Barron’s Remains Bullish On Tribune Media(TRCO) After Recent Run

Last Friday we wrote about Tronc(TRNC), the company formerly known as Tribune Publishing. Catching up on our reading, we came across a bullish piece from last week’s Barron’s on Tronc’s former parent, Tribune Media(TRCO). Despite a 30% increase in the last month, in part on speculation of a sale of the company, Barron’s continues to see significant upside for Tribune Media stock.

Tribune Media stock’s biggest increase came amidst reports of merger discussions with Sinclair Broadcasting Group(SBGI). Some remain skeptical that such a merger is practical in the face of FCC rules.

A sale of Tribune Media, owner of 42 local TV stations as well as WGN America, to Sinclair or any other major TV station owner is likely to run into regulatory obstacles. The FCC prohibits any TV station group from owning networks that cover more than 39% of the country. The commission last year changed the way TV station coverage is counted, resulting in a higher audience reach for some station groups despite no change in the number of stations they own.

Even if FCC Chairman Ajit Pai reverses that policy, it’s unclear whether the 39% gap will be lifted.

Nonetheless, a sale is still possible, Wells Fargo media analyst Marci Ryvicker said in an investor note published on Sunday. “We think a purchase of the entire company is not just possible, but most likely — albeit a bit complicated,” she said.

Sinclair, which has been leading a charge to raise or even eliminate the TV station audience cap, covets Tribune Media because it owns major stations in most of the country’s largest cities. Sinclair, on the other hand, has built a portfolio of mostly medium-to-small-city TV stations with national affiliations.

Barron’s likes Tribune aside from the Sinclair interest

The Sinclair speculation is intriguing. But what seems worth focusing on even more is the discount the stock fetches relative to its net asset value, which could be as high as the $50s.

One bullish analyst, Gabelli’s Barry Lucas, estimates a $54-a-share private-market value for Tribune on his 2017 estimates. On his 2018 estimates, that value moves up to $67 a share.

Wells Fargo analyst Marci Ryvicker, who values Tribune at $44 a share on a sum-of-the-parts basis, wrote in a March 1 client report that a more likely M&A scenario would be selling the stations and WGN in pieces. Ryvicker also noted that “we don’t see a scenario where Tribune sells its stake in the Food Network to anyone other than Scripps Network Interactive [SNI].” Scripps is the network’s majority owner.

Even if Tribune keeps its broadcasting business intact, management is likely to part ways with the rest of its real estate, which could be worth about $400 million. It’s also possible that it will sell its interest in CareerBuilder—valued at roughly $200 million—in the not-too-distant future.

Last September, Tegna (TGNA), which owns 53% of CareerBuilder, announced it’s considering selling its stake in the job-placement firm. That could pave the way for Tribune to take its own action. Moves like these will highlight the stock’s discount to its underlying net asset value, helping the shares to rise.

Tribune Media was mentioned even more bullishly in an interview with Mark and Jonathan Boyar of Boyar Asset Management in the same issue of Barron’s.

Tribune’s been in the news recently.

Mark: Starboard Value, an activist hedge fund, took a 6.7% stake, and then there were reports that Sinclair Broadcast Group [SBGI] approached the company about a takeover.

The stock has moved up to about $37 from the low $30s. Do you still like it?

Mark: Yes. We come up with a value of $60 per share. Tribune owns 42 local TV stations, covering about 44% of U.S. households. It also owns the cable network WGN and a 31% stake in the Food Network, and a 32% stake in CareerBuilder, the online jobs site. It’s a media company with a hodgepodge of assets. It has been selling noncore assets, including about $500 million in real estate. The Food Network stake could be sold as well as CareerBuilder. The company just raised almost $200 million from the sale of licenses at an FCC auction.

What do you think will happen?

Mark: Starboard’s stake, coupled with Oaktree Capital ’s large ownership stake [it owns 16% of Tribune], almost guarantees that a bidding process will take place. Furthermore, it is now improbable that Tribune could dismiss any Sinclair offer. Even if this transaction does not occur, the barn door is open, and it is highly unlikely that Tribune will remain an independent entity.

How do you get to a $60 valuation?

Mark: We apply a multiple of eight to an average of 2017 and 2018 Ebitda for Tribune’s broadcast business, and assume conservative multiples on various assets that could be sold.

While the company is profitable and yields over 2.5%, investors should note the company’s high level of net debt($2.9 billion). Does the future of broadcast television stations look like the past, or is there a “newspaper moment” where the longstanding moats around these businesses are suddenly filled in by other means of content creation and distribution? If the latter, Barron’s and Boyar may very quickly see their margin of safety evaporate.

Disclosure: The author owns no shares of any stock mentioned