Recently, the investment community has witnessed a lot of TV station deals. Gannett Co., Inc. (NYSE:GCI) acquired broadcaster Belo for around $1.5 billion to double its number of TV stations. Tribune spent as much as $2.73 billion to buy Local TV Holdings to become the country’s biggest TV station owner with 42 stations across the U.S. Recently, Sinclair Broadcast Group, Inc. (NASDAQ:SBGI) joined the acquisition spree with a $985 million deal to buy seven ABC Network affiliates and News Channel 8 from the Allbritton family.
Gannett and Belo deal
The TV station acquisition will certainly be strategic deals for Gannett Co., Inc. (NYSE:GCI), Tribune and Sinclair Broadcast Group, Inc. (NASDAQ:SBGI). Gannett Co., Inc. (NYSE:GCI) used to be known as a publisher with 70% of its total revenue coming from the publishing segment. Although only around $906 million in Gannett Co., Inc. (NYSE:GCI)’s revenue, or 17% of the total revenue, was derived from the broadcasting segment, the segment was the largest profit maker with nearly $444 million in operating profit in 2012.
The Belo acquisition will help Gannett Co., Inc. (NYSE:GCI) expand its footprint into the broadcasting industry, doubling Gannett’s broadcast assets with more scale and diversity. After acquiring Belo, Gannett Co., Inc. (NYSE:GCI) will become the fourth biggest owner of major network affiliates, only after FOX, CBS and Sinclair Broadcast Group, Inc. (NASDAQ:SBGI).
Gannett expects to deliver as much as $175 million in annual run-rate synergies, which would spread over the period of three years after the deal is completed. Interestingly, most of the synergies were from cost savings and higher retransmission fees with the pay-TV providers. The deal should also create significant free cash flow and increase its EPS by $0.50 in the first 12 months. Including the three year run-rate synergies, the pro-forma EBITDA multiple (earnings before interest, taxes, depreciation and amortization) is quite low at only 5.4.
Tribune and Local TV Holdings
Tribune spent a lot of money to expand its business footprint in TV stations with the acquisition of Local TV Holdings. It now owns an additional 19 TV stations in 16 markets. The acquisition will prove quite beneficial to Tribune, as most of its new TV stations are number one or number two in their markets. The company expects to have around $3.5 billion in pro-forma revenue, while the pro-forma EBITDA would be likely to stay around $1.1 billion. Taking into account of the potential run-rate synergies, the price multiple was around 7 times its EBITDA.
Sinclair acquired 8 stations from Allbritton family
Sinclair Broadcast Group, Inc. (NASDAQ:SBGI) owns around 134 TV stations in 69 markets and four radio stations with coverage of 34% of the total U.S. TV households. Interestingly, only around 9% of its total revenue comes from retransmission fees, and as much as 85% of its total revenue is derived from ads. In the near future, Sinclair Broadcast Group, Inc. (NASDAQ:SBGI) would like to decrease its ad revenue percentage share to 77% and increase the retransmission revenue percentage share to 16%.
The company reported that it is the biggest TV broadcasting consolidator with nearly $3 billion in assets purchased. The consolidation will help shield the company from local economic downturns. Moreover, the network diversity will provide the company with programming stability. Including the synergies of $21.5 million, a $985 million deal represents a 2011-2012 average EBITDA multiple of 8.7, lower than Sinclair Broadcast Group, Inc. (NASDAQ:SBGI)’s current trailing EBITDA multiple at 10.4. Sinclair expects that these TV stations will generate around $35 – $50 million in free cash flow per year. At the free cash flow multiple of 10, the equity value per share would be around $3.50 to $5. Sinclair expects to finance the deal via bank loan.
My Foolish take
Among the three companies, Gannett seems to be the cheapest valued with only 6.64 times its trailing EBITDA, with the juicy dividend yield at 3%. Both Tribune and Sinclair have much higher EBITDA multiples at 10 and 10.37, respectively. While Sinclair offers a lower dividend yield at 2.10%, Tribune has not offerred any dividends yet.
All three companies will be benefit from TV station consolidation with more negotiating power with content owners and pay-TV distributors. Among the three, I like Gannett the most with its lowest valuation and the juiciest dividend yield. I personally think that Gannett, with the Belo acquisition, will deliver decent return for shareholders in the long run.
The article Benefiting From TV Stations’ Acquisition Spree originally appeared on Fool.com and is written by Anh Hoang.
Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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