Tribune Looks Interesting With the Acquisition of TV Stations

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Tribune Company (NASDAQOTH: TRBAA) has experienced a 16.2% rise since the middle of June from $53 per share to $61.60 per share at the time of writing. What might make investors excited is the company’s recent $2.73 billion acquisitions of 19 TV stations, transforming Tribune into the biggest commercial TV station owner in the U.S. At $61.60 per share, Tribune is worth around $5.3 billion on the market. Should investors get in Tribune at its current trading price? Let’s find out.

Broadcasting segment contributed most of the profits

Tribune operates in two main business segments: publishing and broadcasting. The publishing business consists of eight major-market daily newspapers including the Los Angeles Times, the Chicago Tribune, The Baltimore Sun and The Morning Call while the company’s broadcasting segment includes The CW Network LLC, FOX Broadcasting Company and Antenna TV. Most of its revenue, $2 billion, or 63.6% of the total revenue, was generated from the Publishing segment, whereas the Broadcasting segment contributed $1.14 billion in 2012 revenue. (2012 was its last year in bankruptcy).

Tribune derived the majority of its Publishing revenue from advertising, which accounted for 58.2% of the total Publishing revenue. Even with the much lower percentage share of revenue, the Broadcasting segment was the larger profit contributor, with $366.5 million, or more than 80% of the total operating profit.

After the bankruptcy reorganization, Tribune had a much stronger balance sheet position. It has significantly reduced its debt load, from $12.48 billion in December to only $1 billion in March. The equity emerged from the negative $8.9 billion to nearly $4.6 billion during the same period, its cash position stayed at $554.4 million as of March.

The right strategic move

Tribune seems to have made the right move by acquiring Local TV Holdings for around $2.73 billion in cash to own 19 TV stations in 16 key markets. Interestingly, as the new TV stations ranked either #1 or #2 in their markets, the acquisition will benefit Tribune a great deal. Tribune will become the country’s biggest commercial TV station owner, with around 42 total stations across the country. This will bring Tribune a lot of free cash flow and be accretive to Tribune’s earnings right away.

Including the estimated run-rate synergies, the price multiple came in at around 7 times its average earnings before interest, taxes, depreciation and amortization, or EBITDA. Tribune expected to have $3.5 billion in consolidated pro-forma revenue and $1.1 billion in EBITDA. At $61.70 per share, Tribune is worth $5.36 billion on the market. Including $4.1 billion recent financing, Tribune’s enterprise value might reach $9.9 billion. Consequently, the EBITDA multiple could reach 9.

How about Gannett and Sinclair?

Tribune’s peer Gannett (NYSE: GCI) also expanded its footprint in the broadcasting business by acquiring Belo for around $2.2 billion. With the Belo acquisition, Gannett could nearly double its broadcast assets, making it the fourth largest owner of the major network affiliates, reaching around 30% of the total U.S. television households. The annual run-rate synergies could reach $175 million, spreading over three years after the deal is closed.

Including three-year run-rate synergies, the pro forma EBITDA was only 5.4, suggesting a sweet deal for Gannett. Gannett is trading at around $26 per share, with the total market cap of $5.95 billion. The market values Gannett at only 6.5 times its trailing EBITDA. Its dividend yield is quite decent at 3.1%. The company mentioned that it would maintain its dividend and could return around $300 million in cash to shareholders via share repurchases.

Sinclair Broadcast Group (NASDAQ: SBGI) is also one of the top three largest major network affiliate owners with the coverage of around 34% of the total U.S. television households, 134 TV stations in 69 markets and four radio stations. Around 37% of its net broadcast revenue derived from FOX. Currently, as much as 85% of its total revenue came from ads while the retransmission revenue took only around 9% of the total 2012 revenue. 

Sinclair would like to re-balance those two revenue percentage shares. Three years later, Sinclair estimated that its ad revenue accounted for 77% of the total revenue while the retransmission revenue share increased to 16%.

It is trading at $31.80 per share, with the total market cap of $2.6 billion. The market values Sinclair quite expensively, at 10.6 times its trailing EBITDA. The dividend yield stays at 2%.

My Foolish take

Indeed, the acquisition of Local TV would boost Tribune’s revenue, free cash flow and earnings significantly. An expected $500 million in free cash flow could allow the company to initiate near-term dividend payments or share repurchases. According to Barron’s, Imperial Capital has raised its price target for Tribune, from $63.25 to as high as $76 per share.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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