AGB 2022.7 - Nexstar Media Group (NXST)
AGB 2022.7 - Nexstar Media Group (NXST)
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Nexstar Media
“Just if you look at the evolution of the company, I founded the company in 1996 with one TV station in Scranton, Pennsylvania, that's pretty well-known. We pioneered kind of the JSA/SSA concept of being able to mine economic benefit out of more than one television station in a marketplace. We led the industry in demanding payments from legacy cable operators and distributors, retransmission consent payments, which was a novel idea in the early 2000s for local television. That now this year is $2.5 billion of our revenue. Major acquisition and rollup focus in the mid-2000s with everything from Newport TV to CCA, and then larger acquisitions like Media General and then Tribune being the largest acquisition we've made, which we closed in 2019 right before the onset of COVID.” - Chairman and CEO, Perry Sook, at the Deutsche Bank Media Conference in March 2022
Nexstar is the largest owner and operator of local TV broadcast stations in the U.S. With almost 200 stations in over 116 DMAs, Nexstar reaches 68% (without the UHF discount) of U.S. households. The company’s stations broadcast all the major networks like ABC, NBC, CBS, FOX and the CW. Nexstar also owns 31% of the Food Network (the remaining stake is owned by Discovery) and NewsNation (formerly WGN America), which is a national news network that reaches 75M households.
The company was founded by current CEO, Perry Sook, as one TV station in Scranton, Pennsylvania in 1996. Through aggressive M&A (paid for with debt + equity), the company has grown at a rapid rate. Nexstar has improved many of its acquisition targets, implementing the company’s superior operating practices. The company also pioneered many changes in the industry, including getting MVPDs to pay for retransmission of local TV broadcast signals.
Broadcast TV stations primarily make money through selling ads. Usually the station will have an affiliation with a national network. From the affiliation agreement, the TV station owner gets national programming for a fee and is required to serve some national advertising during the airing of these programs (usually during prime time). The national advertising fees are split between the network and the TV station. Margins for national advertising are thin for the TV stations.
But the remaining airtime can be filled with the TV station’s own programming, which is usually news or daytime talk show programming. These programs are only broadcast locally, and require a local sales force to sell the ad slots to businesses in the area. Margins for local advertising are higher. In 2021, Nexstar’s core ads business (national + local) was categorized into Auto 17% of revenues, Attorneys 8%, Healthcare 7%, Sports Betting 6%, Other Services 36%, and Other Goods 27%.
What interesting about Nexstar that the company was able to find new forms of revenue as the company achieved scale. The most important incremental revenue stream is retransmission fees. MVDPs like cable, telco, satellite and even virtual ones like YouTube TV and Hulu + Live TV, are required to sign a retransmission agreement with the local TV station within a DMA if they want to show the broadcast network. This means that the NBC Station in Scranton, Pennsylvania has to be paid by Comcast or Verizon for them to carry NBC in their video offering. And because many of the broadcast networks carry highly prized sports programming, MVPDs are highly incented to carry the broadcast networks.
Retransmission agreements come up for renewal every 3 years, and the company has been able to step up the payment/subscriber in most of its negotiations. That’s because Nexstar (mostly Perry) is the best at negotiating these contracts and the share of ratings of the major broadcast networks is still materially below that of what Nexstar is paid. Nexstar’s retransmission revenue has grown at a CAGR of 50.9% from 2012 to 2021. A lot of that growth has been positively impacted by the company acquiring more TV stations along the way. Since 2018, retransmission revenues has been Nexstar’s largest revenue segment.
The company guides to an average adjusted FCF number by two year cycles (political ad spend tends to be much higher in even years) and that number has grown materially over the past 5 years. For the FY22/FY23 cycle, Nexstar is guiding towards adjusted FCF above $1.4B (vs. a market cap of $7.1B).
Why is it a good business?
As the largest local broadcast TV station company in the U.S., Nexstar benefits from scale economies. At the local level it’s less pronounced, but the company owns many duopoly markets TV stations. Duopoly markets means that Nexstar owns more than one station within the same market and this is not allowed unless many stringent requirements are met. Duopoly ownership is allowed if (1) there is no coverage overlap within the market or (2) if one of the stations is not in the top 4 of stations by reach of audience within the market. Duopoly markets are efficient since there can be consolidation of facilities, management teams and the maintenance capex spend required to run the station. In 2021, 55% of station revenues can be attributed to duopoly markets for Nexstar.
