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Sinclair Broadcast Group, Inc. (NASDAQ:SBGI)

Discussion of Acquisitions of the Barrington and COX Stations Conference

March 01, 2013 9:00 am ET

Executives

David B. Amy - Chief Financial Officer, Executive Vice President, Secretary of SCI and Secretary of Sinclair Television Group Inc

Lucy A. Rutishauser - Vice President of Corporate Finance and Treasurer

David D. Smith - Chairman, Chief Executive Officer, President and Director of Sinclair Ventures Inc

Steven Pruett - Former Chief Executive Officer and President

Steven M. Marks - Chief Operating Officer, Vice President, Chief Operating Officer of Sinclair's Television Group and Vice President of Sinclair's Television Group

Analysts

Avi Steiner - JP Morgan Chase & Co, Research Division

Davis Hebert - Wells Fargo Securities, LLC, Research Division

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Howard Rosencrans

Barry L. Lucas - Gabelli & Company, Inc.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Tracy B. Young - Evercore Partners Inc., Research Division

Operator

Greetings, and welcome to the Sinclair Acquisitions Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Amy, the Executive Vice President and Chief Financial Officer for Sinclair Broadcast Group. Thank you, Mr. Amy. You may begin.

David B. Amy

Thank you, operator. Good morning, everyone. Participating on the call with me today are David Smith, President and CEO; Lucy Rutishauser, Vice President, Corporate Finance and Treasurer; and Steve Pruett, who will be joining us as Chief Operating Officer of our subsidiary, Chesapeake TV. Before we discuss the transaction, Lucy will make our forward-looking statement disclaimer.

Lucy A. Rutishauser

Thank you, Dave. Good morning, everyone. Certain matters discussed on this call may include forward-looking statements regarding, among other things, future operating results. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ from those described in the forward-looking statements as a result of various important factors. Such factors have been set forth in the company's most recent reports on Forms 10-Q, 10-K and 8-K, as filed with the SEC. Included on the call will be a discussion of non-GAAP financial measures, specifically television broadcast cash flow, EBITDA, free cash flow and leverage. These metrics are not meant to replace GAAP measurements, but are provided as supplemental details to assist the public in their analysis and valuation of our company.

David B. Amy

Thank you, Lucy. We have good news on a couple of fronts, so first off, last night we reached agreement with DIRECTV to continue the retransmission of our content. And second and the main purpose of this call is to follow up with our earlier announcement this week of the formation of Chesapeake Television, a new initiative on our part towards the acquiring and operating small-market television stations.

Last night, we announced that we entered into a definitive agreement to purchase the broadcast assets of 18 television stations owned by Barrington Broadcasting Group for $370 million and entered into agreements to operate or provide sales services to another 6 stations. These 24 stations are located in 15 markets, ranging from DMA 67 to 199, and reach 3.4% of the U.S. television households. The transaction represents a 5.2x multiple on 2011 and 2012 average EBITDA, including approximately $23.8 million of synergies or 7.8x sellers' multiple.

Earlier this week, we announced that we entered into a definitive agreement to purchase the stock and broadcast assets of 4 television stations owned by COX Media Group for $99 million, less $4.3 million of working capital adjustments. And entered into an agreement to provide sales services to one other station. The 5 stations are located in 4 markets ranging from DMA 91 to 158 and reach approximately 1% of U.S. television households. The transaction represents a 4.6x multiple on '11 and '12 average EBITDA including approximately $5.2 million of synergies or 6.2x the sellers' multiple.

Due to FCC ownership role conflicts we have in certain markets, we will be selling our FOX station in Syracuse, New York, WSYT and assigning the local marketing agreement on WNYS, the MyTV in that market. We will also be selling our FOX station in Peoria, Illinois, WYZZ. The purchase prices and buyers have yet to be determined. In addition, the license assets of 5 stations will be purchased by our side car companies Deerfield Media, Cunningham Broadcasting and a newly formed minority-controlled entity owned by nationally known commentator, Armstrong Williams. On a combined basis, after synergies, the transactions will result in no change to our 2012 total net leverage calculations and would add about 0.1 of a turn to our '13 estimated total net leverage calculation.

Assuming an 8x EBITDA multiple, the $29 million of combined incremental cash flow we believe we can create equates to approximately $232 million of added equity value or $2.85 per share. We have said to you in the past that we look towards the accretive benefits of the free cash flow we anticipate earning through our acquisitions, so we've made certain assumptions regarding financing and taxes and the anticipated need to invest approximately $10 million towards capital upgrades for the Barrington stations over their normal annual expectations.

