal (currently being used for CW), giving it ABC (acquired from Gilmore in 2011), CBS and Fox affiliates in that market.

June 4: Sinclair Acquires Titan Broadcasting
On June 4, Sinclair announced it agreed to purchase the stock and broadcast assets of four of Titan Television’s TV stations for $115.35 million and also assume agreements to provide sales and other services to two other stations. The six stations are in California, Nebraska and Iowa, and reach 1% of U.S. TV households. According to Sinclair, the purchase price multiple is 5.76x two-year average cash flow, including synergies, with the two-year average based on 2013 and 2016 (the next presidential election year). The transaction closed on Oct. 3, 2013.

June 6: Media General Merges with Young Broadcasting
On June 6, 2013, Media General and Young Broadcasting announced an agreement to combine the two companies in an all-stock merger transaction, with the combined company retaining the Media General name and Richmond, Va., headquarters. The “new” Media General owns or operates 31 stations in 28 markets, reaching approximately 14% of U.S. TV households, including 16 stations in the top 75 DMAs. Upon the announcement, MEG identified approximately $15 million of operating synergies and recently revised its expectations on interest savings to $29 million per year. Upon completing the transaction, Media General issued 60.2 million shares of stock to Young’s shareholders, with legacy Young shareholders (including Standard General) owning 67.5% of the combined company. On a pro forma basis, the combined company generated two-year average (for 2011 and 2012) revenue of $539 million and adjusted EBITDA of $167 million. The transaction was completed on Nov. 12, 2013, and Media General recapitalized its balance sheet with an $885 million term loan, priced at L+325 bps with a 1% LIBOR floor. Upon the issuance of 60.2 million shares on Nov. 12 at $15.01 per share, we estimate Young was “acquired” by Media General for 13.8x two-year average cash flow to the seller and 11.5x to the buyer, including $15 million of operating synergies. However, the multiple on the day of announcement was 9.7x to the seller and 8.1x, including synergies (based on a $9.76 share price).

June 13: Gannett acquires Belo Corp.
On June 13, 2013, Gannett Co., Inc. (GCI) agreed to acquire pure-play TV broadcaster Belo Corp. (BLC) for approximately $2.2 billion, inclusive of a $715 million debt assumption and the acquisition of all outstanding Belo shares for $13.75 per share in cash. The transaction combines Gannett’s 23 stations and Belo’s 20 stations, including stations in 21 of the top 25 markets. In addition, the combined entity would be the No. 1 non-network owner of CBS affiliates, the No. 4 group of ABC affiliates and expands its existing position as the No. 1 NBC group. Gannett, when combined with Belo, would reach 30% of TV households, behind only CBS, FOX, Tribune and Sinclair. The TV overlap between the two is relatively minimal (only Phoenix and St. Louis), while Gannett owns newspapers in four Belo markets (Phoenix, Portland, Louisville and Tucson). The FCC is requiring Gannett to sell the CBS affiliate in St. Louis to complete the Belo
acquisition. Gannett expects to realize $175 million in annual run-rate synergies within the three-year anniversary of the transaction close. Approximately $75 million of the $175 million in synergies would be realized within a year of the transaction close, primarily due to retrans synergies and duplicative costs on the corporate overhead front. According to management, the majority of Belo’s stations and retrans agreements will fall under Gannett’s “hereafter acquired” clauses (where the Belo retrans rate automatically steps up to Gannett’s). According to Gannett, the transaction value of $2.2 billion represents a seller’s multiple of 9.4x two-year average EBITDA and 5.4x to the buyer, which includes the $175 million in synergies. If we only include the $75 million of Year 1 synergies, the purchase price multiple would be approximately 7.1x.

July 1: Tribune Acquires Local TV and Foxco
On July 1, 2013, Tribune Company agreed to acquire all of Local TV’s 19 television stations (seven Fox, five CBS, two ABC and two NBC stations) in 16 key markets for $2.725 billion in cash. Tribune’s broadcast portfolio would increase from 23 to 42 stations and include 14 CW affiliates, 14 Fox affiliates, five CBS affiliates, three ABC affiliates, two NBC affiliates and four independents. Tribune will own 14 stations in the country’s top 20 markets, become the No. 1 Fox affiliate group, expand its position as the No. 1 CW affiliate group and add market-leading stations in prime cities, such as Denver, Cleveland, St. Louis, Kansas City, Salt Lake City and Milwaukee. Tribune anticipates the
combination with Local TV should generate more than $100 million in annual run-rate synergies within five years after closing. Based on the past two-year actual results, we estimate the multiple at 11.5x, but Tribune said the seller multiple was closer to 9.4x when adjusting for recently completed retrans deals and tax adjustments. Including $100 million of synergies, we estimate the seller multiple to be 8.1x before adjustments and 7.0x post adjustments. Both Local and Foxco are principally owned by Oak Hill Capital Partners.

