Tribune (TRCO) Shuts Down Sinclair (SBGI) Merger: What Comes Next?

The latest developments in the Tribune TRCO and Sinclair SBGI merger came on Wednesday, when the Tribune board voted to terminate the agreement. This comes nearly a month after FCC Chairman Ajit Pai announced that he had “serious concerns” about the proposed deal.

The Saga Continues

Tribune is now suing Sinclair, seeking $1 billion in “lost premium to Tribune stakeholders and additional damages.”  Tribune alleges that Sinclair did not do enough to see the deal gain regulatory approval, according to a WSJ report.

To have a shot at approval, Sinclair needed to reduce its overall market exposure. The $3.9 billion deal, which was announced over a year ago, would have seen the combined company reach 72% of US households. Sinclair’s proposed divestures would have reduced that reach to 62%, but regulators had issues with the details of the proposal (also read: Is Joining Forces the Only Path to Survival for Tribune (TRCO) and Sinclair (SBGI)?).

Pai’s unease stemmed from the fact that a number of the parties that would have purchased the divested stations have direct ties to Sinclair and its Executive Chairman David Smith. This led to the belief that Sinclair could still control those stations “in practice, even if not in name,” according to Pai’s official statement.

The WSJ report detailed accusations that Sinclair breached the merger agreement by engaging in “unnecessarily aggressive and protracted negotiations” with regulators. In other words, Tribune believes that Sinclair’s attempt to find a loophole created unnecessary risk, and ultimately affected the potential success of the merger.

Now What?

The news is tough for Sinclair, the largest operator of local TV stations in the US. While Sinclair has a strong presence in smaller markets, Tribune would have given it a much-needed foothold in large, metropolitan areas. On its own, Sinclair has a presence in just one top-ten market (Washington D.C., sixth-largest by population), while Tribune has stations in each of the seven largest cities.

Tribune announced its Q2 2018 earnings results Wednesday, posting $0.96 in earnings per share on $489.36 million in revenues. Both metrics comfortably surpassed our Zacks Consensus Estimates of $0.59 and $484.32 million, respectively.

Tribune’s solid results were marked by a 29% decrease in programming expenses to $111.6 million, along with a $16.2 million surge in political advertising revenue. The company did not issue any guidance, but the newest figures represent healthy growth nonetheless.

The market expects Tribune to continue shopping around for a potential buyer. A high-ranking source within Sinclair told CNN that Rupert Murdoch’s Fox could be interested. Investors may already be aware of the merger between Disney DIS and 21^st Century Fox FOX, but Murdoch will retain control of Fox’s networks under the deal.

Wednesday marked strong earnings results for Sinclair as well. The company announced $0.27 in earnings per share on $730 million in revenues, beating our estimates of $0.02 and $715 million, respectively.

“Second quarter results came in well ahead of guidance in all key financial metrics, and we expect the second half of the year to continue to be robust, underlined by increasing distribution revenues and strong political advertising spend,” said President and CEO Chris Ripley in the official earnings release. 

“This year's mid-term elections are expected by many to have the most spending in U.S. history with broadcast television a primary beneficiary.”

Political ad revenue also played a big role for Sinclair, outpacing estimates by 37% and leading to guidance of about $160 million for the fiscal year, compared to previous levels of between $140 million and $150 million. Moreover, Sinclair is currently sitting on over $1 billion in cash, leading to speculation that the firm could potentially entertain other acquisition targets.

Outlook

As we noted before, many broadcasters are fighting for survival through a “united we stand, divided we fall” approach. Competition is only growing fiercer, and the prize pool is shrinking. Broadcasting used to be a lucrative, high-margin industry, but the internet has forced change as an increasing number of consumers cut the cord.

Still, both Sinclair and Tribune appear to be well-positioned in the short-term, posting growing revenue and maintaining an optimistic outlook on the year. However, investors should note that political ad spending is only a temporary catalyst, and will take a big hit after this year’s election cycle.

Both firms must carefully consider their fundamental structure and long-term growth initiatives in order to hedge against the threat of becoming obsolete. For now, investors should continue to monitor new developments, including the newly announced lawsuit.

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