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Fisher Communications, Inc. (FSCI)

April 11, 2013 3:00 pm 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

Analysts

Aaron Watts - Deutsche Bank AG, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Davis Hebert - Wells Fargo Securities, LLC, Research Division

Graham Meharg

Douglas M. Arthur - Evercore Partners Inc., Research Division

Operator

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

David B. Amy

Thank you, operator. Good afternoon, everyone. Participating on the call with me today are David Smith, President and CEO; and Lucy Rutishauser, Vice President, Corporate Finance and Treasurer. And before we discuss the transaction, Lucy will make our forward-looking statement disclaimer.

Lucy A. Rutishauser

Thank you, Dave. Certain matters discussed on this call may include forward-looking statements regarding, among other things, future operating results, performance or achievements. 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 joint press release issued this morning, as well as 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 detail to assist the public in their analysis and valuation of our company.

David B. Amy

Thank you, Lucy. This morning, we announced that we entered into a definitive merger agreement to acquire Fisher Communications for approximately $373.3 million. Fisher has no long-term debt and is expected to have approximately $20 million to $25 million of working capital at the time of the closing. And with the terms of the agreement, Fisher shareholders will receive $41 in each -- in cash for each share of Fisher common stock they own. Sinclair expects to finance the purchase price through cash on hand, a bank loan and/or by accessing the capital markets.

Fisher owns 20 television stations in 8 markets, reaching 3.9% of the U.S. television households; and 3 radio stations, which are in the Seattle market. Additionally, Fisher previously entered into an agreement to provide certain operating services for 3 TV stations, including 2 simulcasts, pending regulatory approval. The transaction represents a 6.4x multiple on 2011-2012 average EBITDA, including approximately $26.4 million of synergies for a 12.4x sellers' multiple. After synergies, the transaction would result in less than a 0.2x increase to our 2012 total net leverage and would add about 0.3x turn to our 2013 estimated total net leverage calculation. On a 2-year 2012-2013 average, total net leverage is estimated to be below 5x. Assuming an 8.5 EBITDA multiple, the $26.4 million of incremental EBITDA we believe we can create equals to approximately $224.4 million of added equity value or $2.75 per share to Sinclair shareholders.

In addition, Fisher being a Seattle-based company, has been focused towards the development and integration of the digital elements of television, which we see as being an additive hidden value as we continue to invest and grow that aspect of our business. The transaction is subject to approval by the Federal Communications Commission, antitrust clearance and the affirmative vote of 2/3 of Fisher's outstanding shares and other customary conditions. The transaction is expected to close and fund during the third quarter of 2013, subject to these closing conditions. On a pro forma basis, assuming the consumption of Fisher and all other previously announced transactions, Sinclair will own and operate, program or provide sales services to 134 television stations in 69 markets. Our station group will reach approximately 33.7% of U.S. television households, and our portfolio will include 29 FOX, 24 CBS, 21 CW, 20 MyNetworks, 19 ABCs, 14 NBCs, 5 Univisions, 1 independent and 1 Azteca station. In addition to our primary channels, we will also be airing content on another 99 sub-channels.

Let me now turn it over to David Smith.

David D. Smith

Thank you, David. Fisher is a respected company with a long history in the broadcasting space, and we are very pleased to have the opportunity to bring these stations into our portfolio. As David mentioned, we expect the merger to be accretive for us, creating meaningful value for our shareholders. In the past 18 months, as you know, we've acquired or contracted to acquire $2 billion in broadcast assets, including 81 television stations and 3 radio stations. Our average buyers' multiple of 6.1 represents just over $100 million of EBITDA creation through our scale and our efficiencies. At an 8.5 multiple, this translates to approximately $864 million of equity value or $10.60 per share for Sinclair shareholders. On a free cash flow basis, the completed and impending acquisitions are expected to generate approximately $175 million of average free cash flow, $150 million in odd years and $200 million in even years. This equates to $2.13 of free cash flow per share.

Lucy will now take you through a few historic numbers to help you all build your models. Lucy?

Lucy A. Rutishauser

Thank you, David. On a pro forma basis for 2011, assuming consummation of all acquisitions announced, Sinclair's net broadcast revenues after synergies would have been $1,326,700,000 and EBITDA would have been $545.4 million. 2012's net broadcast revenues after synergies, and including the transactions, would have been $1,531,200,000 and EBITDA would've been $679.2 million. For political, 2011's pro forma political, assuming the transactions, would have been $23 million. And 2012's pro forma political would have been $185 million. Now that should be sufficient details to get you through your 2013 models as it pertains to calculating valuations and pro forma leverage. Just another note, we expect the Fisher stations to add about $6.5 million to our capital expenditures and $10 million for film payments, and that $10 million is already reflected in the EBITDA numbers.

So with that, we'd like to open the call up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Aaron Watts with Deutsche Bank.

Aaron Watts - Deutsche Bank AG, Research Division

Just a couple for me. With the savings you talked about, Dave, the $26.4 million, is it fair to assume that a lot of that upside is coming from bringing these stations on to your existing distribution agreements? Or maybe, it's something else, too, and you could walk us through that a little bit?

