Media

Warren Buffett Backs His Way Into Scripps and ION TV Merger

Jon C. Ogg

Published: September 24, 2020 12:43 pm

It’s not always the case that a company sees its shares rise after announcing that it is making an acquisition and using leverage to fund it. E.W. Scripps Co. (NYSE: SSP) announced that it is acquiring ION Media for $2.65 billion. Even after a gain of more than 15%, E.W. Scripps is worth just under $1 billion in market capitalization.

This acquisition brings a national broadcast network into Scripps’s Katz networks and Newsy, and the company’s announcement telegraphed that this will now create a full-scale national television networks business. One driver of the positive market reaction is that Berkshire Hathaway Inc. (NYSE: BRK-B) will make a $600 million preferred equity investment in Scripps to help finance the transaction.

Another benefit for Berkshire Hathaway in this transaction is that it also receives a warrant to purchase up to 23.1 million Class A shares at $13 per share. E.W. Scripps closed at $10.47 ahead of this announcement, but a gain of more than 15% took the stock very close to that warrant’s exercise price already.

While everyone will assume this is a Warren Buffett-backed deal, Berkshire Hathaway’s Ted Weschler was listed as the officer responsible for the investment. He indicated that Scripps has a history of creating value and that drove Berkshire Hathaway’s interest in the transaction. The dividend rate on the preferred shares will be 8% per year, if paid in cash, or 9%, if deferred.

According to the release, ION currently reaches more than 100 million homes via pay-TV and over-the-air platforms. The group also was shown to have annual revenue growth and earnings before interest, taxes, depreciation and amortization (EBITDA) margins that were said to be “well beyond industry averages.”

Scripps also went on to note that the ION purchase will be highly accretive and that the deal will come with $500 million in synergies over the next six years. The majority of those synergies were shown to be contractual and will come from carriage fee savings associated with the Katz networks.

As for the improvements financially ahead, the transaction is shown to increase Scripps’s reach into advertising and will allow its advertising clients to reach a larger platform to reach their targeted audiences.

The ION network is said to be the fifth-largest average prime-time audience within cable-carried networks. It generates its revenue by selling advertising in the national marketplace. ION distributes its programming through licensed TV stations that the company owns in 62 markets, as well as 124 affiliated TV stations. The company also claims a reach of 96% of U.S. homes.

When most people hear the term synergies, they assume layoffs. The statement from Scripps included how those synergies will be reached:

The combination of ION, Katz and Newsy is expected to produce run-rate synergies that reach as much as $120 million a year, a majority of which will be carriage fee savings associated with the Katz networks. Katz today pays leasing fees to other broadcasters for multicast distribution. As Katz’s current distribution contracts expire, its programming will be migrated to ION stations’ digital subchannels. ION programming will remain on the primary channel.

The valuation was shown to be an implied transaction multiple that is 5.9 times ION’s trailing 12-month EBITDA through the end of June 2020. The annualized synergies were applied at the fully realized annual rate, and the deal was shown to be valued at 8.2 times EBITDA on the same basis without synergies included.

Weschler said:

As the media industry continues its rapid evolution, Berkshire Hathaway is fortunate to partner with this management team and the Scripps family, who have successfully anticipated the future of media for over a century.

This acquisition is currently expected to close during the first quarter of 2021. As part of the transaction, Scripps will divest 23 ION stations so that it fully complies with the FCC local and national ownership regulations. Scripps also already has reached an agreement with a buyer and that buyer has agreed to maintain ION affiliations for the stations.

E.W. Scripps stock last seen trading higher by 15% to $12.10, and it has a 52-week trading range of $5.36 to $16.93. Refinitiv’s consensus target price was $14.67, but very few analysts currently actively cover the stock.

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