Nexstar, Mission to buy six from Gray, Excalibur

As a result of its deal for Hoak Media announced last month, Gray Television will end up with a second duopoly (CBS-Fox) Grand Junction, CO. Since it already has an ABC-NBC duopoly there, it has to  spin off the CBS-Fox combo to Nexstar Broadcasting Group in two separate deals. So to make that happen, Nexstar announced that it and Mission Broadcasting have agreed to buy six television stations in two markets for $37.5 million. The stations are being acquired from Gray and Excalibur Broadcasting and represent the equity interests of Hoak Media, and Parker Broadcasting, which Gray and Excalibur previously agreed to purchase. Under the terms, Nexstar will acquire five stations from Gray, and Mission will acquire one station from Excalibur. Nexstar will fund $33.5 million of the purchase consideration and Mission will fund the $4 million balance.

Nexstar will acquire the Hoak stations simultaneously with Gray’s consummation of its deal with Hoak.

The stations:

On 11/20, Gray announced that it reached an agreement to acquire television stations in eight markets from Hoak.  At that time, Gray also announced that it would identify one or more third parties to acquire the Hoak television stations in Panama City, FL (WMBB) and Grand Junction, Colorado (KREX and its satellite stations KREY and KREG) to satisfy regulatory requirements.

Upon closing these and other previously announced transactions (and reflecting the dissolution of Nexstar’s joint operating agreement in Rochester, NY at year-end) Nexstar’s portfolio of stations that it O&Os, programs or to provides sales and other services, will increase to 108 stations in 56 markets reaching 16% of all U.S. television households.

In the first 12 months following the closing of the transactions, the acquired stations are expected to generate approximately $7 million in adjusted Broadcast Cash Flow and are expected to provide free cash flow accretion in the first two years of ownership of approximately $0.12 to $0.15 per share per year (definitions and disclosures regarding non-GAAP financial information are included later in this announcement).

The purchase price for the six stations represents a multiple of 5.9x the expected average 2013/2014 broadcast cash flow of the acquired stations after giving effect to anticipated operating improvements and synergies identified by Nexstar.

Said Perry Sook, Nexstar CEO: “Since July 2012, Nexstar has doubled the portfolio of television stations that it owns or provides services to as we and Mission acquired or agreed to acquire 53 television stations for a total value of approximately $863 million. Significantly, all of these transactions are accretive to free cash flow, strategically diversify our and Mission’s revenue and operating base and create additional duopolies or virtual duopolies. The agreements to acquire stations in Grand Junction and Panama City mark our entrée into these markets and upon completing all announced transactions, we will own or provide services to multiple stations in 37 of the 56 markets where we will operate.”

He adds, “By adhering to our disciplined acquisition criteria, we are acquiring these six stations at an attractive pro-forma multiple of broadcast cash flow and have identified significant synergies with well-defined paths to realization. From a balance sheet perspective, these transactions are not expected to alter our expectation that Nexstar will end 2014 with net leverage in the mid-3x range. As a result, pro-forma for the completion of all announced and completed transactions, we believe Nexstar will generate free cash flow in excess of $350 million during the 2014/2015 cycle, or average pro-forma free cash flow of approximately $5.85 per share per year, in the upcoming two year period.”

The transactions subject to approval, are expected to be completed in Q1.

Noted Wells Fargo Securities Senior Analyst Marci Ryvicker on the announcement: “This morning, NXST announced that it entered into agreements to acquire 6 stations from GTN’s Hoak acquisition for $37.5MM. The transaction represents a 5.9x buyer’s multiple (for NXST) and 7.2x seller’s multiple (for GTN) on 2013E/2014E EBITDA. The stations, which GTN had previously disclosed it would divest, are located in Panama City, FL (DMA 159, ABC affiliate), Glenwood Springs, CO (DMA 185, CBS), Montrose, CO (DMA 185, CBS) and Grand Junction, CO (DMA 185, FOX, CBS, MY). The transaction is expected to close in Q1 2014, subject to FCC approval.

GTN’s divestiture should not be a surprise and does NOT represent a change of strategy. Recall that when GTN announced its purchase of Hoak on 11/20 the company stated it would sell its stations in Panama City and Grand junction due to regulatory requirements (likely due to GTN’s ownership of the NBC/ABC affiliates in Grand Junction and NBC/CBS affiliates in Panama City). Importantly, we don’t believe today’s sale represents a change in strategy from ”buyer” to ”seller”, but is rather the ”2nd half” of the Hoak purchase.

The deal is immediately accretive for NXST. The acquired stations are expected to add an incremental $7MM in BCF/EBITDA (including synergies) in year one, and an average $0.12-$0.15 of FCF/share over 2014/2015. The company now expects to generate 2014E/2015E FCF/share of $5.85.  NXST’s net leverage is expected to be mid 3x at year-end 2014, meaning the deal is leverage neutral. NXST is funding the deal with cash, existing credit facilities, and future credit transactions.

We view this as more ”neutral” for GTN. While our estimates currently include all of Hoak, we would not consider the 6 stations that are being sold as ”material” to numbers (we estimate ~$15MM in rev, $5MM in CF and ~$0.04 of FCF/share). Given that the seller’s multiple is similar in both transactions, we don’t see any less ”value” post divestiture.”