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Gauging The Business Risks Of Local U.S. TV Broadcasters

Local television broadcasters rely heavily on retransmission fees for revenue stability. Advertising revenue, though more economically cyclical, also contributes to the financial health of local TV stations. A local TV broadcasters' scale and market position will influence its ability to garner greater retransmission and advertising revenues. And, local TV broadcasters' leverage and financial policies carry significant weight in determining credit quality. Here, we discuss the various factors we consider in evaluating the business risk of the public local TV broadcasters we rate, including Nexstar Media Group Inc., Sinclair Broadcast Group Inc., TEGNA Inc., Gray Television Inc., and The E.W. Scripps Co.

Key elements in our rating analyses of these companies include:

  • Scale and geographic diversity
  • Revenue contribution from retransmission
  • Station rankings and market duopolies
  • Diversity of network affiliations
  • Brand recognition and content ownership

Size, Range, And Reach

Scale provides bargaining power and geographic diversity.  We believe TV broadcasters with greater household reach are better positioned to negotiate retransmission agreements with pay-TV distributors and compete for national advertising dollars. This is especially evident for Nexstar, whose local station portfolio significantly surpasses that of its peers following its acquisition of Tribune Media Co. in 2019. Greater household reach also improves a TV broadcasters' ability to negotiate reverse retransmission agreements for network programming. In particular, Nexstar is the largest CBS and FOX network affiliate and the second-largest NBC network affiliate, while TEGNA is the largest NBC network affiliate and the second-largest CBS network affiliate. We also consider geographic diversity because it reduces exposure to volatile performance in any particular market and is more attractive to national advertisers.

Table 1

TV Station Reach
As of Dec. 31, 2020
Company No. markets No. stations U.S. TV household reach--without UHF discount (%)

Nexstar Media Group Inc.

116 198 62

Sinclair Broadcast Group Inc.*

88 188 39

TEGNA Inc.

51 64 39

Gray Television Inc.

94 165 24

The E.W. Scripps Co.*

41 61 25
Note: Figures for Sinclair only represent the broadcast segment and figures for E.W. Scripps only represent the local media segment. Source: Company filings.

Distribution Versus Advertising Revenues

Distribution revenue is more stable while advertising revenue is more volatile.   Retransmission revenue provides a relatively stable source of cash flow to help offset volatile core advertising (excluding political) revenue, which is highly correlated to GDP growth because advertising budgets are predicated on consumer spending projections. Core advertising revenue for the sector declined around 19% in 2020 due to the U.S. recession brought on by the coronavirus pandemic. Meanwhile, retransmission revenue grew about 18% in 2020 due to annual price escalators and higher rates associated with contract renewals with pay-TV distributors. We expect local TV broadcasters will still be able to increase retransmission rates for at least the next retransmission cycle (typically two to three years), which will more than offset total annual pay-TV subscriber declines of 5%-6%. Local TV broadcasters' stations are largely included in virtual pay-TV offerings (such as YouTube TV and Hulu Live), such that virtual subscriber growth is able to partially offset traditional subscriber declines. Past the next retransmission cycle, we believe retransmission revenue growth could flatten or potentially become negative if retransmission rate growth becomes insufficient to offset pay-TV subscriber declines.

On average, distribution revenue contributes more than 40% to local TV broadcasters' revenue (compared to less than 5% in the 2008 recession). However, E.W. Scripps' percentage of retransmission revenue remains the lowest among its peers because a portion of its subscriber base has historically paid below market rates for retransmission.

Chart 1

image

Market Share Matters

Higher-ranked stations and duopolies provide greater revenue opportunities and higher margins.  Highly ranked stations typically receive a higher percentage of advertising spending and provide broadcasters with additional negotiating leverage with pay-TV distributors and network affiliates. Highly ranked stations also tend to have core and political advertising revenue that over-indexes their audience ratings. TV broadcasters with duopolies (more than one TV station in a market) can also share cost efficiencies among their stations in a particular market and, in our view, charge higher advertising rates due to greater market share. Nexstar and Sinclair have the most duopolies, which isn't surprising because they have the highest number of stations. However, TEGNA and Gray have the highest percentage of number one and number two ranked stations. This results in above-average EBITDA margins (greater than 30%) for these companies.

Table 2

TV Station Ranking
As of Dec. 31, 2020
Company No. Duopolies No.1/No.2 Stations (%) No.3/No.4 Stations (%) S&P Adjusted EBITDA Margin (%)*

Nexstar

62 38 29 40

Sinclair

65 24 31 32

TEGNA

10 55 25 33

Gray

43 50 14 36

E.W. Scripps

8 28 36 22
*Calculated on an average trailing-eight-quarter basis and Nexstar's EBITDA includes annual cash dividends received from its minority investment in Food Network. Note: Figures for Sinclair only represent the broadcast segment and figures for E.W. Scripps only represent the local media segment. Source: Company filings, S&P Market Intelligence, S&P Global Ratings.

