Gannett Co., Inc. (GCI), Sinclair Broadcast Group, Inc. (SBGI): Benefiting From TV Stations’ Acquisition Spree

Page 1 of 2

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 Co., Inc. (NYSE:GCI)According to the Wall Street Journal, what makes stations attractive is the fact that in the past several years, cable and satellite operators have to pay TV stations owners fees for the right to air local TV station signals. According to SNL Kagan, the media research firm, retransmission revenue is expected to grow from nearly $760 million in 2009 to as much as $3 billion this year. The industry consolidation gives TV station owners stronger negotiating power with TV networks and pay-TV providers.

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.

Page 1 of 2