Nexstar Media: Broadcasting's Biggest Bet - [Business Breakdowns, EP.221]

0:03This is Business Breakdowns. Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from, and we are here to bring them to you. To find more episodes of Breakdowns, check out joincollossus .com. All opinions expressed by hosts and podcast guests are sole their own opinions. Hosts, podcast guests, their employers, or affiliates, may maintain positions in the securities discussed in this podcast.

0:45This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. I'm Zach Fuss, and today we're breaking down NextR Media Group. NextR is a business that may not carry household recognition, but controls more local television stations than any other company in the US. My guest today is Simeon McMillan, a founder of Media Focus to Research firm, Acrude Interest. Simeon brings a unique perspective to this sector. He's held roles as a banker and executive within prominent television, cable, and radio businesses, including Univision Networks and Media Co.

1:22In this discussion, we will examine the foundational structure of the broadcast television industry, tracing its evolution from the pre -internet hub and spoke model of the major networks, NBC, CBS, ABC, and Fox, to its current state. A simple breakdown of revenue streams that sustain the ecosystem and how subscriber fees from multi -channel video programming distributors, MVPDs like YouTube TV and Comcast Cable are distributed among the networks and their affiliates. And then we'll address the impact of cord cutting on subscribers and how those viewership metrics impact pricing power within the television ecosystem.

2:01This is an industry with substantial consolidation which has reshaped itself over the past decade and ultimately culminated in the emergence of businesses like NextR as the pre -eminent station group of outside of the Big Four. We'll scrutinize their financial profile, including their revenue composition and capital allocation, and then cover their strategic investments and content such as their acquisition of the CW Broadcast Network and their development of news nation. We hope that you enjoy this breakdown of the NextR Media Group. Alright, Sim, appreciate you offering to do this. I know it's an area that is near and dear to you, broadcasters.

2:41I think the way we'll set this up is we'll do a broad discussion about the industry itself and then we'll go into the specifics of some of the larger players next star in particular. I thought it interesting probably to start would be giving your background just taking us through how you got interested in the space, your experience as someone that would It's been on both sides of the table as someone that participated as an operator and also as an investor. And then we'll dive into the way you're seeing the landscape today and introduce our audience into broadcasters generally. Thank you for the introduction, Zach.

3:15My name is Simian McMillan and I'm the host, author and founder of the Accruid Interest Substack. We are a podcast and newsletter and I'm on Twitter under Accruid Interest. My passion is for media investing, primarily because I spent time both as a junior investment banker, a research analyst. I've done a lot of different jobs in the finance industry. I've worked on many media transactions over the years. But then for the second part of my career, for the last 10 years, I've worked as an operator. I've worked as an executive in the financial FPNA department. I've done strategic revenue work with Assetl's departments, and I've worked inside of several television broadcasts and cable networks as well as radio companies.

4:04I spent some time at Univision Networks. I worked across a variety of their properties. I also was part of a new management team that worked at MediaCo. It was a spin -off from MS Corporation and the primary assets were hot 97 WBLS. Yes, they're mediocre at experience working with the radio side, ad sales primarily supporting the CFO, the COO and the entire C suite. And I also had experience working with the company had a billboard division at a point before they sold it. So I am here because I love talking about media. I love dissecting companies and doing business breakdowns is fun for me because on one hand, I know how the research community can talk about a company, but having been in the boardroom, having been inside the offices of senior executives, I know how theory actually comes into practice for these assets.

4:57Given the vernacular in these industries is somewhat complicated, you've got the MVPDs, you've got OTT, Broadcasters, retrans affiliate. I can go on forever for whatever reason, PayTV as an ecosystem loves to get into acronyms and resegmentation and different ways to describe what it is that the industry is at a basic level. Can you just take us through how the industry is structured and how that has evolved over time? When I was in business school at Wharton, we called the acronyms TLA's three letter acronyms. I'll try to use as much general vocabulary as I can, but here is how I think you should think about the broadcast television industry.

5:42The original setup of the broadcast affiliate TV model is a bit of a throwback from a time in the pre -internet days. It was set up back when the limit with how far you can send the video signal was correlated to your local market because the spectrum, the signal coming from the broadcast station could only go but so far. In the beginning of the industry, you had pretty much the big four TV networks, NBC, CBS, ABC, and later on Fox, but we consider them part of the big four. and they operated on a bit of a hub and spoke model. So each of the networks have studios either independent or they can buy shows and content from third party studios.

