The news this week that Fox and Blackstone are forming a joint venture to acquire Tribune Media had researchers, analysts and plain old columnists like me wondering why, and sorting through the implications not only for Fox, but also for Sinclair, Nexstar and CBS.
21st Century Fox CEO James Murdoch told securities analysts in February that Fox was not much interested in growing its station portfolio. “We really like the shape of our station business right now.”
As Sean Spicer progenitor Ron Zeigler would say, that statement is “inoperative.”
We learned this week that Fox believes the shape of its station business is too small and so is forging a joint venture with the Blackstone private equity outfit to make a bid for Tribune Media and its 42 stations. Tribune hung out the for-sale sign a year ago.
The news upset the widespread expectation, much in vogue at NAB last week, that the ever-acquisitive Sinclair Broadcast Group would sweep in and scoop up Tribune so that it would have the major market outlets it needs to fulfill its national ambitions.
So, why is Fox suddenly hot for Tribune?
Wrong question. Fox is not hot for Tribune; it’s hot for Tribune’s 14 Fox affiliates stretching from Seattle (DMA 14) to Greensboro, N.C. (DMA 46). Collectively, they reach 13.5% of TV homes.
If Fox can pull off this deal, its lineup of O&Os would swell to 31 stations covering about half of all TV homes, well within the bounds of the FCC’s newly expanded national ownership limits.
Buying Tribune would give Fox and Blackstone the chore of spinning off the 28 non-Fox stations it doesn’t want. They can be roughly divided into two groups: The traditional Tribune stations, a string of major-market, news-producing stations affiliated mostly with the CW topped by WPIX New York, KTLA Los Angeles and WGN Chicago, and a bunch of Big Four network affiliates in 50-plus markets.
So, let’s reframe the question. Why is Fox hot for 14 more O&Os?
After news of Fox’s play for Tribune broke, the research firm of MoffettNathanson put out a note that says that Fox has good offensive and defensive reasons for scarfing up the Fox affiliates.
On the offensive side of the ledger, it says, Fox would create “incremental value” for itself from the cost synergies of owning more stations and from exposure to more football markets. The Tribune Fox affiliates would give the network entree into six additional NFL markets, including two (Seattle and Milwaukee) for which it holds the Sunday NFC home-team rights.
In addition, MoffettNathanson says, the joint venture with Blackstone, which would absorb Fox’s current stations, would shield parent 21st Century Fox from the volatile ad market and put the slow-growing station assets “below the line.”
I would add another even bigger factor: retrans. According to the back of my envelope, Tribune’s 14 Fox affiliates reach 15.5 million homes. Let’s say 80% or around 12 million are MVPDs subs.
If Fox buys the affiliates, it could get $2 per month from each of the 12 million subs. That works out to $24 million a month or $288 million a year.
But if Sinclair gets the affiliates, it will collect the $2 and Fox will get only half the money through reverse comp.
Here’s where we get into the defensive rationale. If Sinclair wins Tribune, it becomes a massive Fox affiliate group with 52 affiliates covering around 28% of TV homes. That will give Sinclair tremendous leverage to push back on reverse comp and other matters. Maybe Fox ends up on the short end of the retrans split.
Rupert and the boys will suddenly have to consult with David Smith every time they want to make a move. Better to deal with the Blackstone bean counters.
MoffettNathanson says Fox has other reasons to keep Sinclair from getting too big. Because of those major market CW stations, a Sinclair-Tribune merger essentially creates a new national broadcaster outlet with big ideas for programming and new ATSC 3.0-enabled services like datacasting and targeted advertising.
Smith has been talking for years about creating a national news service that would compete with Fox News Channel and, with Tribune, he’ll have all the pieces he needs to do it. MoffettNathanson also suggests that Sinclair-Tribune may have enough weight to compete for NFL rights when they come up in a few years.
So, if Fox buys Tribune, it will prevent Sinclair from becoming the affiliate group from hell and another national TV rival.
There would still be the question of Tribune’s 28 non-Fox stations. Fox would be able to find plenty of buyers to spin off the 50-plus Big Four affiliates. But what of the CWs, particularly in the major markets? Who other than Sinclair wants them?
Nexstar? Perhaps. Like Sinclair, it likes to buy stations, but, unlike Sinclair, it has no visible strategy for putting major market stations to work.
As half owner (with Time Warner) in the CW, CBS certainly has an interest in what becomes of Tribune’s CW affiliates.
I’d be curious to know whether the CW has the right, in the event of a sale, to shift its affiliation in New York, Los Angeles, Dallas and Miami from the new owner of Tribune to the CBS duopolies in those markets. I’d also be curious to know whether CBS is interested in buying Tribune’s CW affiliates in Denver; St. Louis; Portland, Ore. Hartford, Conn.; Norfolk, Va.; and New Orleans.
There is some delicious irony in all this.
Just prior to the Great Recession, it became fashionable among the Big Four networks to shed smaller-market stations, In 2008, Fox sold eight of its O&Os to Local TV LLC for $1.1 billion — WJW Cleveland; KDVR Denver; KTVI St. Louis; WDAF Kansas City; WITI Milwaukee; KSTU in Salt Lake City; WBRC Birmingham, Ala.; and WGHP Greensboro, N.C.
Oak Hill Capital Partners had formed Local TV a year earlier by purchasing the New York Times stations for $575 million, but it turned over the management to Tribune. Tribune liked Local TV so much that it bought it for $2.7 billion in 2013.
So, in a round-about way, Fox is now seeking to buy seven stations that it cast off a decade ago. (In 2009, Local TV swapped WBRC to Raycom for CBS affiliate WTVR Richmond.)
Of course, I must point out that the networks’ station dumps followed by only a few years the nasty network-affiliate feud that tore apart the NAB and hobbled the association for several years.
The feud was triggered by the networks’ insistence that the NAB push to loosen the FCC national ownership cap so they could — wait for it — acquire more stations.
In these turbulent TV days, M&A strategies seem as ephemeral as a Fox primetime offering.
