Summary
- Our SOTP valuation on Sinclair Broadcast Group incorporating Regional Sports Networks' (RSN) EBITDA suggests intrinsic value of $78/share, a hefty 52% upside potential.
- Concerns on RSN deal not going through such as heightened regulatory and financing risk are overblown.
- This makes Sinclair an attractive event driven play, with limited downside risk (7% downside potential in our calculation).
- The clear catalyst to re-rate Sinclair's share price to our SOTP valuation is the closing of RSN deal (expected in 3Q19).
- Ex-RSN assets, Sinclair is not a value trap as fundamentally, its local television business has nominal GDP growth like growth profile, clearly not a business in structural decline.
We take a close look at Sinclair Broadcast Group (SBGI) given Regional Sports Networks (RSN) deal. Recall that post announcement (Fri, May 3rd after the market closed), SBGI’s share price popped up by a whopping 35% to close at $61 the next trading day (May 6th). Of note, what perks up our interest given our long term value investing philosophy is that its share price has since declined by 22% off its 52-week high to $51.65.
What is the M&A deal?
On May 3rd after the market closed, SBGI announced that it has entered into a definitive agreement under which the company will acquire equity interest in 21 RSN and Fox College Sports Networks for EV of US$10.6 bn. RSN portfolio is the nation’s largest collection of regional sports channels that has exclusive local broadcasting rights to 42 professional teams (consisting of 14 MLB teams, 16 NBA teams, and 12 NHL teams). Management expects the transaction to close in 3Q19 (less than 6 months since the announcement, indicating management’s very high confidence level on low regulatory hurdles to close).
In terms of financial impact, the RSN deal is highly accretive to SBGI(explaining a 35% pop in its share price on May 6th). Specifically, the RSN deal would add $1.6 bn EBITDA (prior to synergies) to SBGI, which almost doubles its EBITDA pre-RSN (average 2019-20E EBITDA of $913 mn, average 2019-20E figure is used to smooth out election/even years, which have lumpy political advertising revenues). EV of $10.6 bn implies only 6.6x EBITDA multiple for the transaction. Furthermore, management guides that FCF/share incorporating RSN would double to $13/share. This implies a whopping 25% FCF yield.
