This is a surprising change, but an unavoidable one, Wells Fargo Securities’ Marci Ryvicker says, as FCC Chairman Tom Wheeler begins to crack down on arrangements that enable rival stations in a market to collaborate on ad sales, programming, and retransmission consent negotiations. Many consumer groups and the Justice Department say these cozy so-called “sidecar” deals diminish competition and local progamming, and effectively circumvent FCC caps on the number of stations a company can control in a market. The National Association of Broadcasters says the deals make programming more local and diverse. In any case, “NO pending [merger] deals with any sort of ‘shared’ arrangements will close until/unless they are restructured to exclude such stations and related loan guarantees,” Ryvicker says she was told by her sources in Washington. As a result, she decided it’s time to recommend that investors hold any TV station company stocks they own, but not buy additional shares. She says that she’s “frustrated” because she still likes “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 income from retransmission consent deals with pay TV distributors. But the growing antipathy to the shared services agreements “is likely to put pressure on trading multiples as well as lead to estimate reductions (especially for those with deals pending before the FCC),” Ryvicker says. “We really hope our thesis proves to be wrong over the next several months,” she adds. She lowered her rating to “market perform” from “overweight” for Gray Television, LIN Media, Nexstar Broadcasting, and Sinclair Broadcast Group.
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