6:27Each of the network gets shows from their studios and they put them on the air for you to watch. And then they make money by selling ad time inside those shows as well as collecting subscription fees or affiliate fees from the cable providers that host their channels. You want to look at the structure of the broadcast network. Due to regulation setup many years ago, the FCC set up a cap that any one broadcast entity could not control a broadcast signal that touches more than 39 % of the US population. It's known as the 39 % rule. It was intended to keep any one network of station from controlling what listeners were hearing on the news or their programming all over the country.

7:22What ends up happening is that all of the big four networks decided that if they could only own the stations that covered 39 % of the population, it makes sense that they want to own the stations in the biggest markets. So that's exactly what happened. Most of the broadcast television stations in the top 10 markets are what's known as O &O's owned and operated stations that are still owned by ABC, CBS, NBC, etc. To reach the rest of the country that they contractually are not able to reach, they then work with a network of local broadcast affiliate stations which are owned by third parties, but then strike programming agreements to be affiliated with one of the Big Four networks.

8:12They are basically a partner network in exchange for a share of the ad revenue, the local affiliate then is able to get programming from the Big Four network that would be too expensive than to produce on their own. They're also able to get support for news because each of the Big Four networks have a national news desk that helps out with the local news. And they're also able to get sports and other big ticket programming items that they could not for to pay for themselves. So over the years, as you have evolution video, you've had the introduction of the cable television industry. You've had the introduction of streaming television.

8:54During this entire process, the broadcast affiliate model has pretty much stayed intact, but I think we're about to start seeing cracks in the model. Because where we are today, the local independent affiliates have come out of about a 15 -year period of consolidation. We're going to get into what that means going forward, but there used to be hundreds of local market television stations, and they've mostly been consolidated to about five major owners. So where we sit today with the new administration currently in Washington, operators in the television space are trying to get the FCC to lower their current 39 % cap to allow for the big players that are still there to consolidate the market even more.

9:46All the while, we have viewers who were cutting the core that's still happening and they're finding ways to get video and other entertainment products outside the cable bundle. I love broadcast television because it brings together four or five different industries and you can see the market forces work in tandem as the industry evolves. So if we think about the pie that's being divided up here, I want to make sure that we drive home, how paying subscribers translate into revenue for each of these different parts of the ecosystem. As an example, as a consumer, I may be a customer of YouTube TV, I may be a customer of Comcast Cable.

10:30I pay them per month, call it anywhere from $75 to $200. How does that revenue then work its way downstream to the networks themselves, ABC, CBS, NBC, and then the affiliates? How does everyone get paid? I think a helpful way to describe how everyone gets paid is I'm going to take a moment and talk about some of the revenue streams for next are, but this is pretty representative of the larger broadcast TV companies. A good way to think about this is to describe it as you just did Zach by centering the perspective from the customer paying money to their cable provider cable providers, video providers, satellite, Hulu TV, wherever you get your video, any service that bundles a package of channels is known as a MVPD.

11:23That stands for Multi -Channel Video Provider. You have an offshoot of that of virtual MVPD, which are internet first skinny bundles we used to call them 10 years ago, who knew live TV, Fubo or Slang. You the consumer, get a bill, let's say for $120 for this month from your video provider. What the cable company does is the cable company then has a series of agreements with all the different networks and all the different broadcast stations, all the different publishers that they get video content from get a cut of your bill. For a long time, the biggest recipient of distribution fees directly from the cable companies were the cable channels.

12:12For years, you had about 100 million US households that were getting a package of 50, 70 or 100 channels. And based on the bargaining power of the owners of each individual channel, they would then charge Comcasts or rates. they have a very complicated ratecard where the networks would charge Comcast a certain dollar amount per subscriber per month to be paid for carrying that station. When it ends up happening over time, it is that many networks thought it was unfair that when they added up all the payments for all the different TV networks, the majority of the video payments were going to the cable channels.

12:58This angered me in the industry because over many years the broadcast TV networks, again, were talking mostly the big four is the NBC CBS, Foxes, and ABC is the world were still the majority of the actual viewing habits of the consumers. The split of the cable revenue back to the networks was not perfectly correlated with the viewing. So as a result, something that actually next star media was a pioneer in pushing for back in 2005 was that next star was the first one to go to the cable companies and say, Hey, we're broadcasts. We're a local market station, but our content has value. We have sports primarily the NFL.

13:43They're the biggest draw. We have local news. And many other shows that people want to see over time, the broadcasters started getting affiliate fees. They're called retransfeeze in the television industry. They were getting monthly payments for a certain dollar amount for the number of subscribers that they had in their Comcast market or wherever was the provider. Once the big Ford networks saw that the local market stations were starting to get compensated monthly subscribers fees for the content that the broadcast networks were renting out to them, the broadcast networks said, hey, the local market stations are just re -airing content that is largely content that they're purchasing from us.

