Sinclair/Tribune Could Restructure to Fit Under 50% Cap, Sinclair CEO Says

Sinclair could restructure its Tribune buy to fit under the 50 percent national ownership cap being pushed by several TV station owners (see 1806050040) if that's what the FCC decides on, Sinclair CEO Chris Ripley responded to us at a panel during an S&P investor conference Thursday in New York. Ripley declined to speculate what the agency would do.

Nexstar CEO Perry Sook said in an interview he believes the FCC will set the cap higher, possibly at 60 or 65 percent. Sook said during the panel he expects a court battle to follow action to alter the cap, which could happen at commissioners' July 12 meeting (see 1806110058). "No victory in Washington is ever final,” Sook said. “No defeat is ever fatal.”

The 50 percent proposal pushed by broadcasters also would eliminate the UHF discount, putting Sinclair/Tribune as currently constructed at 58 percent. Ripley said he didn't have an update on the regulatory outlook for the deal.

Ripley and Sook believe FCC Chairman Ajit Pai would support complete elimination of the national cap if it weren't for political concerns. The FCC is unlikely to eliminate the cap, but “the way to get a puppy is to ask for a pony,” Sook said. Nexstar and Sinclair supported eliminating the cap entirely. Eliminating the cap “is the intellectually honest answer,” Ripley said. The agency didn't comment.

The national cap is the biggest factor in Nexstar's consideration of possible mergers and acquisitions, since it's up against the 39 percent limit, Sook said. Uncertainty about the future of the cap is a “governor” on expansion, he said. Ripley named regulation as the biggest challenge facing the industry. “It's abundantly clear that there are a number of competitors in every local market,” Ripley said.” For some bizarre reason, that's not the way the regulators view the world.”

Sook said Nexstar is looking at prospects for station swaps. Fox is interested in stations where there are overlaps with its sports content or heavy political activity, said Fox Television Stations Chief Financial Officer Joe Dorrego. Fox is interested in using sports to promote retransmission consent growth, Dorrego said.

M&A has been slow in 2018 but could pick up with more certainty on Sinclair/Tribune, said S&P Global Senior Research Analyst Justin Nielson. With big buyers like Sinclair and Nexstar frozen by uncertainty over regulations, prospective sellers don't want to go to market, said Bayou City Broadcasting CEO Dujuan McCoy and Cunningham Broadcasting CEO Michael Anderson. “You'll see transactions come out of the woodwork after Sinclair/Tribune,” Anderson said.

The bankruptcy restructurings of iHeartMedia and Cumulus are unlikely to stimulate deals in radio, Connoisseur Media CEO Jeff Warshaw said in a panel on broadcast deals. The two radio giants don't have a reason to spin off stations and there are no prospective buyers, Warshaw said. “There hasn't been access to capital in this industry because there's no growth,” said Emmis Communications CEO Jeff Smulyan.

Radio dealmaking could be stimulated by action to remove the “preposterous” AM/FM subcaps, Warshaw said. The NAB board voted Wednesday on an official position on the subcaps that will be released soon, said Warshaw, a board member. Warshaw wouldn't say what it will be, but Thursday he vocally denounced any measure but total elimination. Partial relief would be “a joke,” Warshaw said.

Implications for retrans have become a major factor for broadcasters considering transactions, said Patrick Communications Managing Partner Larry Patrick. The after-acquired clauses in retrans agreements have become “critical” in discussions around transactions, said Paul Hastings lawyer Sherrese Smith. Retrans rates could rise quite a bit and it wouldn't “break the system,” Ripley said. Reverse retrans, the money passed on to networks by affiliates, was “playing catch-up” with rising rates and should stabilize, he said. Broadcasting is quickly losing leverage to giant MVPDs such as AT&T-controlled DirecTV, Heartland Media CEO Robert Prather said. "They are just thugs,” Prather said of DirecTV's retrans negotiating style.

Broadcast executives said ATSC 3.0 is the most important opportunity for the industry. Sook expects revenue from some of the ancillary uses of 3.0 to start flowing by the time retrans rates plateau, an additional cash stream he called “the fourth leg of the stool.” Sook called the transition a potential industry threat. The shift to 3.0 will be “additive” for broadcasting in the long term but “disruptive” in the near future, said Valari Staab, president of NBCUniversal-owned stations.

Making it easier for national buys of advertising on stations and improving data attribution should improve radio and TV advertising revenue, broadcasters said. “We made it too difficult for national buyers to buy television,” said Staab. Legalizing sports betting created advertising opportunities for broadcasters, and especially for Fox affiliates with their sports content, said Dorrego. Gambling on sports causes viewers to watch more sports, Ripley said.

Investors undervalue broadcasting, Ripley said. "The whole industry is crazy cheap.” Wall Street doesn't consider the full value of broadcaster assets like spectrum, Ripley said. Investors have “a simplistic view” of local broadcasting, Dorrego said.