Nexstar to benefit most when FCC reinstates UHF discount, analyst says

Jefferies’ John Janedis is anticipating a new wave of broadcast TV consolidation, and he sees Nexstar riding the crest.

Nexstar Media is in line to benefit the most when the FCC reinstates the UHF discount today and eases limits on how many TV stations broadcast groups can own, according to one analyst.

Jefferies’ John Janedis is anticipating a new wave of broadcast TV consolidation, and he sees Nexstar riding the crest.

“While the M&A landscape could take many forms (likely dictated by changes made to ownership rules), we believe that NXST is well positioned to benefit. We estimate that an incremental 10-25% reach would be ~20-40% accretive to '17/18 ests (w/ further upside to LT ests given additional operating synergies). While shares have moved in anticipation of M&A, the incremental benefit would still translate to approximately 20-35% upside for the stock,” wrote Janedis in a research note.

Jefferies anticipates that the FCC will reinstate the UHF discount today—which will once again allow lower-power UHF stations to only count 50% toward the nationwide ownership cap—and will revise the overall ownership rules in 2018. The firm also anticipates that future deals will be grandfathered.

The FCC put reinstating the UHF discount on its agenda for the April open meeting and said that, when the FCC eliminated the discount last year, it failed to consider the public interest benefits of essentially tightening the national ownership cap.

“This mistake renders our past action arbitrary and capricious,” the FCC wrote (PDF). “It also means that it was unwise from a public policy perspective. We thus are reinstating the UHF discount for the time being and will launch a comprehensive rulemaking proceeding later this year to determine whether to retain it and/or modify the national cap.”

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Jefferies said the ownership cap could be moved well ahead of the 39% national audience reach limit at which it currently stands.

“With the FCC pushing for cap relief, we believe that the most likely scenario involves the reinstatement of the UHF discount followed by an increase in the ownership cap to 45-50%. The grandfathering of the discount would likely allow for large public broadcaster M&A over the course of this year,” Janedis wrote.

Janedis added that, assuming that entities above the new cap are grandfathered, the “winners” will be Nexstar and Sinclair, which can grow past the cap in the near term, as well as Tribune Media and Tegna, “which could be seen as potential targets, in our view.”

“On the other hand if the discount and cap increase do not occur in tandem, we think [Tegna, Meredith, and E.W. Scripps] could benefit as broadcasters with the ability to combine / add the most reach,” Janedis wrote.

Nexstar recently completed its $4.6 billion acquisition of Media General, but CEO Perry Sook has said the company is well-positioned for more M&A, and Sinclair is reportedly looking into buying Tribune Media’s assets.

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With the FCC’s broadcast incentive auctions officially finished, other broadcasters like E.W. Scripps are looking ahead to the expected uptick in M&A for the broadcast TV market.

“I do think that now with the auction behind us, and positive momentum and probably some regulatory changes, I think, we are anticipating a flurry of activity that begins this year,” said Brian Lawlor, senior vice president of broadcast at E.W. Scripps, according to a Seeking Alpha transcript. “Some of it small, some of it significant. But I think that timeline is now lining up for the beginning of an event.”