Description

Recommendation: Long TRBAA

Price Target: $100/share (Base Case)

Why does the Opportunity Exist? – Following the announcement that the Supreme Court would hear the Aereo case later this year, Tribune along with its local broadcasting peers (SBGI, GCI, LIN, GTN, CBS, FOX) sold off in January anywhere from 10% for the majors to 30% for the smaller local stations. The market is worried that Aereo will win at the Supreme Court and that Netflix or one of the cable companies will acquire Aereo; eventually leading to no retransmission fees for the broadcasters.

Over the years, whenever Aereo has stimulated media headlines, the right call has been to buy the broadcasters at lower levels. The recent Aereo overhang isn’t any different. Aereo is a technology that provides consumers with the ability to transmit broadcast TV for a monthly fee; however, Aereo doesn’t pay the broadcasters for their content and retransmits the signal without permission. Even if Aereo wins at the Supreme Court (to appease the internet companies and the concerns around the digital locker), Congress will most likely amend the Copyright Act to make sure Aereo has to pay retrans. Even though Aereo is selling antennas that individually transmit a broadcast signal, it’s the collective strength of all those antennas that are able to make the signal work effectively. As a result, this means that Aereo is actually not just providing a technology product, but actually a service without legal authorization. Aereo is an exogenous risk that has had minimal business impact on the broadcasters over the last few years (Aereo is not a new offering) and the current worries create an opportunity to own the broadcasters at an attractive valuation with predictable cash flow growth streams (retrains, political revenues).

In addition to the Aereo related weakness, there are a number of “easy to fix” issues contributing to the valuation discount at TRBAA.

• Taint of Bankruptcy – TRBAA emerged from chapter 11 bankruptcy at the beginning of 2013 after spending 4 years restructuring. Crippled with $12bn of debt as part of a 2007 Sam Zell-led LBO and fast declines in publishing, Tribune was destined for a filing. After upsetting a lot of investors and creditors, Tribune has had to prove to investors that the business is a lot different today. This will eventually show through once Tribune starts to hold quarterly conference calls. 

• Concentrated Investor Base – Oaktree, Angelo Gordon and JPMorgan own close to 45% of the outstanding shares as they were the major creditors that had their debt holdings converted to post-reorganization equity. As these legacy investors move out of Tribune, it will allow the shares to flow into more natural holders.

• OTC Listing – Tribune currently trades over the counter instead of on a traditional exchange. Tribune will most likely seek to list on an exchange following the spin-off of its publishing division this year.

• Low Sell Side Coverage – Tribune has recently picked up analyst coverage from two mid-size research shops (Oppenheimer and CRT), but still no analysts covering the name from the major investment banks. Until Tribune moves to an exchange it doesn’t make sense to cover the company, because most long-only equity funds can’t own non-listed securities.

• Transformative Local TV Deal – Detailed financials for Local TV haven’t been released yet given that Local TV was a privately owned company prior to being acquired. Once Tribune begins to report with Local TV in the numbers and pro-forma guidance, investors and sell-side analysts will become more comfortable with the combined company.  

Tribune is my top choice among the local broadcasters because it is the cheapest retransmission story in the market along with having many revaluation catalysts or “multiple ways to win.”

Investment Thesis – The Aereo overhang has actually been made an already undervalued stock more attractive. At the current price, investors in Tribune get a high quality, FCF compounder with a number of valuable fundamental business levers for cheap or no-cost, including:

• Retrans step-up over the next few years (stock pricing in a fraction of upside)
• Turnaround of the WGN
• Private market takeout value for Scripps’ Food Network (TRBAA owns 31% stake)
• Dropdown of Real Estate into a publicly traded REIT
• FCF return to shareholders via buyback/dividends

When Peter Liguori (credited for building FX Networks) decided to join Tribune as CEO in early 2013, he set his vision on building a scalable TV business with strong distribution and quality programming content. Oaktree Capital agreed with Liguori plan and has completely endorsed him. Liguori’s has a two part agenda: 1) integrate and leverage the broadcasting business and 2) rejuvenate the WGN Network. As part of this dual approach, Liguori has been recruiting some of his key FX Network colleagues to Tribune in an effort to get the “gang back together.” Improving WGN will be contingent on creating the right original content while the broadcasting business is more centered around driving retrans higher and political ad dollars higher across its key swing states.  

With a 10% pre-tax running FCF yield, Tribune currently trades at a 35%+ discount to its fair value estimate. Following the spin of the publishing division later this year and potential monetization of some of its JV assets, Tribune will be better positioned to close the valuation discount to its sum of parts.

Sum of Parts Valuation –Adding up the base case values for Tribune’s different segments and netting out net debt and other liabilities, we arrive at approx. $100/share or 35% upside.

