Note: First VIC posting, never going to try to use bullet points again from word. Huge failure, please excuse formatting (spaces between bullets)

Intro:

Fisher Communications in a VIC name that has been around for a while, but has recently become relevant again as a potential opportunity.  Maggie2002 did a helpful write-up in May, 2010-anyone interested should consult that analysis as well. The basic premise here is that you have an extremely cheap broadcasting company which is poorly run, sub scale and really shouldn't be a public company. Although I hate to use Broadcast Cash Flow, in this case it makes sense to use it instead of EBITDA, because FSCI is likely to be an acquisition target over the next 6-12 months and its corporate costs are bloated enough to obscure the valuation of its assets. These costs will go away (including public company costs, management costs etc) when a larger strategic makes a play at FSCI. We believe FSCI would have already been an acquisition target, if not for having until recently having other extraneous assets and a management team with no desire to sell.

We value FSCI at $41 per share in value as an acquisition target, versus the current trading price of ~$26. That is assuming 8x BCF for the TV stations, at a discount to recent multiples for transactions.

The activist angle has been around FSCI for a long time-Mario Gabelli has been pushing for them to be a seller for years, but it appears that the clock has finally run out on management's stonewalling to keep their jobs.  On December 5, GAMCO filed a 13d with the SEC stating they are looking at board nominations and Towerview filed a D the next day stating that they would be interested in working with other investors. Together these two funds control 37% of the vote. Normally the staggered board would stop them from being able to make a ton of progress, but the heavy lifting is done, with 3 board members of the 9 already placed there by FrontFour (activist spin out from Pirate Capital). There are 3 class II Directors whose terms are expiring in 2013, and we would expect all of them to be in play-Colleen Brown (CEO), Donald Graham (original founding family), and Brian McAndrews. Willey, Goldfarb and Troy were all nominated by FrontFour and should join together with the new directors to shop the company. We believe the market is overlooking the importance of the most recent activist move, given fatigue over an activist campaign that has gone on for years.

We would expect GAMCO to nominate new directors, and for them to be placed on the board in May of 2013. From there we would guess they would start a strategic process to sell the assets, which could take another 6 months or so. All in, assume a timeline of year with upside of approximately 60% if it plays out the way we expect.

Background:

• Fisher Communications is a broadcasting company, primarily operating free to air local TV stations in the Northwest
  • Company was founded in Seattle in 1910 as a flour mill operator and has morphed it's business over time

• More recently the company has undergone a restructuring as it has generally trimmed its focus towards TV broadcasting
  • Sold 24 small market stations in Eastern Washington and Montana to Cumulus in 2006 for $33MM
    • Kept Seattle stations and Great Falls (unclear why they held on to Great Falls at this point)
• Sold a 2% stake in Safeco Insurance to Liberty Mutual in 2008
• Sold Liberty Plaza for $160 MM (versus $108 MM in book value) to Hines Realty in December 2011
  • Prime property, with strong rents and a data center that has seen strong demand
  • Sold property at a 5% cap rate
• Divested of Great Falls stations at end of 2011 (just leaving Seattle radio stations)

• The primary remaining assets are ABC/Univision duopolies in Seattle and Portland
  • They are the #13 and #22 DMA respectively
  • In both cities, the ABC affiliate is a strong #2 to Belo's assets and has seen strong market share growth over the last 5 years

• Fisher also owns 16 other TV stations across 7 other markets primarily in the Northwest and California
  • Paid a 15x multiple ($55MM) for Bakersfield duopoly in 2008 in a deal that will mark the top of the market
  • It is estimated that Portland/Seattle make up approximately 60% of revenue for the TV segment
  • All of the other markets are in sub 100 DMA’s
  • Company recently paid $9MM to add another station in Eugene, creating a duopoly
    • While we generally don’t like this mgmt team allocating capital, paying mid to high single digit BCF to create a duopoly isn’t the end of the world

• FSCI has exposure to approximately 3.5% of viewers in the US, relatively small for a standalone broadcasting company

