Description

Investment Thesis:

Tribune is a long. A conservative analysis of sum of the parts is significantly above current trading levels while downside is limited. At the same time, an excellent management team put in place 18 months ago has started to execute on a turnaround of the operations (especially WGN) which could make the Company a multi-year compounder with  significant upside.  The Company is undercovered and underowned as a result of its long bankruptcy and only recently listed on a stock exchange.

Company Description:

Tribune is a media company composed of 3 main pieces: Local TV affiliate broadcasting, National programming via the WGN superstation and a collection of non-core assets. 

·         Tribune’s acquisition of Local TV (“LTV”) in December 2013 positions the combined company as the largest independent TV broadcast group in the U.S., with 42 stations reaching 50mm U.S. TV households, ~43% of the national total. Tribune’s diversified end‐markets include several of America’s largest urban markets, with a particularly strong presence in the Midwest and South. Tribune’s stations are balanced between The CW network (14 stations), FOX (14), CBS (6), My TV/independent stations (3), ABC (3), and NBC (2).

o   LocalTV increased political exposure. On PF basis, of their 42 stations, 13 are located in PA, FL, CO, OH, WI, MI, VA and NC.

o   NFL stations increased from 7 to 23

·         WGN is a legacy “superstation” which is a nationally distributed single feed cable network (ie a show on at 8PM NY time is on at 5PM LA time which is an inefficient way to program a channel). WGN already reaches ~75MM US households and is in the process of converting into a cable network which would maintain the same distribution but allow multiple feeds. 

o   WGN was essentially an over the air national broadcaster that broadcast local Chicago content (Cubs and Bulls games) as well as syndicated programming and reruns. The Company looks to reprogram the station and convert to a cable company with higher value, original programming. This would also enable them to move away from a single feed.

·         Non-core assets worth $30+/share. Specifically they own a 32% stake in Careerbuilder, a 31% stake in TVFN (which owns Food Network and Cooking Channel) and over 80 real estate assets (representing ~8MM sq ft and ~1200 acres of land). These 3 non-core assets are worth ~$2.5Bn (~$25/share)

o   They have substantial spectrum which should be worth at least ~$1Bn (~$10/share) and could be worth double that in certain scenarios

o   They also own digital media assets which aren’t necessarily core, but aren’t non-core either (including Gracenote which provides audio recognition software) which could be worth ~$500MM (~$5/share)

Key Investment Attributes:

·         Company is essentially under-earning on retransmission revenue as a result of lengthy bankruptcy process where their focus was not on retrans negotiations.

·         Opportunity to utilize a proven management ream to effectively reprogram a unique asset in WGN

·         Significant non-core asset value helps truncate downside.

Why this opportunity exists:

·         Taint of BK: Trib emerged from Chp 11 in early 2013 after spending 4 years in BK.

·         Change in corporate structure: Upon emergence, Trib represented both the current TRCO as well as publishing assets (TPUB) which was spun out in July 2014.

o   Transformative acquisition of Local TV station group in Dec ’13 not appreciated.

·         Company traded OTC until December 2014 when it was uplisted to NYSE.

·         Minimal sell-side coverage: No bulge-bracket bank covers the Company.

·         Concentrated investor base: Pre-petition creditors (Oaktree, JPM and Angelo Gordon) own 40% of the Company.

o   Average daily trading value of ~$30MM is small compared to $6.1Bn market cap (ie Sinclair Broadcasting whose market cap is less than ½ of Trib’s has a similar average daily trading value)

Details on thesis:

·         Incremental retrans opportunity represents major low hanging fruit.

o   Retrans for broadcasting has gone from $2MM in ’11 to $130MM in ’13 to $230MM in ’14.

§  Company still has ~half of their multichannel footprint remaining to be negotiated.

o   Excluding Local TV, Tribune affiliate stations had $0.17/mo in retrans fees v other station groups closer to $2/mo

o   Also, unlike many other affiliate groups, LTV’s agreements allowed them to keep 100% of retrans revenues through mid-’18 (at which point they will begin paying reverse comp to the networks)

o   LTV expected to generate $100MM of synergies within 5 years (assume evenly split bw revenue and cost synergies)

·         Political advertising opportunity provides incremental revenue growth as they are present in 13 swing states w both primary and general elections and #1 or 2 in news in most of those markets.

o   Political revenue has gone from $56MM in ’10 to $105MM in ’14 (and $166MM in ’12)

o   Industry-wide political ad spending increased ~50% from ’10 to ’14 and spending in ’16 is expected to be up ~35+% from ’12.

§  After the Local TV acquisition, the Company has ~21 of their 42 stations in key swing states

§  They also have 22 markets where they are #1 or #2 with local news which tends to support increased share of political ad dollars.

o   This is all incremental profit for the broadcasters.

o   On Q414 call Co said they think they can do $200MM in political inn ‘16

·         Outstanding management team has an opportunity to exploit unique WGN asset 

o   Trib is run by Peter Liguori and WGN is run by Matt Cherniss who both have excellent track records in content creation. Trib’s chairman is Brush Karsh from Oaktree who is a savvy capital allocator.