This indicates that we should be enjoying approximately $44 million of free cash flow in the odd years and approximately $58 million in the even years. The Barrington and COX transactions are subject to approval by the Federal Communications Commission and antitrust clearance. The company anticipates the transactions will close and fund in the second quarter of this year, subject to closing conditions. The company expects to finance the total purchase price, less $25 million in deposits through a bank loan or by accessing the capital markets.

On a pro forma basis, assuming the consumption (sic) [consummation] of the transactions just described, there's no question Sinclair will be the largest television broadcaster owning and operating programming or providing sales services to 112 television stations in 61 markets. Our station group will reach approximately 30% of U.S. television households and our portfolio will include 27 FOX, 20 MyNetworks, 20 CWs, 17 ABC, 15 CBS, 11 NBCs, 1 independent and 1 Azteca station.

Now I'd like to turn it over to David Smith who will discuss our small-market operating strategy.

David D. Smith

Thank you. As you know, we have led the industry in consolidation, particularly in the midsize markets, acquiring 30 TV stations and creating over $400 million of equity value. Knowing the advantage of scale as it relates to purchasing power, negotiating leverage and creating efficiencies, we have decided to build a small-market TV group where we can replicate a roll-up strategy similar to what we have successfully done in those middle markets. We believe there are many more opportunities to acquire quality assets and to unlock hidden value in both the middle and small markets.

Because competition in economics can vary among the large, midsize and small markets, we established Chesapeake TV as a wholly owned subsidiary of Sinclair as our primary operating entity for the Barrington and COX stations and other small-market stations we may acquire, while Sinclair Television Group will continue to be our primary operating entity for our midsized markets.

We believe the dual operating structure is crucial to the success of both strategies. We are pleased to announce that Steve Pruett will be joining our senior management team as Chief Operating Officer of Chesapeake TV. Steve has been in and around the media business for many years as an operator and financier. Most recently, he served as Chief Executive Officer of Communications Corporate (sic) [Corporation] of America, 25 television stations and as Chairman of the FOX affiliate Board of Governors. While Steve Pruett will oversee our small-market strategy, Steve Marks will continue as the Chief Operating Officer of the Sinclair Television Group, overseeing all of our midsize markets and we welcome Steve to the company. Steve?

Steven Pruett

Thank you, David. I can't begin to tell you how thrilled I am to be a part of Sinclair and lead our small-market TV strategy. I have personally traveled to each of these markets and stations over the past couple of months and I see so much potential. At these stations, we're running a competitive news operation in each market and the digital interactive team is nothing short of top-notch. We will be operating Chesapeake out of Barrington's headquarters in Chicago, keeping a lot of their talented corporate team in place. In addition, we will be leveraging Sinclair's resources, scale and staff to help support the operations and, based on what I've experienced so far in working with the Sinclair team, they have exceeded my expectations. Lucy will now take you through a few housekeeping items.

Lucy A. Rutishauser

Thank you, Steve. All right, so I want to update a couple of numbers that we gave you on our February earnings call to reflect the announcements today and help you with your modeling. So on a pro forma basis for 2011 and after synergies, assuming consummation of all the acquisitions just described, net broadcast revenues and that's net broadcast revenues, not total revenues would have been $1,149,500,000 and EBITDA would have been $493.8 million. 2012 net broadcast revenues after synergies and including the transactions would have been $1,335,500,000 and EBITDA would have been $616.4 million. 2011's pro forma political, assuming the transactions, would have been $17 million and 2012's pro forma political would have been $166 million.

Just a couple of other numbers here, as you think about your 2013 models and first off, a lot of this will depend on when the transactions actually closed. However, for valuation and leverage purposes, if I look at full year historical numbers after synergies, Barrington and COX combined, and again after synergies, would have done about $187 million in net broadcast revenues in 2011 and $232 million in 2012. EBITDA, again, after synergies would have been $77 million in 2011 and $105 million in 2012. Film payments, we expect to run about $6 million per year. There will be some additional corporate overhead as it relates to Steve and the Chicago group, which he talked about and that could run in the range of about $5.5 million to $6.5 million per year and that is already factored into the EBITDA numbers after synergies that I gave you. CapEx in year 1, we would estimate at about $15 million based on making some initial investments into the station and then decline to about $10 million per year thereafter. And as Dave Amy already mentioned, we would expect free cash flow to average about $44 million in the odd years and $58 million in the even years.