Following the recent acquisition of Local TV, Tribune consists of a number of 4 components including, broadcasting (TRB legacy + Local TV), publishing, JV assets (Food Network, Career Builder and Classified Ventures) and real estate.

• Legacy Tribune Broadcasting ($26/share) – Tribune’s legacy broadcasting segment (ex-WGN) is expected to generate EBITDA $270mm in 2013 (odd year). Tribune has 41mm household subs in its footprint currently across 23 TV stations (13 CW, 7 FOX, 2 Ind., 1 CBS). TRB Legacy is the largest CW affiliate and also has a few “Big-4” affiliates. The CW affiliates aren’t generating much in terms of retransmission fees, but the recent acquisition of Local TV should provide TRB with additional leverage to command some retrans for the CW stations. Outside of core broadcasting, Tribune also derives $3/share from its small radio broadcasting business and media services division.

• Local TV Broadcasting ($28/share) – The Local TV deal closed at year-end and makes the pro-forma Tribune the largest FOX affiliate. Local TV comes with 20 additional stations and is on pace to generate $325mm of EBITDA on average over 2014/15 (including $25mm of realized synergies).

• Incremental Retransmission Fees ($15/share) – Given Tribune’s bankruptcy, the company had a late start in terms of collecting retrans. With the acquisition of Local TV, Tribune will effectively have 3 segments of retrans: 1) Tribune Legacy 2) Local TV legacy (non-FOX stations) and 3) Local TV Fox. Collectively, pro-forma Tribune should do $100mm in retrans in 2013. Assuming approx. $1.00/sub/month along with a 50/50 reverse retrans split (following reverse retrans holidays), Tribune should be collecting $200mm in incremental retrans beginning in 2013. Discounting back the retrans value to today and applying 10-12x multiple (assuming 90% cash flow margins) results in $10 to $20+/share value. In our base case we model $15/share of value.

• WGN Network – ($21/share = $6/share today + $15/share improvement) – WGN is a cable channel that operates as a superstation feed (Channel 9). Currently, it shows mostly Chicago sports and syndicated TV shows. WGN should do $50mm in EBITDA this year with low 30% EBITDA margins. Assuming a low-end cable multiple gets to $6 value today. The incremental upside at the WGN station comes from Liguori and his team seeing the benefit from their new original content strategy. Given WGN’s 74mm homes reached, affiliate fees for WGN are coming at roughly 6 cents/sub/month. This compares to 58 cents per sub for peers, such as TBS, USA, AMC and FX. The turnaround of WGN is definitely a longer-term strategy (2-3 years), but we will get a taste of Tribune Studios first shows this April with Salem followed by Manhattan in July. Assuming Tribune can move to begin to close the gap in terms of affiliate fees and ratings, we can see $8-$20/share step up in value ($15/share ~$1.6bn base case).  

• Publishing ($10/share) – The publishing unit is currently doing $200mm in EBITDA with low double-digit EBITDA margins and consists of 8 papers. The two most prominent newspapers are the LA Times and Chicago Herald. The declines in revenues have been less steep as expected and the cost cuts implemented by Liguori have been welcomed. Publishing will be spun out this summer and is just another step by management to highlight the value of the core media asset.   

• Real Estate ($7/share) – In order to value the real estate, I assumed a sale-leaseback of the properties back to Tribune in order for the publishing business to remain an ongoing concern. The real estate was last valued by Lazard as par of the bankruptcy valuation opinion at around $525mm (9% cap rate assumed in 2009). Given the recovery in commercial real estate, it is safe to assume that the real estate is worth realistically anywhere fro a 5%-8% cap rate. Assuming a 6.5% cap rate, we arrive at $750mm in value for the real estate portfolio.

• JV Assets ($24/share) – Tribune’s JV assets include a handful of businesses, including: Food Network (31.3%), Career Builder (32.1%) and Classified Ventures (27.8%). The largest component of this value is derived from the Food Network, majority-owned by Scripps Networks. Scripps and Tribune are continually having conversations about selling back the minority stake to Scripps, but price is the gating factor. For Tribune, they are in no rush to sell it given the steady cash from. With the recent news that Discovery Communications is interesting in bidding for Scripps, Tribune might actually be better holding and waiting for a private buyer to facilitate a take-out. We are modeling 11x for Food Network, which is in-line with its higher-quality cable comps. In the case of Career Builder, it is valued at 6x EBITDA, which might prove conservative, but it reflects the more likely clearing price for the asset following the failed auction of Monster.com last year at higher multiples. Classified Ventures is the fastest growing segment of the JV assets and houses a collection of Internet assets, such as apartments.com and cars.com. The JV group is currently shopping apartments.com and will most likely follow it up with cars.com.

• Net Debt/PV of Tax Asset/Cubs Liability = Minus $35/share

• Cash + 2014 FCF = Plus $10/share

• Sum of Parts Total = $104/share (40% upside)

Catalyst