BREAKINGVIEWS-A $6 bln broadcast tie-up adjusts the M&A picture

By Jonathan Guilford

NEW YORK, Aug 19 (Reuters Breakingviews) - There is nothing wrong with your television set: pugilistic dealmakers now control the transmission. On Tuesday, TV broadcaster Nexstar Media NXST.O agreed to acquire rival Tegna TGNA.N for $6.2 billion. The companies boldly advertise that their tie-up well oversteps trustbuster norms and arcane regulations that have long governed the U.S. industry. It’s a sign that the incentive in M&A is now to play the game by breaking the rules.

A legacy of the rabbit-ears era, broadcasters face restrictions enforced by the Federal Communications Commission. Among these: one company cannot acquire two of the top-four-rated stations in a local market, and no group’s reach can exceed 39% of the U.S. population.

Nexstar touts that it will reach 80% after the deal and that its stations overlap with Tegna in dozens of local markets. Unsurprisingly, the business case is solid. Take $300 million of promised cost-cuts and revenue boosts and add it to the seller’s $770 million in estimated operating profit next year, according to Visible Alpha. Taxed at the standard rate, and it implies a chunky 14% return, Breakingviews calculates.

Boss Perry Sook feels comfortable with the deal because the top-two rule is poised to disappear, thanks to a court ruling. The FCC also began a process to review the ownership cap. Industry opinions differ on whether it can abolish a 39% threshold set in statute. If this fails, Nexstar could try other workarounds, like shuffling stations to partners for which it provides services. The deal is illegal right now. It might not be for long.

Antitrust enforcers are another matter. They traditionally view television broadcasters as competing with each other, rather than with advertising giants like Alphabet-owned Google GOOGL.O. Early in the Trump administration, the Department of Justice seemed to take a hard line – for instance, blocking tech giant Hewlett Packard Enterprise’s HPE.N acquisition of Juniper Networks. Recently, advisers sense a shift. HPE reached a bargain to save its purchase. A lawyer dismissed from the agency claimed that reviews are politicized, the Wall Street Journal reported.

Nexstar pitches this merger as building a better competitor to digital advertising and steward of local reporting in an “age of fake news,” as Sook put it. The agency is filled with staffers with firm views, and they will surely tease out whether any advertisers or audiences depend uniquely on local broadcast competition. Political appointees, though, ultimately make the call. For M&A consiglieri, the move now is to push to the outer limits.

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CONTEXT NEWS

Broadcast television group Nexstar Media said on August 19 that it had agreed to acquire rival Tegna in an all-cash transaction valued at $6.2 billion, including debt and transaction fees and expenses. The per-share price of $22 represents a 31% premium to Tegna’s 30-day average stock price ending on August 8, the day before media reports of a potential tie-up emerged.

Bank of America, JP Morgan and Goldman Sachs are providing financial advice to Nexstar. Allen & Company is serving as advisor to Tegna.