So with that, operator, we'd like to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Avi Steiner with JPMorgan.

Avi Steiner - JP Morgan Chase & Co, Research Division

A couple here. Number one, did you say the seller multiple for the COX stations was 6.2? It just seems lower than what we're used or at least what I've seen and was there something unique about those assets?

David B. Amy

Yes, we did and that relates to the fact that there is a significant piece of that as a stock transaction. So that will bring down your typical asset multiple.

Avi Steiner - JP Morgan Chase & Co, Research Division

Okay. And then just from a quick credit perspective here. You're forming this new subsidiary but I want to confirm it'll be part of Sinclair. It'll be restricted sub. It'll be part of the overall credit. Financing will raised as it historical has at Sinclair.

David B. Amy

That's correct. It'll be 100% wholly owned subsidiary of Sinclair.

Avi Steiner - JP Morgan Chase & Co, Research Division

Excellent. And then on the synergy front here, is all that retranslated or are you getting any back office or other operating savings and can you help us differentiate between the 2?

David B. Amy

It's mostly retran. But there's a lot of potential and upside that we'll be looking to pick up here and like we had mentioned, there's close to $10 million of capital spending that we're looking to put into the Barrington operations and that will certainly go a long way to solving some of the issues that they have as well.

Avi Steiner - JP Morgan Chase & Co, Research Division

Excellent. And then very last one for me. As you engage in your roll-up process, I'm trying to figure out if there's really anyone else that can compete with you guys and I guess would also be bidding for some of these other assets and was Barrington a competitive auction. I'm just trying to figure out the small-market landscape and if anyone else can do what you're doing.

David B. Amy

Well, I think it's going to be hard for anybody to get to our scale but the fact of the matter is anybody can buy anything they want anytime they want. So we just assume everything that we're involved in is a competitive process.

Operator

Our next question comes from the line of Davis Hebert with Wells Fargo.

Davis Hebert - Wells Fargo Securities, LLC, Research Division

Just a few for me. I wonder if you could just talk from a big-picture standpoint, some of the fundamental differences between the small and midsize markets that you've historically been focused on?

David D. Smith

There's a couple of things. We're not going to talk about retrans. But fundamentally, I think there isn't any gigantic difference in terms of the way these businesses run. They all pretty much do the same thing every day. Our sense is having some experience in around small markets is small markets tend to take a little more attention to detail than the larger markets. There's less room for error in smaller markets than there is larger markets. And Steve has demonstrated with his history at CCA that he's a very detailed guy and this is kind of what we need to run this business. So that's really pretty much it.

Davis Hebert - Wells Fargo Securities, LLC, Research Division

So no major differences in terms of like local, national breakdown or the competitive landscape, et cetera?

David D. Smith

I think the competitive landscape is what it is in every market. I mean, the obvious objective in all of this is, as it has been in our smaller markets, is to accumulate as much mass as we can in every market to be as competitive as we can. So whether we have one station or start with one station and end up with 2 or various operating structures to get scale on efficiency is to be determined.

Davis Hebert - Wells Fargo Securities, LLC, Research Division

Okay, great. And then any of these stations, whether Barrington or COX, really stand out to you in terms of a flagship sort of station or #1s, #2s, et cetera?

Steven M. Marks

Well, there are some great stations and some very high-performing FOX stations and very high-performing traditional affiliates, Myrtle Beach, Columbia, South Carolina, Colorado Springs, Syracuse are ones that stand out to me as markets and, well, the operations that are in those markets.

Davis Hebert - Wells Fargo Securities, LLC, Research Division

Okay. That's helpful and then where do the affiliation agreements stand with the Barrington and COX stations? Is there any upcoming renewals that we should be aware of?

David B. Amy

The FOX agreement on Barrington is up to us to complete. They had -- we'll be renewing those but pretty much based -- we would think based on our current structure with FOX and the other, I guess, major affiliation agreement with ABC, and we worked with ABC on those particular affiliation agreements and we'll be taking assignment of that.

David D. Smith

We would just expect those things to be normal course.

Davis Hebert - Wells Fargo Securities, LLC, Research Division

Okay. And then the last question for me, and when you talk about free cash flow of $44 million in an odd year, $58 million in an even year. I just wanted to know exactly how you're defining those? Is that after dividends, any other?

