The hottest names this week were ATUS (245bps better than the S&P), DISH (237bps), WWE (182bps), AMCX (92bps), and CBS (5bps).
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With CMCSA earnings coming up next week (1/23), we provide our thoughts on the numbers, sentiment and what to do with the stocks into the print. Please see the Full PDF link below for our detailed 30 page slide deck. OK
We think an SSP-COX deal makes the most sense. Recall that on 7/24, Cox Enterprises announced its intention to explore strategic options for its 14 TV stations in 10 markets. Our view at the time was that Cox understood its need for scale (Cox covers only 6% of the U.S. with the UHF discount) and is looking for a partner (i.e. GTN-Raycom) rather than the highest bidder. While the process initially involved just about every broadcaster in the space, there are 3 final bidders per press reports – SSP, TGNA & Hearst – looking to pay “almost $3B”, or 11x ‘18/’19 EBITDA per our ests. Based on our analysis, an SSP deal makes the most sense from a geographic/regulatory and an accretion standpoint (16% ‘18/’19 blended FCF/sh.) but we also ran the math for two additional scenarios: TGNA buys the whole thing (15% FCF accretive) or TGNA & Hearst team up to split the assets (12% FCF accretive to TGNA). CONFIRMATION SHOULD COME END OF JAN/EARLY FEB.
I generally love reading these proxies (I am that big of a nerd) esp. the detailed background leading up to the final transaction because there’s usually something unexpected that occurs during negotiations. In this particular filing, we learned that once TRCO terminated the Sinclair Merger Agreement (Aug. 9, 2018), mgmt. immediately contacted 9 parties (6 strategics and 3 private equity) with respect to a potential acquisition – 5 of whom actually bid. We know how this story ends – NXST won the auction, paying a total of $6.4B consisting of ~$4.2B in equity ($46.50/sh.) & ~$2.2B of debt & pensions. Below we provide the identity of each bidder & summarize their respective TRCO M&A journeys.
This note details our conversations with London investors, with the biggest surprises being: 1) The skepticism regrading New DIS – particularly the value of streaming vs. long-tailed content. That said, should uncertainties become more certain, this is the one most still want to buy. 2) The tremendous pushback on CMCSA – all because of Sky. And 3) the number of requests for our ATUS and OUT models (which must be positive signs, no?). PERHAPS THE BIGGEST TAKEAWAY IS HOW IMPORTANT MANAGEMENT TRANSPARENCY AND CREDIBILITY HAVE BECOME – above and beyond the numbers and the balance sheet.
Eric, Stephan, Se and I are reintroducing our WHAT’s HOT WHAT’s NOT weekly wrap up – this being our first edition from Wolfe Research.
In this note, we dissect the NXST-TRCO deal. Recall that NXST formally announced its intended purchase of TRCO on 12/3 for ~$6.4B – comprised of $4.2B in equity ($46.50/sh.) and the assumption of ~$2.2B of net debt/pension liabilities representing a ~10x sellers multiple & 7.5x buyers multiple (on $160MM Yr. 1 synergies). Since this announcement, we’ve heard some concern from investors re. PF leverage, New FOXA and the regulatory path from here. We’ve also watched NXST’s stock underperform the S&P 500 by ~330bps. WE BELIEVE INVESTOR CONCERNS ARE OVERDONE. We reiterate our Outperform and $112 PT on NXST.
We went straight from our launch (check out our 252-page slide deck – which was NOT an easy feat) to a whirlwind of marketing – hitting NYC, NYC (not a typo), Boston, the Mid-Atlantic, and more NYC. Ahead of us is CT, the West Coast, NYC (again, not a typo), and then Europe (Cheers!). The biggest surprises from our first set of meetings have been: 1) The fact that just about every conversation has begun with New DIS and New FOXA (there are way more bulls than bears). 2) There appears to be significant incremental interest in OUT and ATUS. 3) There appears to be significantly more concern re. CBS & VIAB. 4) No one has pushed back on our “downgrade” of DISH (Peer Perform). And 5) Local isn’t a huge focus due to macro and leverage. BOTTOM LINE: We feel incrementally positive on New DIS, New FOXA, CMCSA, ATUS and OUT; we are worried that our positive call on VIAB might take longer to play out.
We like NXST with or without TRCO. Without TRCO, leverage is quickly moving to the mid-3x; there is active buyback activity and consistent increases in the dividend; there are smallish, infrequent investments (like LTQD); and core tends to trend at the high end of the peer group. We value standalone NXST at $112/sh. When it comes to the TRCO deal, we are a lot less concerned than the Street appears to be (NXST is only +3.2% vs. the S&P 500, +1.1% since 11/30, the trading day prior to the formal deal announcement): 1) NXST has already identified the divestiture markets that are likely to be required by the FCC – recall, SBGI played around with this up until the deal was effectively cancelled. 2) The regulators have already vetted TRCO and the broadcast space via the SBGI deal. 3) TRCO’s asset portfolio is much cleaner this time around as its 32% stake in CareerBuilder was sold, real estate monetization is almost complete (and for ~20% higher than initially anticipated), WGNA has turned a profit, leverage is hovering at 2.0x, and TV Food distributions have continued to increase. 4) There is more certainty with FOXA - the TRCO reverse comp agreement is signed (there is visibility here); and we already know which 7 stations FOXA is interested in via the SBGI deal. 5) Leverage will be ~5.3x PF post close, dropping to 4x by year-end 2020E. And 6) We have every reason to believe NXST is being VERY conservative with regards to synergies, station divestiture proceeds and timing – based on history and recent conversations. If we were to apply NXST’s current P/FCF multiple (’18/’19E) of 6x to the company’s PF post-divestiture FCF/share of $19.50, we would get a $117 stock. We view NXST as our top pick in broadcast; we initiate with an Outperform and a standalone price target of $112 /share
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