Description

SSP (85M shares pro forma; $1.5B market cap) is an under-earning, underfollowed, high free cash flow, conservatively managed, family-owned media broadcasting company with an over-capitalized balance sheet, near-term and mid-term catalysts, a long-ramp of retransmission renewal driven growth, with a $30+ target price in 3-4 years. 

The broadcasting industry has been extensively covered on VIC. 

Here is a list of write-ups: JRN, SBGI, LIN, NXST, GTN, and MEG.  They provide an excellent overview of the industry including the opportunities (retransmission revenue, consolidation) and the challenges/controversies (JSA/sidecars, TV ad spend, reverse retransmission contracts).

While the same overarching themes apply to SSP, except JSAs/sidecars which do not appear to be an issue for SSP, I believe there are some unique aspects to the SSP story that make it a compelling investment, including an overcapitalized balance sheet and a long retransmission runway.

BUSINESS OVERVIEW

SSP spun off its cable network assets in 2008 while retaining the broadcasting and newspaper assets.  With the pending double merger/spin deal with JRN (announced in July, more on this later) SSP will become a pure-play broadcasting company with an attractive political footprint in OH, CO, MO, FL, AZ, WI, and NV.  

Prior to the deal, SSP was the largest ABC affiliate, by households, and with the closing of the deal, SSP will add FOX and CBS stations to its portfolio of ABC and NBC stations.

SSP also owns four original shows – The List, Let’s Ask America, RightThisMinute, and TheNow -  which saves on syndication costs  of around $15-20M per year. SSP also owns the advertising revenue stream with the option to syndicate these shows to other stations. Finally, SSP owns some digital assets – Newsy (video news service which powers the video on the WSJ website), DecodeDC, and a few weather apps.

In July, SSP and JRN announced a double merger/spin of the respective companies’ broadcasting and publishing assets.  For a description of the pending deal, please review the press release available here:

http://www.scripps.com/press/details?id=1357

For a detailed overview of New Scripps including station portfolio and footprint, please see the investor presentation available here:

http://phx.corporate-ir.net/phoenix.zhtml?c=98686&p=irol-presentations

VALUATION

Special dividend:

When the deal closes, SSP shareholders will get a $60M special dividend or $1.05 per share.

Newspaper assets:

I don’t have a strong view of these assets which will be spun out.  They are projected to generate around $55-60M of EBITDA with no debt. At a 4.0x multiple, the assets will be worth $2.30-2.50 per share to SSP shareholders.

Balance Sheet

The business generates high free cash flow which is generally greater than net income. 

Each incremental dollar of EBITDA translates into around $0.55-0.60 in free cash flow. 

I expect SSP to generate almost $600M of cumulative EBITDA in 2015-2016 and $330-360M of free cash flow, which could bring down net debt leverage from almost 2x to modestly net cash by end of 2016.  Management seems comfortable levering up to 3x; indeed, 4x is not unreasonable because broadcasting peers have leverage in the 4-7x range.  At a 3-4x leverage, management could have $1.0-1.2B of excess cash on 2016/2017 average EBITDA of around $300M+, which could be used to repurchase 40-50% of shares.

Retransmission opportunity

SSP’s average retransmission fees are only around $0.25 per sub per month versus broadcasting peers close to $1 per sub per month due to legacy contracts signed related to the spin of the cable network, Scripps Networks which resulted in SSP getting paid below market rates.  As these contracts expire, SSP could begin to capture a more industry-peer like rate. 

This retransmission renewal schedule, which is essentially a normalization of SSP’s retransmission to average industry rates, will drive a long runway of growth through 2020.

The renewal schedule includes a large gap-up in retransmission in 2015, followed by step-ups in 2016 (a pull forward of Comcast subscribers under the Charter deal that would have otherwise renewed in 2019), 2017, and 2019, due to the Comcast renewal at the end of that year.

As these contracts renew, retransmission ramps up to $1.00+ from $0.25, not including contractual escalators which could drive it even higher. I don’t have similar visibility into JRN’s retransmission schedule and only incorporate contract escalators which may well turn out to be conservative.

Management projects retransmission revenue for the combined broadcasting company to be greater than $165M in 2015, from $90-95M in 2014, and based on our understanding of the upcoming renewal schedule retransmission could be close to $300M by 2020. 

SSP has high exposure to ABC (15 of 34 stations) with only 2 CBS and 3 FOX stations.

SSP’s ABC stations are up for renewal in January and is expected to cover all legacy 11 ABC stations.  If the company successfully renews these contracts for five years, it would provide some certainty (similar to the point made by engrm842 in the MEG write-up) and remove this overhang on SSP, somewhat independent of what happens to its broadcasting peers. 

While hard to say what terms will be agreed upon with the renewal, ABC appears to be less confrontational about reverse retransmission compared to CBS/FOX and Sinclair just renewed their ABC contract earlier this month. Please see the press release here:

http://www.sbgi.net/site_mgr/temp/ABC%20renewal%202014.pdf

SBGI gave very little detail in the release and I’m not sure how to get comparisons because they are rolling contracts with lots of expiration dates and nobody is really talking about their terms.  I have not seen a Marci Ryvicker report or other analysis that talks about ABC.

Digital

SSP is incurring around $20-25M of incremental digital expenses with no (as yet) revenue to show for it, which partly explains why SSP is under-earning versus peers (margins are half that of peers).  These expenses (“investments”) could be worth around $2.00-2.50 per share if they are stopped or are able to generate a reasonable type of return. 

For a nice overview, of these digital initiatives please see the series of deep-dives at NetNewsCheck.com here:

http://www.netnewscheck.com/tag/digital-deep-dive

I don’t have a strong view on how successful these initiatives will be or how to value them.

Advertising / Political

I don’t have a strong view of advertising spend growth and project a low single growth level in line with GDP. And like other broadcasters and with an attractive political footprint, SSP gets a nice political cash windfall in 2016.

Radio

With the JRN merger, SSP will have some radio assets which are relatively small and will contribute around $20M EBITDA. I refer readers to andreas947’s write up on JRN for a discussion of these assets.

Expenses and synergies

SSP’s corporate expenses are running at around $65-70M, pension expenses at $4M, and cost synergies at $35M.

In total, 2-year average EBITDA could grow to $300M+ by 2016/2017 from around $200M in 2014. 

At an 8-10x EBITDA multiple, SSP could be $30-40 when including use of balance sheet, special dividend, publishing assets, and optionality around the digital initiative.

It is unclear if there is any incremental value in SSP’s spectrum.

Management / Scripps ownership

The Scripps family will retain voting control of New Scripps.  This is not necessarily a negative because the Scripps Family has a track record of value creation and SSP management appears to be thoughtful allocators of capital.  Management acquired the McGraw Hills TV stations at a reasonable 8x EBITDA making legacy SSP the largest ABC affiliate and bought back 2% of shares when the broadcasting companies came under pressure due to the FCC’s review of JSAs/sidecars. 

ATTRACTIVE ASSET

SSP makes an attractive acquisition target.  As a standalone, SSP’s retransmission contracts won’t normalize until 2019.  On the other hand, a buyer could potentially fold up the Comcast contracts sooner and immediately capture the upside. That said, the Scripps family retains voting control and they have no interest in selling the business. 

Catalyst