David B. Amy

No, it's EBITDA and then we take -- we subtract out financing, interest and any principal, if there's principal. In this case, we're not assuming any principal. So it's assuming interest and then taxes. So we deduct for taxes and capital spending.

Operator

Our next question comes from the line of Alexia Quadrani with JPMorgan.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Just a follow-up on the subsidiary. Are there any changes that we should expect in your reporting format? I'm assuming no.

Lucy A. Rutishauser

No, since it's all part of the Sinclair Television Group, when we do our earnings calls, we'll just be talking about the consolidated company. We'll be able to give you some color, though, as far as Steve Marks would typically do, we'll have Steve Pruett also to give some color as it relates to the small market, but we will not be breaking out the financials on those calls.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Okay. And you have favored duopolies in the mid-markets in the past. With regards to that, what's your strategy for small market? Should we expect you to have a similar strategy?

David D. Smith

I think as we said a minute ago, we expect to, where possible, to create as much operating synergy as we can. So if that requires an acquisition and is permissible under the rules, then we'll do them. And if it requires some other type of structure to get that scale, then we'll make an effort to do those types of things.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

And then for clarification, I know you said that most of the synergies are coming from retrans. Are any of these stations currently getting retrans?

David D. Smith

Yes.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Any pay in reverse comp?

David D. Smith

My sense is they're all pay in reverse comps.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

They all are? Okay. And then for clarification again, for the FOX stations, is it fair to assume that they'll roll on to your current agreement with FOX and the expiration on the affiliate agreements will be 2017?

David D. Smith

Yes, I think that's reasonable.

Operator

Our next question comes from the line of Marci Ryvicker with Wells Fargo Securities.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Just 2 questions. I want to clarify some of the numbers you gave. Lucy, is all of this net of the stations that you're selling?

Lucy A. Rutishauser

No, this is just as it pertains to the COX and Barrington stations that we are acquiring.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Well, you gave specific numbers for those stations but then you also updated your pro forma 2011 and pro forma 2012. So is that -- so those pro forma numbers you gave, those still include the stations you're selling?

Lucy A. Rutishauser

Okay, so -- well, just to be clear, are you referring to the Lansing and Providence stations that we're selling?

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Syracuse, Peoria.

David D. Smith

Syracuse and Peoria, no, those numbers remain in our numbers.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Okay. Are they -- I'm assuming they're not that material so that when we do update our models, we can still go off of the pro forma '11 of $1,149,500,000 and the EBITDA, $493.8 million.

David B. Amy

Yes, I think that's fine.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Okay. And then in speaking to one of your peers, they suggested that going smaller market is not a good strategy and this is before you made your announcement and they have chosen to not do that. So can you talk about why you think this is a good idea and what Sinclair specifically can add here because it sounds like you're taking 2 companies, operating them separately but kind of adding them together with the major synergies being retrans. What else are you adding here?

David D. Smith

Well, look, I think it's -- first of all, let's backtrack a little bit. Yes, there's retrans synergy but the longer-term synergies are going to be a function of the overall mass that we bring to the table in terms of operating the business on a day-to-day basis. And the really longer-term strategy and I don't know what the definition of longer here is, it could be 2 years, could be 3 years, could be 4 years, is about spectrum space. And we think that the notion of having spectrum space and being a really large-scale multichannel broadcaster for the long-term is well worth the play.

Operator

Our next question comes from the line of Howard Rosencrans with Value Advisory.

Howard Rosencrans

Just in terms -- 2 different questions, 1 is in terms of the retrans. Now you're not in these market, these are new markets. So when you talk about being able to garner synergies from retrans, is that due to just your superior ability to negotiate? And my second question.

David D. Smith

Yes, yes to the first question.

Howard Rosencrans

Okay, that was easy. And the second question, what is the -- since we have this formal call, maybe you could give us an update on the tone of business of late that you're seeing in -- since your fourth quarter call. And if you could give us some color on the tone of business, if it differs materially at the newly acquired businesses?

David B. Amy

Well, thanks for the effort there to get an update on the business but we won't be talking about that now.

David D. Smith

Sorry about that, Howard.

Operator

Our next question comes from the line of Barry Lucas with Gabelli & Company.

Barry L. Lucas - Gabelli & Company, Inc.

David, you've made several comments about the subsidiary structure for Chesapeake but you've been very adept at using balance sheet and capital structure and other entities. Is there any thought or would there be any advantage to splitting out Chesapeake at some point as separately financed, separately traded public vehicle?

