LOS ANGELES and NEW YORK—TV shares are taking a throttling in the market
over a shifting regulatory paradigm. A TV
Technology index of 19 U.S.-based television broadcasting has dropped 18
percent since March 4. During that time, the Federal Communications Commission
announced a crackdown on shared management arrangements and retransmission
“We just came back from a day in D.C. and can’t help but feel incrementally
negative on the regulatory environment—especially as it relates to pending and
future M&A,” said Wells Fargo
analyst, Marci Ryvicker this morning. “While nothing is final, at least until
the FCC’s March 31 meeting, there seems to be tremendous focus on tightening
the rules around JSAs, SSAs and retransmission consent. And given the recent
processing guidelines, we heard that no pending
deals with any sort of ‘shared’ arrangements will close until/unless they are
restructured to exclude such stations and related loan guarantees.”
Ryvicker, et al at Wells Fargo, were
talking specifically about a downgrade to LIN, Gannett, Sinclair and Nexstar.
“Given what we perceive to be an indefinite ‘hold’ on pending and future
M&A, we find it hard to see multiple expansion,” Ryvicker said.
The four stocks were downgraded to “Market Perform.” The television sector as a
whole went from “Overweight” to “Market Weight.”
Ryvicker said the regulatory situation was frustrating, “given that we really
like the underlying fundamentals of the business, as we see strong core and
political advertising revenue trends, robust free-cash flow generation, and a
nice growth trajectory for net retrains. Unfortunately, we just see the
regulatory environment worsening in the near term, which is likely to put pressure
on trading multiples as well as lead to estimate reductions—especially for those with deals pending before the FCC.
“Over the near to medium term, we foresee a ‘rationalizing’ of the sector and
truly believe that those who survive will end up in positions of great strength.
We just don’t know however, how or when this theory will play out. We really
hope our thesis proves to be wrong over the next several months. But after spending
a day in Washington D.C., we can’t get over our fear that the regulatory
environment is more than likely to remain an overhang for quite some time.
She said the stocks are likely to stay at 6-7x FCF, and that those covered by
Wells Fargo seem already to have adjusted, “which to us suggests limited
downside risk, unless there is the need for further estimate cuts. The bad news is we see limited upside
potential, all due to the regulatory environment, hence, our sector downgrade
to Market Weight.”