Sinclair Broadcast Group (NASDAQ:SBGI) just inked a huge deal that will transform its business. On May 3, the company announced it would acquire a portfolio of regional sports TV channels and the Fox College Sports channel from Walt Disney (NYSE:DIS) for $9.6 billion.
Sinclair is already the largest operator of local TV stations. This acquisition, if approved by the Department of Justice, will make Sinclair the largest player in local sports television. Not only does the deal have strong strategic merit, but it also came at a good price for Sinclair. The market agreed, sending shares of Sinclair sharply higher.
What Sinclair is getting
The sale of Fox's regional sports networks came about because of Disney's acquisition of Twenty-First Century Fox, which closed last month. Disney primarily wanted to acquire Fox's movie studios and film library to gain more scale for building a streaming service. The Department of Justice issued a decree that Disney had to divest the regional sports networks (RSNs), because it said the combination of Disney's ESPN and the local sports channels would be too dominant.
The announced Sinclair deal includes 21 regional sports networks (42 teams) and the Fox College Sports channel.
Sinclair isn't new to the sports entertainment business. The company already owns an interest in several sports assets, listed in the table below.
|Sports Assets Sinclair Already Owns||Sports Assets Sinclair Is Acquiring|
The acquired channels will dramatically beef up Sinclair's sports business, as it will be acquiring the largest collection of RSNs, with exclusive local TV rights to 42 professional teams.
Last year, the 21 RSNs Sinclair is acquiring generated $3.8 billion in revenue from 74 million subscribers. This is more than the $3.1 billion in revenue that legacy Sinclair generated last year, which means the acquired assets will become the majority of the business. This is the definition of a transformational acquisition.
What Sinclair is paying
In total, the assets Sinclair is buying are being valued at $10.6 billion, but Sinclair is paying $9.6 billion because some minority equity owners will keep their stakes. The company expects the acquired assets to generate $1.6 billion in EBITDA (earnings before interest, taxes, depreciation, and amortization) for 2019; if you divide the total valuation of $10.6 billion by that $1.6 billion, you get a valuation multiple of roughly 6.6 times EBITDA.
A valuation of 6.6 times EBITDA is not expensive. For reference, MSG Networks is a publicly traded RSN for the teams that play at Madison Square Garden in New York City. MSG Networks trades at a valuation of roughly 7.6 times EBITDA -- a 15% premium to the assets Sinclair is acquring.
The acquisition will tack on a significant amount of debt to Sinclair's balance sheet (more than $8 billion), which will likely come at a high interest rate. However, the additional debt should be manageable because cable TV channels have stable revenue streams, high profit margins, and limited requirements for capital investments.
Looking at what Sinclair is getting and what it's paying, it's apparent that the company got a really good deal. This is probably because the DOJ auction process made Disney a forced seller, which reduced its ability to negotiate a better price.
Betting on live television
At the heart of Sinclair's strategic thinking is a bet on live cable television. Sports broadcasts have outperformed other TV programming in terms of viewership; advertisers have continued to pay up for slots on sports shows because viewers tend to sit through the commercials so they won't miss any sports action.
In a press release, Sinclair CEO Chris Ripley stated: "While consumer viewing habits have shifted, the tradition of watching live sports and news remains ingrained in our culture. As one of the largest local news producers in the country and an experienced producer of sports content, we are ideally positioned to transfer our skills to deliver and expand our focus on greater premium sports programming."
Making a bet on live cable TV may be contrarian these days. In recent years, cable TV has lost subscribers due to the rising popularity of internet-only options.
Sinclair has defended the move, pointing out that RSNs have been able to mostly offset the lost cable-subscriber revenue with new revenue from the online services disrupting traditional TV. Several services such as YouTube TV (owned by Alphabet) and Hulu (owned by Disney, AT&T, and Comcast) offer live sports in their internet-only TV bundles.
Sinclair's bet on live TV with cable RSNs will likely pay off as people still want to watch sports; they may just choose to pay for them to be delivered by an online platform rather than a cable TV subscription.
A solid strategic move
Although it's too early to speculate about what Sinclair will be able to do with its new TV assets, there are a few levers it can pull to increase the overall value of its portfolio. Now that the company has greater scale, it has more bargaining power with its advertisers and content partners. For example, Sinclair could bundle its local TV stations and RSNs into a package and try to negotiate higher payment rates from TV network operators.
It's no secret that sports broadcasting rights are valuable, and Sinclair is getting its hands on a crown-jewel portfolio of broadcasting assets. What's surprising is the relatively cheap valuation multiple that Sinclair ended up paying. There are some risks in this transaction -- the amount of debt Sinclair is taking on, and the threat from cord-cutting -- but those risks pale next to the potential rewards.