David D. Smith

I think the answer to that is certainly yes. I think, it's not something that we're going to evaluate until the platform has sufficient mass to it. I think, at which point in time, Barry, we'd look at it and say, is it better served out on its own with Sinclair as a principal shareholder or is it better off under the umbrella? We have time to make that decision. But that certainly is an option.

David B. Amy

Just to add a little more color to that, we have an intention to more than double the EBITDA over time. With Chesapeake and Steve Pruett will be -- part of his job duties will be to search out and find other small-market televisions to add to the group.

Barry L. Lucas - Gabelli & Company, Inc.

Great, which brings me to the next question on mass. How much more of an appetite is there and opportunity, given, if you are 30% reached today, back of the envelope numbers would suggest, I don't know, another $1 billion would get you to 39% give or take? Is that a realistic and reasonable target?

David D. Smith

I don't think -- I think it's a question of how you spend the $1 billion. If you spend $1 billion to create duopoly or SSA or just the same [ph] structures in marketplaces, then your percentage of the country doesn't change. Could you spend another $1 billion in Chesapeake? I would certainly think so, but we could also spend another $1 billion hypothetically in mid-market area. So I think there's certainly plenty of assets out there that are for sale or will likely be for sale in the future and we expect to be a candidate for those assets as I imagine everybody else would.

Lucy A. Rutishauser

And Barry, if I can just add, the 30% where we are today is total from an FCC calculation, it's about 17% coverage with the UHF discount.

Barry L. Lucas - Gabelli & Company, Inc.

Great. It's a good point, Lucy. Last item is, David, as long as you had alluded to this earlier and this is more 30,000 feet, opportunities to use this spectrum putting the UHF discount aside, you're going to have spectrum in 1/3 of the country or more assuming you are a likely candidate in some of these other asset sales. You're banking an awful lot of wireless real estate there. How do you think about that down the road?

David D. Smith

I think it's an undeveloped asset that's waiting for just a few events to take place in the industry. And I think if and when those events take place and we think there's a high probability they will, then the whole landscape for over-the-air television changes dramatically.

Operator

[Operator Instructions] Our next question comes from the line of Edward Atorino with Benchmark.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Can you talk about the competition you face in some of these smaller markets? Are they mostly independent operators? I don't think they're any of the "bigger group guys" and does that give you an advantage or a disadvantage? And second, could you talk about -- do you need any programming fine-tuning or targeting or something like that, that may be in the game plan somewhere?

David D. Smith

Well, I think there's a couple of things there. The first is when you look at a company our scale, when it comes to buying programming and doing things of that nature, I think we clearly have an advantage in terms of any market that we're in and I think that gives us an advantage from a standpoint of looking at one-off operators or two-off or three-off, kind of generally small operators. And my sense is that over the long term, it's going to be somewhat difficult for small broadcasters to keep up given the competitive landscape out there. So we think...

Edward J. Atorino - The Benchmark Company, LLC, Research Division

That's my point.

David D. Smith

Yes, exactly. And I think that's the precise point. So we think it puts us in a position to certainly work out structures or transactions with people in these smaller markets that can be of assistance to them and to us at the same time. But again, our model in doing all this has never wavered. It's fairly straightforward. If we can buy businesses at the right price that are accretive to our free cash flow, then we're a candidate.

Operator

Our next question comes from the line of Tracy Young with Evercore.

Tracy B. Young - Evercore Partners Inc., Research Division

Two things. Congratulations on your deal with DIRECTV. I just want to confirm that's your major deal for 2013 for your stations. The second question, is there anything else that we should be thinking about as we adjust our models for 2013 besides the 2Q close for the stations?

Lucy A. Rutishauser

Yes. The first question on DIRECTV, that is the major deal for this year. And Tracy, I'm not sure when you might have joined into the call. I did give a little bit more detail on the '13 numbers, so if you need this, you can give me a call afterwards.

David D. Smith

Just one political note. It's worth noting that the DIRECTV and Sinclair transaction was accomplished without regulatory intervention. For those that are always curious as to why the government gets involved in things, private market does work well when left alone. So that is a footnote to the deal.

Operator

Thank you. We've come to the end of our Q&A. I'd like to turn the floor back over to management for closing comments.

David B. Amy

Thank you, operator, and thank you, everyone, for your time today and look forward to our next call with you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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