UPDATED with closing stock prices. After a nearly two-year odyssey of waiting for its acquisition ship to come in, Tribune Media is getting full credit from Wall Street for finally finding a home with Nexstar Media.
After the companies’ $4.1 billion combination was announced this morning, Tribune stock jumped nearly 12% to close at $44.98, its highest level since 2015. Nexstar stock increased almost 7% to finish at $88.32 a share, defying the usual rule of the acquiring company getting dinged on the day of a deal.
Analysts greeted the merger with enthusiasm. One reason for optimism is Nexstar’s forecast of a “clear path” through the regulatory process and its vow to divest enough stations to remain at the current 39% ownership cap. That scenario would come as a relief to investors after Sinclair Broadcast Group’s long-gestating $3.9 billion deal went up in flames last summer. Beyond stability, the Street is responding to the promise of cold, hard cash.
“Nexstar plausibly argues that this debt-financed merger will boost its two-year average free cash flow — which pre-merger was a mid-teens yield to the equity — by 46%,” wrote B. Riley analyst Barton Crockett in a note to clients. “This fact trounces potential nitpicking on relative price, and highlights what we have argued for some time, that TV station groups are undervalued, and that M&A can be a road to unearthing that.”
What’s more, the legal tangle with Sinclair will dissipate, Crockett predicts. “The risk we had seen to Sinclair from Tribune’s $1 billion deal-break lawsuit now goes away,” he wrote. “There’s no harm, so no scope for damages, if Tribune is getting more now from Nexstar than Sinclair was offering.”
Leo Kulp of RBC Capital Markets declared the deal “attractive relative to our expectations.” The 46% boost to free cash flow was better than his prediction of 39% to 43%. Cost synergies of $160 million also topped his estimates of $150 million.
“Overall, we think this is a transformative deal for Nexstar that should greatly increase its scale on financially attractive terms,” he wrote in a note.
The station sector should see plenty more dealmaking in the months to come. Divestitures by Nexstar in order to satisfy regulators will draw interest from other station groups like Tegna or possibly Fox. Also, in the run-up to the 2020 presidential election, which is expected to bring record-breaking ad revenue, there will be plenty of interest in further consolidation. Nexstar’s bid for Tribune came after private equity firms like Apollo had made overtures.