David B. Amy

Yes, it's a combination of all that, Aaron. It's the distribution agreements, the nature of just Fisher being a public company and us being a public company, and the implied savings that we'll see there. There's other synergies that we bring to the table that come from us in just in terms of the size that we have and what we'll be able to do for the business. But what we look at is synergies that we can bring to the table within the first 12 months of the year.

Aaron Watts - Deutsche Bank AG, Research Division

Okay. And actually, just 1 follow-on on that. I thought Fisher had negotiated a lot of their distribution agreements at the midpoint of last year, that would cover 2013 and '14. Are you able to kind of, preclude those and bring them on before the end of those new contracts? Or is that something you'll have to wait for?

David B. Amy

Well, it varies. It's not a question you can just answer specifically in regards to -- and even if we'd like to answer it specifically, we probably wouldn't be able to but it depends on each MVPD that you're talking about, in terms of the distribution arrangements that are in place. Some are, kind of, hang on for a while and some become immediately, and if not most, become immediately available to us under our agreements.

Aaron Watts - Deutsche Bank AG, Research Division

Okay, all right. And then, any thoughts as to what you might do with the radio stations at this point?

David B. Amy

Our understanding is that they work very closely with the Seattle television stations, and are complementary to, and benefit the Seattle television stations. So we've been on radio in the past, and we're familiar with what works and what doesn't work within a television market in that regard. So it will take us some time to, I guess, verify those comments that are being made to us. But at this point, no, we haven't made any decision to do anything but to continue the way they are.

Aaron Watts - Deutsche Bank AG, Research Division

Okay. And last one for me, and it's -- it doesn't have to do, specifically, with this transaction, but I think just given a lot of the talk this week about comments made by Fox out at the NAB, as well as comments made to the press by Univision, given that you're a big affiliate partner of one of those, and you're picking up some more Univision here. David, maybe you can just give us your thoughts on the networks going to cable-type model and what that might mean for Sinclair? And also, maybe how you would react to Aereo coming into one of your markets?

David D. Smith

I think there's probably some confusion as to what was intended by the comments made by either Haim Saban or Chase. So let me explain to you what our view of the comments means. Number one, the notion that they would go to cable means that they would go to cable through us. So in other words, if we made a collective decision as a group, meaning the Fox affiliates and Fox, the network said, "Hey, let's take our content and make it only available via satellite and cable," which would be fiber, generally speaking, we would substitute different programming in prime time and theoretically, other day parts as we saw fit, to provide a competitive challenge to Aereo. So in other words, if you're an Aereo subscriber, at any given moment, if you can't watch the content that you're accustomed to watching, then, what are you going to do? Most people, I think, would probably say, "Well, if I can't get what I want, I'm not paying for it?" So whether that type of structure takes 2 weeks to happen or 30 days or 90 days is to be determined, the market will determine that. But I think just the idea that Fox will go to cable means the affiliate will go to cable. Well, we're already on cable. It simply means that we'll change the over-the-air content versus the cable satellite content. That's all that means. And frankly, if Aereo wanted to come into one of our markets, another alternative that hasn't been talked about but, clearly, is on the table. There's nothing proprietary about the technology they're using, absolutely nothing. If it turns out that it was a $10 billion business, my guess is, the entire broadcast industry tomorrow will wake up and say, "Well, we'll just go and do that, too." So I have, frankly, no concern about Aereo, whatsoever.

Operator

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

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

First question, is there any incremental corporate overhead that you're incorporating in these EBITDA numbers?

David B. Amy

Yes, the fact of the matter is, they have a lease agreement with the office building in Seattle, and there'll continue to be services that they provide for their stations that will certainly continue to come out of the Seattle market. And then, of course, just operating the group will require additional overhead expenses. So yes, they're in the model. They're in the numbers.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Okay. They're included in that -- those EBITDA numbers, right? At pro forma?

David B. Amy

Yes, they are.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Okay. A question I'm getting today is now that you cover 34% of the country, how much more can you do in terms of M&A?

David D. Smith

Well, I think we can do a lot more because you have to really think about the 34% is one view of the number and the other view of the number is that UHF's count half, if you remember. So what that means is just we're probably -- I'm looking at Lucy...

Lucy A. Rutishauser

Yes. It's somewhere around 18%.

David D. Smith

So we're really only 18% to 20% the way the FCC calculates the number. So we could double, theoretically, in size, and still not be at the 39% number, which is kind of the line in the sand.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Okay. Another question, how long will it take you to realize the synergies that you were talking about? Is it instant? Or is it over a 12-month period?

David D. Smith

I think...

David B. Amy

Well, it's a combination. It all -- we expect that it will be done within the 12 months, but most of it takes place pretty quickly.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Okay. And then, my last question is, is Fisher paying the networks' reverse comp?

David B. Amy

Yes.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

All of them? Or just some of them?

David B. Amy

I think it's all of them.