• Colleen Brown was elected CEO of Fisher in 2005 after a 25 year career in Media that included stops at Gannett, Lee and Belo
  • The general consensus is that she has done a good job of growing market share and solidifying #2 position in Seattle and Portland, but poorly in everything else
    • Missteps include Bakersfield acquisition, inability to get margins anywhere in-line with the industry, generally poor capital allocation and poor governance
    • She is the primary impediment to business being sold, sees herself as someone who can grow business as opposed to selling
• She owns approximately $2 MM in stock

Investment Thesis:

• Board members put in place by activists already control 3 of the 9 seats, this will be going to a majority after annual meeting in May (6 of 9) if Gabelli puts up a new slate (which seems likely)
  • Concentrated shareholder base and past success make it unlikely that management would win a proxy fight battle

• Portland/Seattle are attractive large DMA’s with good demographic trends, we think they would be good markets for larger strategics to want to expand
  • Most of the value of FSCI is in these two cities

• Gabelli has made it clear over a long period of time that he thinks FSCI should be sold, this will be his chance to act upon it

• Stock is worth approximately $41 per share assuming 8x BCF on the TV side and including $5MM of corporate costs in TV BCF
  • Newport TV sold for 10.5x BCF this summer, and Gannett and SBGI have both paid 8x+ (to the buyer) recently

• Company has been historically mismanaged, margins are 10% lower than their competitors despite having attractive stations, much more upside if you get paid for any of that margin improvement opportunity
  • Mgmt used to state that they could get to 40% margins on TV side, have since dropped that claim
  • We believe SBGI etc could get more out of these stations

• Retrans contracts provide a nice tailwind to earnings on a full year basis for 2013

• Absent a sale, opportunity for improved capital structure with net cash on the balance sheet even after the large one-time dividend in October (see Gabelli filing on levered recap)

• FSCI announced on 12/17 that they plan on spending $15MM in share repurchases in 2013, which should be a good use of capital

Activist Campaign Specifics:

Valuation:

We are valuing FSCI in terms of value to a strategic, because we believe that is the most likely outcome and core to the investment thesis. We assume a BCF multiple plus an estimate of the amount of expense from Corporate that really should be in BCF-rent on Fisher Plaza allocated to TV stations plus some other odds and ends. Please note that multiples on similarly attractive assets in recent transactions have actually been higher.

Also noted is valuation as a standalone basis-we do not think that it trades at a discount to standalone value. Possibly over time if they were to make smart acquisition and leverage their corporate costs, it could become attractive-but we would not invest behind that thesis.

M&A Environment:
The M&A environment in Local TV stations has generally been robust, although not quite as excessive as pre-recession. 8x+ BCF multiples to the buyer are common for the larger and more attractive transactions. Sometimes the BCF multiples by the acquirer will be materially different because of assumed synergies with duopolies etc reported by the acquirer.

Generally Local TV is moving more and more towards a scale business. To be relevant with advertisers, station operators need reach; to negotiate retrans with MSO’s it is helpful to have more stations and the same goes with negotiating network deals. This has led to a general consolidation in the industry. We would expect this consolidation to continue.

We believe the reasons FSCI has not participated in the consolidation stem mainly from management, and secondarily from asset mix. Mgmt does not own a lot of stock, and is economically incentivized to keep their jobs. We do not expect this to change, but believe it will be taken out of their hands. Secondly, having the real estate and the radio assets may have quelled some interest because TV operators didn’t want to deal with the disposition. The real estate is gone and the radio has shrunk-we would expect they could sell the radio stations to someone like an Entercom in advance of any larger deal.

As you can see from the below chart, there have been very healthy multiples paid for scale TV assets in the last couple of years. We would expect SBGI, LIN, Gannett, Journal Communications and EW Scripps to be players that would have some interest. BLC and Meredith can’t bid, Tribune seems unlikely, as does Nexstar.

Risks:

• FSCI is not cheap on a stand-alone basis because of the egregious G&A costs, so if the activists fail to gain traction it is not a great opportunity
• Management has proven generally ineffective in operating the business, but relatively effective at being impediments to change-could be value trap if not sold; corporate costs are real and cannot be ingored
• Business is very sensitive to the regional economy in the Northwest
• Portland under-indexes for ad buying, which hurts the attractiveness of the tv station there
• Low liquidity in stock, makes it difficult to change your mind