Diversity Bests Concentration

Network diversity provides more stability than network concentration.  It also reduces potential volatility from the popularity of a network's programming slate, including its primetime shows and sports airings. Local TV broadcasters remit a higher percentage of retransmission revenue to the big-four network affiliates (NBC, CBS, FOX, and ABC), resulting in lower net retransmission margins, while stations affiliated with the CW network typically have higher net retransmission margins. Depending on the timing of affiliate renewals, a diverse affiliate mix can smooth out increases in reverse retransmission fees. While TEGNA and E.W. Scripps' station portfolio was historically heavily weighted toward NBC and ABC, respectively, both companies have diversified their affiliate mix over the past several years through acquisitions.

Chart 2

image

Metrics Matter

Leverage and financial policy are the key differentiator between our ratings on local TV broadcasters.  We view Nexstar's business modestly more favorably than those of its local TV broadcast peers given its greater household reach, geographic diversity, industry-leading margins (even without dividends received from Food Network), and balanced affiliate mix. However, many of the TV broadcasters we rate have similar business risk because they are industry leaders, many of which have increased their scale and diversity through large acquisitions over the past few years. As a result, the key differentiation between ratings is mainly leverage and financial policy. We see large scale acquisitions becoming increasingly difficult without deregulation, such as loosening the national ownership cap, which currently limits TV broadcasters to reaching 39% of U.S. TV households (incorporating a 50% discount for UHF channels). Financial policy has historically constrained our credit ratings on some TV broadcasters that have acquisitive track records. As companies evaluate their financial policies with a more muted M&A environment, potential acquisitions may become less of a rating overhang and instead be driven more by shareholder return policies. We revised our outlook on Gray (B+/Positive/--) to positive from stable in December 2020 and raised our rating on Nexstar (BB/Stable/--) by one notch in April 2021 because we believe these companies will operate with more conservative financial policies.

Table 3

Leverage Comparison
Company Rating as of April 14, 2021 Business risk profile Rating upgrade threshold (x) Rating downgrade threshold (x) S&P Global Ratings-adjusted leverage as of Dec. 31, 2020 (x)

Nexstar

BB/Stable/-- Satisfactory 4 4.5 4.5

TEGNA

BB-/Positive/-- Satisfactory 4.5 N/A 4.1

Gray

B+/Positive/-- Satisfactory 5.5 N/A 4.9

Sinclair

B+/Negative/-- Fair N/A 6.5 5.4

E.W. Scripps

B/Stable/-- Fair 5.5 6.5 6.5
Note: EBITDA is calculated using average trailing eight-quarter EBITDA for broadcast segments and trailing 12-month EBITDA for nonbroadcast segments and is pro forma for acquisitions prior to Dec. 31, 2020. N/A--Not applicable. Source: S&P Global Ratings.

Sinclair's fair business risk reflects our assessment of the consolidated operations of both its broadcast television stations and its regional sports networks. We view the regional sports networks less favorably than broadcast television due to elevated subscriber churn and carriage challenges, which will weigh on profitability over the next few years.

E.W. Scripps' fair business risk reflects its higher mix of lower-rated affiliates, lower percentage of retransmission revenue, and lagging EBITDA margins. While E.W. Scripps' acquisition of ION Media Networks Inc. in January 2021 increases its household reach, it also increases its exposure to advertising revenue. Advertising revenue represents about 55% of its local broadcast segment but around 70% of total pro forma revenue in 2020.

Owning Content Beats Redistribution

Local TV broadcasters primarily redistribute content, which we view less favorably than owning content.  We believe companies that own content are better positioned to build a differentiated brand and pursue a multi-platform distribution strategy (including direct to consumer or subscription video on-demand services) to help offset secular shifts in advertising and distribution revenue, including the fragmentation of television viewing as audiences migrate away from traditional television to alternate entertainment sources. For these reasons, we view the business risk of local TV broadcasters modestly less favorably than those of the large U.S. diversified media companies, including ViacomCBS Inc., Discovery Inc., and Fox Corp. This is because local TV broadcasters primarily remain distributors of content (rather than a creator/owner), they lack global operations, and have fewer business lines.

Table 4

Business Comparison
Company Rating as of April 14, 2021 Business risk profile
Comcast A-/Stable/A-2 Strong
Walt Disney BBB+/Stable/A-2 Strong
ViacomCBS BBB/Stable/A-2 Satisfactory
Fox BBB/Stable/-- Satisfactory
Discovery BBB-/Stable/A-3 Satisfactory
Nexstar BB/Stable/-- Satisfactory
TEGNA BB-/Positive/-- Satisfactory
Gray B+/Positive/-- Satisfactory
Sinclair B+/Negative/-- Fair
E.W. Scripps B/Stable/-- Fair
Source: S&P Global Ratings.

This report does not constitute a rating action.

Primary Credit Analyst:Rose Oberman, CFA, New York + 1 (212) 438 0354;
rose.oberman@spglobal.com
Secondary Contact:Scott E Zari, CFA, Chicago + 1 (312) 233 7079;
scott.zari@spglobal.com

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