July 29: Sinclair Acquires Allbritton
On July 29, Sinclair Broadcast Group, Inc. (SBGI), announced its fifth acquisition of the year, agreeing to acquire the Allbritton TV stations for $985.0 million in an all-cash, debt-free deal. Sinclair has been the busiest consolidator, having announced or completed nine deals ($2.9 billion in transaction value), and the Allbritton deal is the company’s largest target to date. Sinclair is paying approximately 10.7x two-year average cash flow before synergies for the Allbritton stations and NewsChannel 8 (a local cable network that reaches 2 million pay TV subscribers) and 8.7x with $21.5 million in synergies. This multiple is higher than other recent transactions. We believe the premium multiple is warranted, given the opportunity to own the flagship Washington, D.C., ABC affiliate (WJLA), which should dovetail nicely with Sinclair’s Baltimore presence, and the longterm opportunity to expand NewsChannel 8 across a wider footprint. In fact, Sinclair CEO David Smith characterized the Allbritton deal as a “once in a lifetime opportunity.”
Allbritton has successfully operated NewsChannel 8 since 1991, when it was launched as the first independent local news channel in the country. The 24-hour news network is wired into more than 15,000 federal offices in Washington, D.C., and has significant access to decision-makers in the political scene. Sinclair believes it can leverage News Channel 8’s presence in Washington, D.C., to create a national cable network—beginning with its own footprint and eventually including non-Sinclair markets. Currently, the FCC is looking into the existing “grandfathered” LMA structures that are part of legacy Sinclair’s duopolies together with the stations being acquired by Allbritton. We believe
Sinclair has organizational flexibility to address any concerns and that the transaction should close sometime in H1 2014.

Sept. 16: Nexstar Acquires Stations from Citadel, Stainless
On Sept. 16, 2013, Nexstar Broadcasting announced it agreed to acquire five stations in four markets for $103 million from Citadel Communications and Stainless Broadcasting. These transactions consist of two stations in Binghamton, N.Y., for $15.25 million and one station each in Des Moines, Iowa, Rock Island, Ill., and Sioux City, Iowa, for $88 million in aggregate. The two Binghamton stations and Rock Island station are additions to markets where Nexstar already has a presence, whereas the Sioux City and Des Moines stations provide an entry into Iowa, which should have a strong political year in 2014 with congressional elections. Even though none of these stations are ranked higher than 72, they are attractive strategically, as Iowa is politically important and Nexstar has a strong presence in upstate New York. Nexstar purchased these stations at attractive multiples–we estimate a 6.1x buyer multiple for these transactions.

Sept. 25: Sinclair Acquires New Age Media
On Sept. 25, 2013, Sinclair announced it entered into an agreement to purchase the broadcast assets of eight TV stations owned by New Age Media, or to which New Age Media provides services, for an aggregate purchase price of $90 million. The company expects to fund the purchase price at closing through cash on hand or a delayed draw under its bank credit agreement. The eight stations are in three markets (Wilkes-Barre-Scranton, Pa., Tallahassee, Fla., and Gainesville, Fla.) and reach 0.8% of the U.S. TV households. The stations bolster Sinclair’s existing presence in Pennsylvania and Florida.
Including the New Age station acquisitions, all previously announced acquisitions, and pro forma for expected synergies, the company’s 2011 and 2012 net broadcast revenues would have been $1.634 billion and $1.894 billion, respectively. The $90.0 million purchase price represents a 6.8x multiple of the average 2011–2012 cash flow, including $4.9 million of operating synergies, and a 5.98x multiple on average 2014–2015 cash flow. Sinclair expects to close the transaction in Q1 2014.

Nov. 6: Nexstar Acquires Grant Company
On Nov. 6, Nexstar announced it signed a deal to acquire seven stations in four markets from the Grant Co. for $87.5 million, representing a buyer’s multiple of 5x their expected average 2013–2014 broadcast cash flow. The stations include WFXR-WWCW Roanoke, Va., WZDX Huntsville, Ala., KGCW-KLJB Quad Cities, Iowa, and WLAX-WEUX La Crosse, Wis. With the deal, the portfolio of stations that Nexstar owns or operates increases to 102 in 54 markets, reaching approximately 15.5% of all U.S. TV homes. Upon completing all announced transactions, Nexstar said, it would own or provide services to multiple stations in 36 of the 54 markets in which it will operate.

