Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message| ()  

Shares of the Sinclair Broadcast Group (SBGI) are trading with gains of some 30% over the past trading week, thereby sending shares to levels not seen over the past fifteen years. Shares rose some 10% in Thursday's trading session as the television broadcasting company announced the acquisition of Fisher Communications (FSCI). Shares rose another 16% on Friday as investors were digesting the news, only to fall back 8% half way during Monday's trading session.

The Deal

Sinclair Broadcast Group announced that it has entered into an agreement to acquire Fisher Communications in a $373 million deal. The offer values shares of Fisher at $41 per share.

While the deal only offers a 5% premium compared to yesterday's close, the price represents a 44% premium over the closing price of the 9th of January, when Fisher announced a review of its strategic alternatives.

Fisher owns some 20 television stations, reaching almost 4% of the US television households. The company furthermore owns 3 radio stations in the Seattle market.

CEO David Smith commented on the deal, "We are excited to acquire Fisher and expand our coverage westward, especially in the two key markets of Seattle and Portland. Started in 1910, Fisher's history of operating television and ratio stations in the northwest corner of the US has played an important role in its communities in producing high-quality local news. We look forward to expanding upon those traditions and improving the cash flows of the stations through the benefits that come with our scale."

Fisher Communications generated full year revenues of $168.2 million for 2012, on which the company managed to earn $13.2 million. The company operates with $20.4 million in cash and equivalents, and has no debt outstanding. As such operating assets are valued around $353 million, or around 2.1 times annual revenues and 26 times annual earnings.

At least two-thirds of Fisher's shareholders would need to vote in favor of the deal to make the transaction succeed. The deal is furthermore subject to approval from the Federal Communications Commission (FCC) and is subject to normal closing conditions.

Valuation

Sinclair Broadcast Group ended its fiscal year of 2012 with $22.9 million in cash and equivalents. The company operates with $2.27 billion in short and long-term debt, for a net debt position of roughly $2.25 billion. Financing of the deal should not be a problem after the company refinanced its existing credit facility and received additional term loans on Wednesday.

For the full year of 2012, Sinclair generated annual revenues of $1.06 billion, up almost 40% on the year before. The company nearly doubled its annual earnings to $144.7 million, or $1.54 per diluted share.

Factoring in a 8% correction, the market values Sinclair's equity at little above $2.0 billion. This values the company at around 1.9 times annual revenues and 14 times annual earnings.

Sinclair Broadcast currently pays a quarterly dividend of $0.15 per share, for an annual dividend yield of 2.4%.

Some Historical Perspective

Shares of Sinclair Broadcast have seen movement over the past decade. Shares peaked at $17 in 2007 and fell to lows of $1 in 2009 as the slower economy and a weak balance sheet put pressure on the valuation of the equity of the firm.

Shares steadily recovered towards $12 in 2012, and have already returned some 90% in 2013, currently exchanging hands at $25 per share. At these levels shares remain within sight of all time highs, set around $30 back in 1998.

Between 2009 and 2012, Sinclair has steadily grown its revenues and net earnings, driven by its acquisition-based growth strategy.

Investment Thesis

Sinclair Broadcast Group has successfully grown its operations in recent years by relying upon an acquisition-based growth strategy. In 2011, Sinclair acquired Four Points Media Group for $200 million, followed by the $412.5 million acquisition of six stations from Newport Television in 2012.

The latest deal adds significantly to the operations of Sinclair Broadcast. The $373 million deal will increase annual revenues by some $168 million, or some 16% of 2012's annual revenues. The deal values the company at 2.1 times annual revenues, a multiple in line with Sinclair's own valuation of 1.9 times annual revenues.

Fisher Communications is much less profitable compared to Sinclair, as the deal values the company at 26 times annual earnings. This is a significant premium compared to Sinclair's own valuation at 14 times annual earnings. Yet the company stated that it sees opportunities for synergies, which have not been quantified by Sinclair.

Investors applaud the latest acquisition, sending shares to levels not seen since 1998. While the overall valuation is still appealing, and Sinclair's growth track record is strong, I will hold off making an investment at this point in time.

The significant momentum and the increase in leverage make me hesitant to pick up shares at this point in time. Investors looking to make a long term investment should wait for a significant pull-back before reconsidering their standpoint.

Source: Sinclair Broadcast Group Has Too Much Momentum Given Fisher Acquisition