14:33The local market stations, your local market, broadcast stations will have originally produced news content and originally produced morning shows and other content like that. But the prime time shows that drive majority of the viewership come from the parent network that they have an affiliate agreement to. So when the happening over time is we sit here today where through the introduction of retransmission fees, through the fact that next star and other broadcasters pushed the cable industry to be paid like the cable companies, I would argue that the broadcast television industry is now a subset of the cable companies after about a decade of tremendous growth in subscription fees.

15:19You have the broadcast networks who now have upwards of 50 % of their revenue coming from video subscribers from the cable channels. Bring it all together. If you go through your video bill, I would probably imagine that the ABCs, the CBSs, the NBC's of the world are probably getting anywhere between $3 to $4 a sub per month out of your bill. To demonstrate to the customers how expensive the retrans fees had become for the cable companies to pay the broadcasters. If you go to your bill for a cable company today, you'll probably see the broadcast fee broken out as a separate line item because they want to show you when just how expensive that is.

16:03So that's a good sense of how the money is split out. The math is the same for the digital skinny bundles except because the cable companies have a most favorite nations clause with the networks the cable companies have agreements that basically whenever they strike a new three to five year deal with a network, the network must give the cable company the lowest rate in the market. Whatever rates ABC for example is charging Comcast per subscriber per month that raise actually higher on YouTube TV. It's higher on sling. It's higher on these other streamers. That difference in pricing has been another reason why the broadcast model has survived as long as it has.

16:49As you lay out those dynamics clearly there's been this friction amongst the negotiating leverage within the players in the ecosystem. And my guess is a lot of that is what drove this wave of consolidation over the last decade or so. And I think that'll be a nice segue into next star and what the business is and what it represents as the largest player in the space. Take us through some of the drivers of that consolidation and then introduce us to next star and the business itself. As I said in the beginning of this episode, broadcast and cable had existed for decades before streaming came into the picture.

17:28And there was long attention for viewer ratings, for viewer minutes between broadcast and cable. For about 20, 30 years, ever since cable was introduced in the 70s and became ubiquitous in the 80s, more and more TV viewership was going from the broadcast stations to the cable stations. When the happening is that as the broadcast ratings were falling for decades. It was a very slow managed decline, a very slow trickle as companies kept adding more and more cable stations to the bundle. The broadcast ratings were falling for 20, 30 years, but broadcast ratings were still the largest piece of the pie.

18:13They still had the sports. They still had all of the marquee shows, the signfelds, all of the water cooler shows that people tuned in to see. The tension for the distribution of the affiliate fees was what drove the first wave of consolidation in the 2010s. In the 2010s, you had hundreds of M &A transactions where you had these smaller market, local market, broadcast TV stations that finally wanted to get the bargaining leverage to get paid like cable channels. So you had these third party broadcasters who were bulking up. They were also bulking up to compete and to fight for a share of the pie from the actual big four networks that they were partners with.

19:03Because I said before, there was attention between the parent network, the ABC, and the third party ABC station because the ABC station believes, hey, look, local station, the reason why you're getting paid that monthly fee is because of the high value content that we provide you. There was a new dynamic where the Big Four networks introduced what's known as reverse retrans, where the Big Four networks were asking for a give back. They were trying to pull back the newly earned subscribers fees that the local market had just one from the cable companies. By combining the local market stations, the theory was that they would now have to scale to better compete versus the cable companies, the video providers, but also to push back on the big four networks themselves, who remember the big four networks were being constrained by regulations they can't grow anymore as the smaller market stations would scale up together In theory, they'd be able to push back.

20:09When Next Star came in, Next Star was founded in 1996. They went public in the early 2000s and out the gate, they were doing acquisitions. The company is still led by its founder, Chairman and CEO, Perry Sook. Perry has been with the company the entire time and he's a legend in the industry for coming up with the whole concept of reverse retrans. during the 2010s through a series of mergers and acquisitions, next our media went from being one of the smaller local market stations groups. They were primarily in second and third -tier markets. So point where they are the number one station group outside the big four by far in the country.

20:55They have about 200 local market stations. They are in about 116 US markets. Their signal reaches about 68 % of the population, which technically is more than the 39 % cap and I'll explain why in a second. So now, next star is the largest broadcast station outside of the big four because they got superchars in their growth in the last five or six years through two major acquisitions that I just wanted to call out. First, in 2017, Nexstar merged with Media General for about 4 .3 billion in cash and stock. And this was, I want to say, their first big acquisition that really pushed them to the forefront of the industry in terms of size.