At the national level, the company has better negotiating leverage with the national broadcast networks like ABC, NBC, CBS, FOX and the CW and indirectly has better negotiating leverage with MVPDs that carry Nexstar’s stations on their services. The company pays an affiliate fee to these networks so that the stations can carry national programming and serve national ads. But as the broadcast networks have seen Nexstar’s revenue stream coming in from their retransmission agreements with MVPDs, the networks have also increased their affiliate fees. What Nexstar gets paid is gross retransmission revenues and what is left over after the company pays the broadcast networks is net retransmission revenues.
As Nexstar has increased in scale, the company has become less reliant on the big 4 broadcast networks. In FY12, these 4 contributed to almost 100% of ad revenues but have declined over time to just 77% in FY21. The company has been questioned as to where the net retransmission margins will go over time, and the worry is that the networks will raise prices, hampering margins. However, because Nexstar has many CW stations (and less so MyNetwork stations), which are almost 100% net retransmission revenues, the company believes that net retransmission margins will stay north of 50%.
Nexstar also has negotiating leverage over the MVPDs when renegotiating retransmission agreements (every 3 years). This is because the company has more data than any other TV station owner to make a case for higher affiliate fees and the company can put some leverage on the MVPDs with duopoly markets and their other network offerings like NewsNation.
Lastly, Nexstar has been able to build out a very large political advertising business off the scale of the core advertising business. Political ad revenues were just $46M in 2012 and reached $508M in 2020. The best comparison is even year to even year, and keeping presidential election years separate from midterm election years. Political advertising is more stable than the core ads business as typically depends on campaign fundraising growth. For FY22, Nexstar is predicting that Political ads will generate $440M, compared to $251M in 2018, but we also have to account for the fact that Nexstar now owns Tribune.
Returns on incremental capital?
Over the past 10 years, Nexstar has spent 93% of its capital on acquisitions and 7% on capex. Because building a TV station from scratch is an uphill battle (and the company is limited by the FCC on how many stations it can own), capex spend is mostly for station maintenance. As of late, the company has been spending more on Station Repack, which is changing the spectrum band that the TV station broadcasts its programming.
On the acquisition front, the company has done two transformative acquisitions over the past 10 years. The first is the acquisition of Media General in 2016 for $4.1B, 72% in cash and 28% in stock. Also included in the deal was a CVR or contingent value rights for the Media General spectrum that Nexstar would auction after the close. The implied multiple to EBITDA was around 9.6X, before considering synergies of $75M ($25M of which was for duplicative processes). Just after the first 9 months since the deal closed, the company was able to achieve $86M in synergies. Media General was a very successful acquisition, considering the better than expected synergies (Nexstar quickly put in their own managers in place) as well as the step up in retransmission revenues from the Medial General owned stations.
After this acquisition, Nexstar was the third largest TV Station owner after Sinclair and Tribune. After the UHF discount was instated in late 2016, Tribune was the asset that both Sinclair and Nexstar were eying. Because the company had just closed the Media General acquisition, Nexstar was not in a place to bid for Tribune and so Sinclair signed an agreement to acquire Tribune in early 2017. However, the deal never closed as regulators got wind that Sinclair was not negotiating in good faith with respect to station sales and blocked the deal.
Nexstar acquired Tribune in late 2018 for $6.6B inclusive of debt, for all cash. This implies a multiple of 7.5x EBITDA after synergies of $160M ($75M of which was a step up in retransmission revenues). This was quickly increased to $185M. Although Nexstar had to divest 13 of Tribune’s TV stations to close the deal (21 stations in total), Tribune had many CW affiliation stations, which have the highest retransmission margins. The company also acquired the 31.3% ownership stake in the Food Network and WGN America which was later rebranded to NewsNation.
We estimate that Nexstar has generated returns on incremental capital between 13%-15% over the past 4 years. Because the company has made two transformative acquisitions (closed in 2017 and 2019), the return on capital is suppressed (vs. just growth through political ads and retransmission fees). However, to make up for that the reinvestment rate for the company over these years is much higher than most of companies covered so far.
