Sinclair Broadcaster Group
May 8, 2017
- NASDAQ: SBGI
- Recent PPS: $36
- Shares Out: 124 million
- Market Cap: $4,447
- Net Debt: $7,095
- Enterprise: $11,542
- Net Leverage: 5.94 (excluding Food Network distributions)
- Adj. Net Leverage: 4.64 (adjusted for non-core assets)
Today SBGI announced the approximately $6.6 billion acquisition of Tribune Media (NYSE: TRCO) for $35 in cash and .23 SBGI shares per TRCO share. The Company expects the deal to close in 4Q17, pending TRCO shareholder and regulatory approval, with perhaps a modest number of required divestitures. The Company notes the following attributes of the pro forma entity:
- 72% operational household coverage
- 233 pro forma station count
- #1 or #2 ranked station in 26 out of the top 75 DMAs
- Non-core assets – real estate, CareerBuilder, Food Network – worth $2 to $2.5 billion
- 40% immediate FCF accretion
Using Wells Fargo’s most recent 2017/2018 average FCF estimate of $4.52, at $36 SBGI trades for just 5.69 times pro forma FCF. Clearly nonsense due to overly generous “non-cash” adjustments. If we adjust the Wells Fargo estimate by a factor of 85% and assume 30% accretion from the TRCO deal, SBGI trades for 7.21 times.
Again using Wells Fargo estimates, SBGI was projected to turn approximately 63% of EBITDA into FCF on a 2017/2018 basis. My FCF estimate outlined above assumes 40% conversion.
If pro forma SBGI is fairly valued at 10 times FCF, at $36 SBGI trades for just over 70% of fair value. This could be too aggressive this late in the “cycle” (pick a cycle, any cycle); but it could also be too conservative if pro forma SBGI can successfully create alternative streams of revenue around “ATSC 3.0” technology (🤔). Let’s call it a wash.
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Keeping in mind the likelihood that this year is a “short in May and go away” type of year for the equity market, and the negative short-term technical trading picture for the Media space broadly, deal-related technical selling pressure in SBGI has created a reasonably attractive short- to medium-term buying opportunity, IMO.