Sinclair Broadcast Group (Nasdaq:SBGI) strengthened its bench in the Pacific Northwest April 11 with the announcement of its $373 million acquisition of Seattle-based Fisher Communications (Nasdaq:FSCI) and its 20 television stations and three radio stations. With this acquisition and two previous deals, Sinclair now owns 134 TV stations across the U.S. Its stock reacted positively to the news jumping 16.5% the day after the announcement.
Should you buy its stock on the news? I'll have a look.
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What Sinclair Bought
Included in the 20 TV stations Fisher brings to the table are ABC TV affiliates in the 12th (Seattle) and 22nd (Portland) largest markets in the U.S. as well as CBS affiliates in the 73rd (Spokane), 111th (Boise) and 121st (Eugene) biggest markets. Paying $41 per share, it's acquiring a group of TV stations serving eight markets that reach 3.9% of the U.S. population. With this acquisition Sinclair will now broadcast in 69 markets reaching 34% of the American TV audience. Most importantly, its Seattle stations become its biggest market while Portland chimes in as the fifth biggest.
In its conference call to discuss the Fisher acquisition, CEO David Smith reminded investors that Sinclair (once the Fisher deal goes through) will have acquired 81 TV stations and 3 radio stations over the past 18 months. These acquisitions will add $2.13 per share of free cash flow. On a pro forma basis its 2012 net broadcast revenue including the Fisher assets would have been $1.53 billion with $679 million in EBITDA (accounting for synergies) for an EBITDA margin of 44%. Fisher's 2012 EBITDA margin was 23.5%. Clearly it has an opportunity to boost its margins even further.
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CFO David Amy mentioned something in its conference call that most investors likely wouldn't consider when thinking about the cost synergies of this transaction: Sinclair, a public company, was buying Fisher, another public company. The overlapping cost structure associated with operating two public companies would effectively be cut in half. That in itself makes the deal attractive. Add to it the scale Sinclair brings to the integration and it's easy to see why its management project annual EBITDA savings of $26.4 million.
The FCC began allowing duopolies in a single market in 1999. That got the consolidation ball rolling. However, under FCC rules imposed in 2004, television broadcasters can only reach a maximum of 39% of all U.S. television households. A mere five percentage points away from that cap, it appears that Sinclair's next move will be to solidify station ownership in the top middle markets in America. It currently owns one or more stations in 24 of the top 50 markets in America with none in the top 10. My guess is it will make further acquisitions in the top 50 markets while continuing to avoid any top 10 markets like New York and Chicago. As it acquires stations in larger markets it will unload some of its stations outside the top 50.
Sinclair's three biggest markets including the Fisher Communications acquisition are Seattle, Tampa Bay and Minneapolis. Its competition in Seattle includes Belo Corp. (NYSE:BLC), Cox Enterprises and CBS (NYSE:CBS). In Tampa Bay it's up against Fox Television, Gannett (NYSE:GCI), Media General (NYSE:MEG) and CBS. Finally, in Minneapolis its competitors include CBS, Fox, Gannett and Hubbard Broadcasting. The enterprise value of its four publicly traded peers averages 7.2 times EBITDA. Sinclair's enterprise value is 10.74 times EBITDA. However, if you use the pro forma EBITDA (includes Fisher Communications) for 2012 of $679 million, the multiple drops to 6.6 times, which is reasonable given its excellent operating margins.
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Sinclair Broadcast Group's stock is up 102.5% year-to-date through April 15. Between 2009 and 2012 it averaged an annual total return of 53.3%. Of course, those gains came from a low of $1 in March 2009. Now trading over $25 you have to wonder how long it can keep it going. While I'm hesitant to recommend its stock after such an extended winning streak, its valuation doesn't seem excessive.
Furthermore, I like what it's doing rolling up smaller players in the television market. Every move gives it greater negotiating power with advertisers, etc. As the largest independent owner of TV stations in the nation, you can't help but root for the Smith family whose idea it was to become a consolidator of television stations. If you've got a 3-5 year window, I like this investment a lot.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.