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Nexstar-Tribune merger reignites calls for 39% cap change

After all the political hoo-ha which saw Sinclair Broadcast’s $3.9 billion takeover of Tribune Media eventually derailed back in August, in a virtually inevitable series of events, it turns out Tribune could now end up under control of the country’s second largest local TV station owner, Nexstar, in a deal valued at $4.1 billion. Tribune really, really wants a buyer.

If approved, the merger would propel Nexstar beyond Sinclair into top spot, but Nexstar risks falling into the same trap as Sinclair and – crucially – Nexstar does not benefit from a certain Presidential blessing which Sinclair was almost able to flaunt to full effect.

Nexstar alone reaches 39% of TV households in the US, the legal limit for a single station owner, and by buying Tribune it would breach this ceiling, giving the Texas-based group important footholds in Los Angeles, New York and Chicago. So, clearly the onus once again is on selling off certain stations to receive regulatory approval and Nexstar may well be tripped up in the exact same manner to Sinclair, yet it will be wary of making the same mistakes. Nexstar addressed this briefly in its initial release confirming the agreement this week, saying the merged entity would reach 39% of US households following the necessary divestitures.

The collapse of the Sinclair deal, for which lawsuits are ongoing, involved Sinclair saying it had sold off station assets as instructed but, in reality, it shipped them off to friends and family while retaining full control of the stations. It was also alleged that FCC chairman Ajit Pai had been working to Sinclair’s tune, sparking an internal investigation, and he swiftly palmed the case off to a court which distanced himself from any involvement and therefore any blame in getting the deal blocked.

But perhaps the most intriguing aspect of the whole debacle is how social media has become more powerful than TV stations when it comes to winning votes. This has prompted calls from TV firms to have the FCC review the 39% cap currently enforced, arguing that Google, Facebook and Amazon have unregulated freedom to reach 100% of US households and similar rules should apply to television given its shrinking influence. That said, Tribune boasts 54 million monthly unique visitors across its online properties.

The $4.1 billion figure reflects a 15.5% premium based on Tribune’s closing price at the end of November, and a 45% premium to its closing price at the end of July 16, on the day Pai issued a public statement regarding his intention to circulate a Hearing Designation Order for the failed Sinclair merger.

According to Reuters sources, Nexstar outbid private equity firm Apollo Global Management to enter an agreement for Tribune and the 50 million households reached by its 42 local TV stations. Tribune’s cable entertainment cable network WGN America alone reaches over 77 million TV households and also owns a stake in the Food Network.

In the wake of the collapsed merger, Sinclair is instead going after 21st Century Fox’s regional sports network, teaming up with CVC Capital Partners to fund the deal, according to reports.

Nexstar expects combined revenue of approximately $4.6 billion and adjusted EBITDA of approximately $1.7 billion.

Nexstar CEO Perry Sook said, “The transaction offers synergies related to the enhanced scale of the combined broadcast and digital media operations, and increases our audience reach by approximately 50%.  Furthermore, the addition of the Tribune Media broadcast assets further expands our geographic diversity, as pro forma for the completion of the transaction, we will serve 18 of the nation’s top 25 markets and 37 of the top 50 markets. Financially, the transaction will result in approximately 46% growth in Nexstar’s average annual free cash flow in the 2018/2019 cycle to approximately $900 million.”

If it plays by the rules, this deal has a chance of going through, but only that, a chance.

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