Hi! Welcome to Part 1B of Yet Another Guide to media stocks. Today’s post will cover a brief update on the broadcasters, particularly Tegna (TGNA; disclosure: long). Before diving in, I’d highly encourage you to check out the intro section to the guide, which goes over why I’m doing this and dives into the most important thing hitting the media sector today: cord cutting. You can also find links to all of the pieces in this series here.
The broadcasters were the first group I covered in the media series. Rereading that post, I'd say I was slightly bullish on the broadcasters. They were just so cheap.... but I couldn't pull the trigger on buying them because I was worried about terminal value issues (Modest proposal (frustratingly) summed up my worries quite well). In addition, I thought the opportunity costs for buying the broadcasters were kind of high: FOX and VIAC (the networks) were both trading at multiples similar to the broadcasters despite (IMO) much better businesses. To date, failing to buy the broadcasters has been a mistake; since my post, the broadcasters have all enjoyed quite a nice run, significantly outperforming both the networks and the overall market.
Generally, I try not to revisit themes and ideas too much on the blog (except for cable companies and sports team valuations; you're stuck with me ranting about those!). However, two things happened recently that made me want to revisit the broadcasters: CBS's (VIAC, disclosure: long) renewal with Comcast and activism at Tegna.
Let's start with the simplest: the CBS / Comcast renewal. I want to focus particularly on the second paragraph of the renewal:
In addition, CBS All Access, CBS’ digital subscription video on-demand and live streaming service, will be available on Comcast’s Xfinity X1 and Flex platforms later this year. This will mark the first time CBS will make the CBS All Access app available on an MVPD-based set-top box.
Why do I care about that sentence?
Well, it seems like that deal can easily be the start of CBS and Comcast edging out broadcasters in a variety of ways. The simplest way (though not the only way) would be to look at this through Comcast Flex. Flex is Comcast's service for cord cutters. If you get internet from Comcast, they'll give you Flex for free, and you can use it to subscribe to any streaming service you want (Netflix, Hulu, etc.). By using Flex, all your shows and bills will be in one place. Everyone wins: apps get access to all of Comcast's internet subs, Comcast keeps control of a customer and gets a cut of the billing, and the customer gets to access all of their shows in one place. The CBS / CMCSA new agreement puts All Access on Flex.
Say you're Nexstar, and you own the local CBS affiliate in a Comcast market. I'm sure right now you'll get a cut of any sub who subscribes to CBS All Access through Flex (I don't know the specifics of the agreement and don't think it's been put out there, but I feel like the broadcasters would be absolutely rioting if Comcast was offering CBS All Access to customers in their local areas and the broadcasters weren't getting a cut, so it's probably safe to say they get a piece), but why should that be the case in the future? I mentioned this in the first part of the series, but right now broadcasters basically extract payments from distributors based on the strength of the network programming they get from their affiliate deal plus their local programming (mainly news). I'd argue the vast majority of broadcaster's value comes from the strength of their network programming and the legacy rules that prevent the networks from owning broadcasters across the whole country; it seems agreements like the CBS / Comcast deal are a stepping stone to cutting broadcasters out of the picture in the future.
Anyway, I just wanted to highlight that because it seems to be such a clear stepping stone towards a network getting to a place where they can cut a broadcast affiliate out of a large piece of the pie.
The other thing I wanted to mention in this update is the recent activism at Tegna (TGNA). I'll be upfront and note I have a small position, but it's still a work in progress and the position can get larger or smaller (or go away!) at any time!
This week, Standard General went hostile looking to replace the board at TGNA. They own just shy of 10% (they first filed in October); in addition to Standard, we found out this week activist Donerail apparently owns just under 5% of Tegna.
That's almost 15% of Tegna in the hands of activist investors that want it sold. That's a lot of pressure on the company. My belief is that pressure will likely lead to a sale of Tegna. We know that Apollo has previously approached Tegna, and Apollo just completed the purchase of Cox Media group in December. It seems pretty likely that if Tegna was up for sale, Apollo / Cox would be eager bidders.
PS, speaking of Apollo, I thought it was interesting that Tegna's CEO was willing to comment directly on Apollo's investment in Cox. Tegna made these comments at the DB conference in March 2019, so presumably this was after Apollo had approached Tegna.
It's tough to get a clean earnings number for Tegna. They did ~$705m in EBITDA in 2019, but their go forward earnings should be much higher for a few reasons.
Anyway, most broadcasters trade on an average 2 year EBITDA multiple (so, take fiscal 2020 and 2021 and average the EBITDA over those two years) in order to adjust for the political / Olympic cycles.
It's tough to get an exact earnings number for Tegna over 2020/2021 given how many moving parts there are here. My guess is EBITDA averages $950m/year over that time frame; I think that's directionally correct but you could add or subtract ~$40m in either direction and I probably couldn't argue with you. Anyway, we know average broadcaster M&A happens at a tough over 9x EBITDA. If Tegna got that multiple, shares would be worth ~$22/share in a takeout.
I actually think that might be a conservative takeout valuation for two reasons.
There are a lot of different places I could cover here, but this is still a work in progress so I think I'm going to wrap it up here. My bottom line is that Tegna is in a consolidating industry and I think it's an extremely strategic piece that would command a nice premium. With 15% of shares in the hands of investors who will likely push for it to be sold, I think Tegna is likely to start a sale process at some point in the next few months. The process should lead to a sale at a nice premium to today's price.
Odds and ends
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Another broadcaster who said they would be for sale at the right price is GTN. GTN is controlled by the Howell family so the price would have to be right. Of the group, I like GTN due its rural high margin focus.
As to trying to squeeze out the affiliates, I do not think the networks would want to remove a distribution channel. IMO having multiple channels to distribute content to various price point audiences is a positive not a negative not to mention keeping the anti-trust folks at bay.
WSJ out today with Bloomberg spending massive cash on ads, projecting 20B in political spend vs 12B in 2016, huge cash for local broadcasters, SBGI has lagged, down 50% from run up after buying RSN's from FOX, putting a 9x multiple on broadcasting leaves the RSN's trading at 4x EBITDA, and a 40% free cash yield, just saying might be interesting trade, not LT investment
Great series! I've been learning a ton. This is a bit off topic, but I can't help but wonder if you've spent any time looking at the Canadian telcos (especially BCE and Rogers). They seem to tie in very nicely with a lot of ideas/themes that you're interested in (cable, media and sports rights), and the valuations are undemanding. For disclosure, I own an equally-weighted basket of the big four (BCE, Rogers, Telus and Shaw Communications).
Keep up the great work!