Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Tribune Media Co.'s bidding has gone live. 

Twenty-First Century Fox Inc. and Blackstone Group LP are reportedly teaming up against Sinclair Broadcast Group Inc. for control of Tribune's 42 local television stations, including KTLA in Los Angeles and New York's PIX11 (as well as 14 Fox affiliates). The private equity firm would fund the all-cash bid, while Fox would contribute its own in-house stations to a joint venture that would act as Tribune's effective acquirer. 

As if the Murdochs didn't have enough on their plates.

Fox is, of course, grappling with the firing of its top on-air personality, Bill O'Reilly, amid sexual-harassment scandals. It's also trying to prove to a U.K. regulator that it's "fit and proper" enough to take full ownership of British broadcaster Sky Plc. And it's keeping watch of big M&A movement among fellow content providers, such as Time Warner Inc., a target Rupert Murdoch once had his eye on that's now selling to AT&T Inc. But the pressure to merge among TV-station owners is proving hard to resist.

A Year's Worth of Options
The time is right for Tribune to sell itself
Source: Bloomberg

Tribune announced more than a year ago that it would explore strategic options, and it was just in February that Fox CEO James Murdoch said the company wasn't inclined to buy more TV stations in the U.S. Two things changed recently, though: a more friendly merger environment in the industry, and the opportunity for Fox, which clearly has its hands full, to team up with a deep-pocketed partner such as Blackstone, the world's largest private equity firm.

The Federal Communications Commission -- seen as broadly more pro-deals since Ajit Pai was elevated by President Donald Trump to agency chair -- is tinkering with the cap on station ownership, which opens the door for would-be dealmakers. It's forcing the Murdochs to now quickly weigh the cost of doing a deal with Tribune against the cost of letting Sinclair have it. A combined Sinclair-Tribune would mean more leverage in future carriage negotiations with Fox.

Having a bidding partner makes this an easier decision for Fox. Blackstone's willingness to fund the cash portion of the deal means Fox's leverage -- already set to spike if its Sky takeover offer gets clearance -- won't need to stretch any further. It also doesn't create too much added distraction for the Murdochs and other management while they focus on Fox's biggest and most needy business, Fox News.

Bigger Fish to Fry
Fox is funding its purchase of the 61% of Sky it doesn't already own with a combination of cash and debt. Its leverage ratio will climb to above 4:
Source: Bloomberg, company filings

But as always, it will come down to price. There's other competition looming: Bloomberg News reported in March that Nexstar Media Group Inc. was considering adding to its TV-station empire after beating out Meredith Corp. in a takeover battle for Media General Inc. last year. But while Blackstone surely has the ability to knock out Sinclair or Nexstar, it won't overpay.  

In early trading on Monday, Tribune shares at times traded above $40 apiece, surpassing the high-$30s that Sinclair was previously said to have been looking to pay. The rush to take advantage of laxer regulations and consolidate buying power amid concerns about the impact of cord-cutting millennials on profit margins and advertising sales could make buyers more willing to stretch on price.

That said, there's an awful lot of takeover premium baked into Tribune's stock price -- it hasn't traded above $45 since the summer of 2015. The outlook for Ebitda is choppy even with forecasts for slow but steady revenue growth and yet Tribune is now valued at a multiple of about 14 times what analysts estimate it will earn this year. That compares with Nexstar's final bid for Media General, which when announced valued the target at about 8 times then-projected Ebitda for 2016.   

How Much is that TV In the Window?
Like peers, upward swings in Tribune Media's Ebitda and revenue are tied to election years, when political advertisements typically tend to rise
Source: Bloomberg
Note: Tribune Media spun off its Tribune Publishing arm in July 2014. Tribune Publishing has since renamed itself Tronc, for reasons we do not understand.

Fox and Blackstone may not even need to offer materially more than Tribune's stock price to win this fight because they have cash on their side. With the future of TV stations far from certain, that may be a more appealing option for Tribune's shareholders.

Tune in next week for the next episode of this season's media bidding war: Tribune's earnings. 

Peter Grauer, chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director at Blackstone.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Meredith -- scorned (for now) by magazine publisher Time Inc. -- is also in the background, but may not have the financial wherewithal to compete.

  2. The offer also included a contingent value right that was to be based on the proceeds from the disposition of Media General's spectrum in the FCC auction. As of February, Nexstar estimated the value of the CVR to be between $1.70 and $2.10. Adding the high end to Nexstar's final bid for Media General gets you to a multiple closer to 9.

To contact the authors of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net