RPT-BREAKINGVIEWS-Sinclair’s brash TV M&A script could use a rewrite

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Jennifer Saba

NEW YORK, Nov 17 (Reuters Breakingviews) - A pushy broadcaster is re-airing a tired script. Local U.S. television group Sinclair SBGI.O took an 8.2% stake in rival E.W. Scripps SSP.O, adding pressure to takeover talks. Chunky cost savings are tantalizing, and consolidation makes strategic sense for an industry in decline. Yet lumbering debt and boss Chris Ripley’s history of aggressive dealmaking gone awry urge a calmer approach.

After Sinclair disclosed the move in a filing on Monday, the target’s shares shot up by more than a third. The would-be bidder is promising some $300 million in annual cost savings, touting that Scripps shareholders would see the value of their stakes increase threefold if the two join forces.

Assume Sinclair generates approximately $700 million in EBITDA, a two-year average to smooth out lumpy political advertising. Back out maybe $100 million to exclude a division holding the Tennis Channel and a grab-bag of other ventures, for which the firm is exploring strategic options. Scripps, meanwhile, should generate roughly $500 million by the same measure. Throw in synergies, put it all on a multiple of 6.5 times – in line with peers Nexstar Media NXST.O and Gray Media GTN.N, according to Visible Alpha – and it implies a combined enterprise value of over $9 billion.

Both companies are knee-deep in a combined $6.2 billion of debt. Strip that out and it suggests a market value of nearly $3 billion. If Scripps owns roughly a third of that, in line with its current share of the combined companies’ total value, it would equate to $1.1 billion, about three times where it sits now after the recent share-price bump.

Despite the financial logic, the problem is Sinclair’s brash approach. Buying a bunch of shares on the open market ahead of a tie-up is cheaper than accepting a puffed-up valuation or adding cash to the mix. Yet the Scripps family controls more than 90% of the vote, so they will be hard to bully. The target seems to see the move as combative, noting it plans to evaluate all options “to protect the company’s shareholders from the opportunistic actions.”

There are further potential complications. The deal makes sense because it would be carefully structured to avoid the forced repayment of Scripps’ outstanding debt, including a huge slug of preferred shares owned by Berkshire Hathaway BRKa.N, which carry a redemption value of $734 million, according to filings.

Sinclair has messed up by being overly aggressive before: In 2018, the company botched its $4 billion bid for peer Tribune Media when it played fast and loose with arcane regulations. Sinclair had to abandon its deal, and Tribune was scooped up by Nexstar the following year. Pushy tactics have a way of backfiring.

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CONTEXT NEWS

Local broadcast group Sinclair has acquired 8.2% of rival E.W. Scripps' non-voting stock, according to a regulatory filing on November 17.

Sinclair said it has engaged in constructive talks about a potential merger with Scripps. It identified $300 million in annual cost savings and believes a deal would deliver Scripps shareholders approximately three times the average trading price of its stock over recent periods.

Scripps said in a statement on the same day that the board is evaluating all its options and will take all appropriate steps to protect the company's shareholders from the opportunistic actions of Sinclair or anyone else.

(Editing by Jonathan Guilford; Production by Pranav Kiran)

((For previous columns by the author, Reuters customers can click on SABA/jennifer.saba@thomsonreuters.com))