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.
TRCO has been through the ringer, having been in regulatory limbo for ~15 months during the SBGI deal, which was cancelled on 8/9 after the FCC punted this transaction to the ALJ. And then going through another sale process whereby it is now being purchased by NXST for a total of $6.4B ($46.50/share plus assumption of debt), which represents a ~10x sellers and 7.5x buyers multiple (PF for $160MM of synergies). We absolutely believe this transaction will be consummated – 1) NXST has already identified the divestiture markets that should satisfy the FCC (recall SBGI kept changing the divestitures up until the last second, at which point it was too late); and 2) the regulatory agencies already vetted the TRCO assets and broadcast marketplace in general via the SBGI-TRCO transaction. We also believe there is a bit more certainty this time around – as TRCO has more or less cleaned up its portfolio (it sold its 32% interest in CareerBuilder, is almost through its real estate sales, and has turned WGNA into a profitable asset) and we have a lot more clarity with regards to FOXA (TRCO signed its reverse comp agreement and we know the 7 stations FOX wanted for $910MMM as part of the SBGI deal). We know first-hand that there is no guarantee, but we do think the risk is relatively low here. When it comes to fundamentals, we have been pleasantly surprised by TRCO’s EBITDA trajectory, beating just about every quarter since the SBGI deal was first announced back in Q2 2017. We also remind you that TRCO was the biggest beneficiary of the federal tax reform of just about all of our coverage. That all said, we think TRCO is range bound from here. Relative to a market that is expected to be up next year, we get a technical Underperform. We initiate on TRCO with an Underperform rating and $44/share price target, which incorporates the time value of money and regulatory risk relative to NXST’s $46.50/share offer.
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