David D. Smith

I think it's -- fundamentally matches up against what we do as a company. So if you're asking me if CW is paying, any CWs they might have, I would say...

David B. Amy

I was thinking the big 4. So you just think...

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Just the big -- just the big 4.

David D. Smith

Yes, I think they pay -- and consistent with what the industry does. There's nothing unusual about that.

Operator

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

Davis Hebert - Wells Fargo Securities, LLC, Research Division

I wanted to talk about or follow-up on the affiliate agreements. Do any expire I guess, particularly, the Seattle and Portland stations, do any expire between now and the end of 2014?

David B. Amy

Well, that's part of the agreement. Those -- as they come with the deal, and so we have to have affiliate agreements in place. So yes, we're -- if you're looking for, "Could they expire and be gone before we close?" that's not part of the agreement. It can't happen.

Davis Hebert - Wells Fargo Securities, LLC, Research Division

Okay. And then, I don't think you own any Univision stations, so I just wondered if you could expand on how they fit into your portfolio and strategy?

David B. Amy

Well, they're part of the deal. It's a stock acquisition, of course, so those are affiliations that Fisher has in place now. And they do very well as Fisher vehicles, so as affiliates within those markets. So...

David D. Smith

I think we just treat them like any other network. And run it like any other business.

Lucy A. Rutishauser

Yes, and those are actually coupled in multi-station markets. And we do have Spanish-language networks, Davis, that we have. As we mentioned, Azteca; we have several D2s throughout the country.

Davis Hebert - Wells Fargo Securities, LLC, Research Division

Okay. And then, you mentioned $6.5 million of CapEx so maybe, if you could expand on that a little bit? I guess, the state these stations are in and the rankings of some of their top stations, I guess, particularly, Seattle and Portland.

David D. Smith

Are you asking us how many cameras we're going to buy? Is that kind of the question or...

Davis Hebert - Wells Fargo Securities, LLC, Research Division

No, not necessarily. I guess, just what kind of upfit these stations need, are they in pretty good shape?

David D. Smith

I think it's safe to say they are, based on what we've physically seen, based on our guys being out there, the stations are in pretty good shape. So I think the $6.5 million, while it's not a plug number, it's just kind of ongoing routine stuff. Just as a way to characterize it.

Davis Hebert - Wells Fargo Securities, LLC, Research Division

Okay. And the rankings for Seattle and Portland, are those in, like, top 1 or 2 sort of area?

David D. Smith

Yes, I think the Seattle station is -- describes itself as the top news station in the marketplace. I don't have the -- how Portland gauges itself right in front of me, but it's really a serious player on the marketplace.

Operator

[Operator Instructions] Our next question comes from the line of Graham Meharg with Loeb Capital.

Graham Meharg

Just a couple of quick questions here. The first one, I didn't see on the press release, but are there any lockups? I know we've got a pretty large shareholder in Gabelli.

David B. Amy

No, there are not.

Graham Meharg

Okay. And then, if you guys on the 18% to 20% of the market, I mean, I saw the number 34%. I'm sorry, I couldn't hear you guys before. Could you just iterate sort of how you get to the 18%, 20%, how that's calculated?

David B. Amy

Yes. The 18% is calculated by simply taking UHF channels in the marketplaces, and divide them by 2. So in other words, if you look at the Seattle station, the Seattle station is a UHF channel. So if Seattle were 1% of the country, hypothetically, it would only account 0.5% of the country, for calculation purposes, because it's a U versus a V.

Graham Meharg

Got it, got it. And then, one last question for you, is there -- I didn't see it in the press release, but was the decision on FCI's board, do you guys know if that was unanimous or not?

David B. Amy

Do not know.

David D. Smith

Do not know.

Operator

Our next question comes from the line of Doug Arthur with Evercore.

Douglas M. Arthur - Evercore Partners Inc., Research Division

Yes, and most of my questions have been answered. But Lucy, given the increasing portfolio of NBC stations, is Olympic becoming a meaningful number in the even years?

Lucy A. Rutishauser

Well, it will for us. As we mentioned, with all the NBCs, we're actually now -- once we close, we'll be one of the top NBC affiliates in the country. So if you go back, really, even just 12 months ago, we had 1 NBC, and now, we're right up there as one of the biggest. So that will become a bigger part of the story for us.

David B. Amy

I think it's also, I think, we'll be either 1 or 2 in ABC and 1 or 2 in CBS.

Lucy A. Rutishauser

Yes, we're #1 in everything other than CBS and NBC, and we're in the top 1 or 2...

David B. Amy

I think I think we're 1 or 2...

Lucy A. Rutishauser

1 or 2, right.

Douglas M. Arthur - Evercore Partners Inc., Research Division

So is it -- on a pro forma basis, is -- like a Summer Olympics, could that be a $20 million swing factor for you?

Lucy A. Rutishauser

Don't know off hand.

Operator

There are no further questions in the queue at this time. I would like to turn the floor back over to management for closing comments.

David B. Amy

All right. Well, thank you, operator. And if you have any further questions regarding the transaction, feel free to give us a call. And have a good day.

Operator

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

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