And to close these deals, the company had to take on a lot of debt on the balance sheet. This has been the way the company has operated because although core advertising revenues are somewhat cyclical, retransmission and political advertising are more consistent. Furthermore, the company was able to quickly improve the acquired assets so that debt coverage ratios remained consistent, even with modest debt pay down.
Reinvestment potential?
Up to the point of the tribune acquisition, the reinvestment opportunity for the company was to acquire more TV stations in the U.S. But since the cap has been met, even after the UHF discount, Nexstar has to find other ways to reinvest capital going forward. There are been some TV station portfolio pruning and rightsizing, but that is minimal. So far the areas of focus are digital media properties and national networks.
Even starting in 2017, Nexstar’s management team has shifted the narrative around reinvestment to digital. Here is Perry Sook discussing the digital strategy on the Q1 2017 earnings call.
“Nexstar Digital will be a major growth engine for Nexstar Media Group going forward, and we're in the final stages of merging all of our digital products under the Nexstar Digital brand with a unified market strategy and message. Our intention, as stated previously, is to double the revenue of Nexstar Digital over the next five years by making smart investments in people and companies that are accretive and that complement our core competencies.”
Nexstar’s digital properties are 120 local websites and 280 mobile applications (related to each station), a consumer product reviews platform called BestReviews and political content site, The Hill. Through these digital properties, Nexstar gets over 94M unique monthly visitors and 100M monthly video plays.
As it relates to retransmission fees, while there is little reinvestment that the company needs to make, the company expects retransmission revenues to catch up to local broadcast’s share of ratings for the next 5 to 6 years. The company thinks that there is another 66% of upside to gross retransmission revenues as the contracts get renegotiated.
With a reinvestment rate between 125%-150% and a return on capital between 13%-17%, we estimate that Nexstar has increased its intrinsic value between 19%-21% annually over the past 4 years. The reinvestment rate is greater than 100%, because the company has taken on more debt for its two large acquisitions. And with high FCF generation, the company was still able to keep its debt coverage ratios between 3x-6x EBITDA.
It’s almost certain that the reinvestment rate going forward will have to come down as there are no more TV station assets to acquire. However, the company can actively pay down debt and buyback stock to get their debt coverage ratios down. This could actually be beneficial for the equity portion of the cap structure as the market could perceive it to be less risky without so much debt.
What else is important?
Food Network + NewsNation Ownership
With the Tribune acquisition, Nexstar gained both the ownership interest in the Food Network and NewsNation. Financials of Food Network are unconsolidated and brought in $239.5M in earnings for 2021. With this experience and NewsNation, Nexstar may think that they are a in a position to own and operate more national networks. In January of 2022, there was a rumored bid for the CW by Nexstar (with CBS and WarnerMedia as minority owners). Here is the WSJ article that covers it.
MVPD subscriber losses
For sometime, investors were concerned with the MVPD video subscriber losses impacting retransmission revenues in a negative way. It makes sense since most agreements are based on a per subscriber affiliation fee. However, because the company has grown in size through two meaningful acquisitions, the broadcast channels are usually included in the most basic video package and retransmission agreements are renegotiated every three years, there hasn’t been a slowdown in growth just yet. When Nexstar finally gets retransmission revenues up to the share of ratings for its channels, the subscriber losses (should they continue) will likely show in revenue declines.
Optionality
With the stations that Nexstar currently owns, the company is capped at reaching 39% of the U.S. households after the UHF discount. The company has been more vocal about the FCC potentially removing the cap altogether since acquiring Tribune. And instead of the FCC increasing the number from 39% to another arbitrary number, Nexstar’s management is advocating for removal of the cap. Their argument is that digital media companies have the ability to reach 100% of the U.S. population, so local TV shouldn’t be any different. That’s where the argument falls short. Because the idea of the cap isn’t to prevent a TV station owner to reach all of the U.S. It’s rather that the FCC doesn’t want any single entity to command that much influence over local broadcasts.
But if the cap were to be removed at some future date, Nexstar would be on the hunt for more TV station deals. Reasoning behind acquiring these assets (even at a high-ish multiple to EBITDA) is that Nexstar is the best at negotiating retransmission fees from the MVPDs and Nexstar can (1) bring the acquired stations up to Nexstar’s fee structure and, (2) the company can command even more leverage over its existing MVPD partners with increased scale. Furthermore, the company can negotiate better with the affiliate networks and have more scale within each DMA (from more duopolies).
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