§  Liguori became CEO of FX in ’01 and essentially made FX what it is today (ie a high value cable property). He led creation The Shield in ’02, Nip/Tuck in ’03 and Rescue Me in ’04 and took the channel from zero revenue to $500MM in 5 years.

·         He was also COO of Discovery Communications

§  Matt Cherniss was EVP of Programming at Fox when the network created key content like Glee, Bob’s Burgers and Raising Hope

§  Oaktree is the largest holder of TRCO and with Karsh’s supervision as Chairman, they will work to maximize value (also note the Company has approved a $400MM share repurchase program). Over past 18 months, they have spun off publishing, sold their cars.com stake to GCI for $426MM, sold their apartments.com stake to Costar for $160MM. They will continue opportunistically pursuing monetizations.

o   This track record is very relevant given the key role that new content creation will play in turning WGN from a broadly distributed but unwatched channel to one with actual value.

§  Management believes they can eventually increase monthly carriage fees from ~$0.08/mo  to ~$0.25 which would be the low end of general entertainment cable networks (ie Bravo)

§  The Company will likely seek to negotiate retrans for broadcast channels at the same time as carriage for WGN. This allows them to utilize the leverage they have with cable companies over broadcast to ensure continued carriage of WGN (and in any event, given low carriage fees at WGN, cable companies have little incentive to drop the channel)

o   Initial results from new shows are very positive. Manhattan and Salem have been very well received and for Manhattan, WGN has seen a 173% YoY uplift in ratings vs same slot last year.

§  30% of the viewers who tuned in to Salem premiere last year had never previously watched anything on WGN.

·         Underappreciated non-core asset value worth ~$40/share

o   Company screens as optically expensive as non-core assets don’t contribute EBITDA

§  31% stake in Food Network and Cooking Channel which are valuable assets and worth ~$1.3Bn (~$13/share)(fully taxed and valued in-line with other specialty cable properties)

§  32% stake in Careerbuilder.com worth ~$300M (~$3/share)

§  ~$1Bn in real estate (worth ~$10/share)

§  Digital properties like Gracenote and baseline which generate ~$170MM in annual revenue (~$35MM/year in EBITDA) and should be worth ~$400MM (~$4/share)

o   Company is sitting on potentially valuable spectrum which is being underutilized and could be monetized under proposed FCC spectrum auctions next year.

Scenario Analysis:

·         Bear Case: $54 (~13% downside). TV valued at 8x ’15 EBITDA of $540MM, WGN turnaround fails and contributes no uplift  and incremental retrans of $10MM. Assumes no value for spectrum.

·         Base Case: $83 (~35% upside). Assume TV valued at 9x ’15 EBITDA of $582MM, WGN turnaround is modest success and incremental retrans of $31.5MM and spectrum worth $8/share.

·         Bull Case: $96 (53% upside). Assume TV valued at 9.5x ’15 EBITDA of $600MM, WGN turnaround allows for carriage fees at Bravo’s level and incremental retrains of $40MM and spectrum worth $15/share.

·         There is also a leg to the bull case which can get to $120/share (~95% upside). Under this scenario assume same TV valuation but greater uplift from WGN as Liguori executes on programming quality content. Also, spectrum could be worth $15+ in a best case scenario and non-core assets like real estate and Gracenote could contribute to upside.

Sum of the parts:

Pre-mortem/mitigants:

·         Networks may seek to claw back more retrans revenues.

o   Networks provide the valuable content which allows retrans leverage with cable companies in the first place and they may feel undercompensated for that.

§  Having said that, Co believes net retrans margins will settle out around 50% which may be lower than some market participants expect

o   To that point, FOX said they would pull their Seattle affiliation agreement with Tribune and make the station owned and operated. This would have been a material negative for Tribune but also represents potential future risks. Ultimately a deal was reached and the Fox affiliation stayed with trib but presumably on terms more favorable than Trib initially offered.

§  The fact that a deal was ultimately reached could indicate this risk is more a negotiating risk than fundamental business risk (especially because networks like Fox are bumping up against ownership caps which limit nationwide ownership of to 39% of households)

§  Similarly, CBS yanked their Indianapolis affiliation agreement from LIN and gave it to Trib as LIN’s terms weren’t attractive to CBS. This is probably the bigger risk than networks making stations owned and operated.

o   This risk is offset by the fact that for Tribune, especially, retrans revenue are all incremental.

·         Weak advertising market could impact profitability given its importance to Trib’s revenue

·         They may fail at reprogramming WGN (and at the very least, it will take a while to turnaround)

o   This risk is partially mitigated by the fact that they are starting from such a low base and have demonstrated a track record of successful programming, but is still a risk.

o   This is really the key risk here.

Appendix:

Broadcasting comps:

Station Profile:

Industry retrans landscape (from JPM)

Reprogramming uplift:

Catalyst

Company continues to execute on their turnaround strategy with well thought capital allocation policy. Given their size, liquidity and sell-side coverage increase attention on the name.