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 negotiations.
“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,” saidWells 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.”
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