Nov. 1: Gray TV Acquires Yellowstone Media
On Nov. 1, 2013, Gray Television announced it has entered into an agreement to purchase Yellowstone Television. Yellowstone Television owns KGNS-TV in the Laredo, Texas, market (DMA 184, NBC, CW, Telemundo), KCWY-TV in the Casper, Wyo., market (DMA 197, NBC), KGWN-TV in the Cheyenne, Wyo.–Scottsbluff, Neb., market (DMA 196, CBS and CW, extends throughout the market via KSTF-TV in Scottsbluff, Neb., and K19FX in Laramie, Wyo.) and KCHY-LP, the NBC affiliate for the Cheyenne–Scottsbluff market, which is expected to integrate its operations with KGWN-TV. According to BIA revenue data, each of KGNS-TV, KGWN-TV and KCWY-TV is the highest-ranked television station in its market. Gray purchased a 99% nonvoting interest in Yellowstone for $23 million and commenced operating the Yellowstone stations pursuant to a local marketing agreement. Subject to receipt of regulatory and other approvals, Gray plans to acquire voting control of Yellowstone in a subsequent transaction that is expected to close in Q1 2014. The transaction purchase price represents a multiple of 6.2x a blended average of 2013–2014 pro forma broadcast cash flow of the stations. We estimate the multiple to the seller to be north of 7.0x.

Nov. 20: Gray TV Acquires Hoak Media
On Nov. 20, 2013, Gray Television, Inc., along with its sidecar entity, Excalibur Broadcasting, LLC, made its first sizable strike in the M&A market in this “modern era” (going back to 2010), agreeing to acquire 15 small-market TV stations in seven markets from Hoak Media, LLC, and Parker Broadcasting, Inc., for $335 million in cash.
Separately, Excalibur is to acquire two stations from Prime Cities Broadcasting for $7.5 million in cash. These stations fit well with Gray’s strategy of focusing in top-ranked news franchises in small markets, in our opinion. All of the stations are primarily No. 1 or No. 2 stations (the one exception is the Lincoln, Neb., NBC affiliate, ranked No. 4; however, Gray already owns the No. 1 spot there with its CBS affiliate. In several cases, Gray is acquiring satellite stations, where the signal is extended to cover larger geographic areas in Sioux Falls, Bismarck and Grand Junction. It is our understanding that the retrans rate differential between Hoak and Gray is rather nominal and the large majority of synergies are cost-related (Hoak corporate overhead and new duopolies in Lincoln and North
Platte). Gray earmarked approximately $5 million in synergies for the transaction, or roughly 11% of presynergies EBITDA of $45.4 million. Based in Dallas, Hoak Media was formed in 2003 as an acquisition vehicle focused on stations in small to midsized markets, with strong local news franchises and duopoly opportunities. In particular, Hoak focused on Big Three stations in small markets (DMAs 125 or smaller) and was willing to acquire non-Big Three affiliates in midsized markets (DMA 75–125). The company was managed by Chairman Jim Hoak, an executive with a deep media background, and CEO Eric Van den Branden, who co-founded Hoak Media.

Dec. 19: Nexstar Acquires Select Stations from Gray TV
On Dec. 19, 2013, Nexstar Broadcasting Group announced it and Mission Broadcasting have entered into definitive agreements to acquire six television stations in two markets for $37.5 million from Gray Television and Excalibur Broadcasting. The stations represent the equity interests of certain subsidiaries of Hoak Media and Parker Broadcasting, which Gray and Excalibur previously agreed to purchase from Hoak and Parker, respectively. According to Nexstar, the acquisitions are going to be funded through internal sources, borrowings under the existing credit facilities and future credit market transactions and in the first 12 months following the closing of the transactions are expected to generate approximately $7 million in adjusted BCF. Nexstar still expects to end 2014 with net leverage in the mid-3x area and to generate in excess of $350 million
of cash over the 2014/2015 cycle. Nexstar expects the transaction to be immediately accretive upon closing and represents a buyers multiple (including expected synergies) of 5.9x and sellers multiple just north of 7x based on 2013/2014 average BCF (according to Gray’s management).”