21:43The Media General acquisition pushed Nexstar into, let's say, the top four or five local market station groups. Their biggest acquisition to date, and the last one they've done of consequence, came in 2019 when NexStar merged with Tribune Broadcasting, another one of the bigger local market stations groups. The reason why NexStar can reach about 68 % of the US population is because one of the nuances of the regulatory cap from the FCC is that the station groups built into the regulations, lots of technicalities that help them work around the 39 % cap. I won't get into all the jargon because we said we have enough acronyms, but the local market stations basically have a form of sidecar agreements.

22:33They're called local market agreements, LMAs. They have many different names, but the station groups basically have these arm -length agreements where they can partner with television stations that they do not technically own and agree to manage the station on behalf of the other owner. By managing on behalf of the other owner, they can then provide them with territorial content, they can manage their news, they can run it almost as if they own the station themselves. Broadcast has been using this loophole for decades, and next star has been the most aggressive aggregator to date. And that's why they sit at about 68 % of the US population, which is far in ahead the second biggest one, which I would say is probably TeGNA.

23:20They probably reach about 39 % of the US population. Next star really is a product of M &A and part of the reason why I think they're at a critical juncture right now is that that they have one more M &A cycle in this industry, probably, that they want to have into the buy at the Apple, but all the organic growth drivers for the underlying business have either tapped out, stalled out, or aren't currently in decline. Next our media is a roll -up machine, but sometimes the roll -up can run out of runway. So, to drive some of those points home from a quantitative perspective, maybe just lay out the financial profile, NexStar, size, scale, margin, revenue composition, and capital allocation.

24:06So, to give you a sense of scale, I'll rattle off some high level numbers here. NexStar has a market cap a little over about 5 .2 billion today. In terms of total enterprise value, we're looking at almost 12 billion. The company is highly leveraged as most broadcast stations are. their leverage net debt to EBITDA is usually anywhere between three and a half to four times leverage in terms of trailing revenue keep in mind broadcast experiences bumps in even numbered political years and larger bumps in presidential years. 2024 is a little bit higher in 2025 but give you a sense of scale next our date about five and a half billion of revenue in 2024, about 2 billion in adjusted EBITDA.

25:00So we're looking at a EBITDA margin of about 37%. Broadcast networks have very low maintenance capEx. When they're not doing acquisitions, it costs almost nothing to keep the stations running. Broadcast converts about 50 % to 60 % of the EBITDA on the free cash flow. So off of about 2 billion in just the EBITDA, about 1 billion, in a little over 1 .1 .2 billion is going to drop the free cash flow. In terms of the revenue composition, I said in the beginning that after a decade of demanding local broad castations get paid like cable networks, broad castations finally got their wish. In terms of the revenue mix, about 55 % of the revenue is distribution fees.

25:43These are retransfes from cable companies and digital video providers. you then have advertising, and this is how I want you to think about advertising. Advertising is about 45 % of total revenue. For context, advertising used to be about 75 % of revenue about 10 years ago. It's part of the mix has shrank as distribution of revenue has grown more consistently and more quickly. This called half the business is advertising. That is about two -thirds of 70 % that local advertising, where they have a local sales force to that specific market that actually goes out and talks to small and medium businesses, car dealerships are probably the most prominent examples, but tons of local mom and pops will advertise local TV.

26:32And then the other 25 to 30 % of the business is national business. What national is is that if an advertiser wants to do a national ad buy, the way they do that is they combine a number of local markets together to sort of build a patchwork that if you add up the coverage, it equals to national. So the local market stations like Next Star will use third -party companies, third -party services to outsource the selling of the national, but it's still a part of the business, but it's not growing that quickly. Built into the advertising mix, built into the advertising half, you have some digital in there, but I just want to be very careful because digital and broadcasts is not like Google or Facebook, digital and broadcasts really means display ads, websites that are owned by the different local market stations.

27:28And all the stations will have their own weather apps or things like that. Digital is about 10 % of revenue altogether in terms of expenses. The direct costs, These are programming fees. That's the cost of running the evening news, the reporters, the writers, the engineers, the cost of running the station. But then you have programming fees paid to the Big Four Networks for affiliation. You have a fee paid to NBC or ABC for the content that they give you. And you also have reverse retrans fee, which about 50 % of that monthly subscriber fee that the station is getting from the cable company, gets given back to ABC or CBS.

28:13This is trending in the wrong direction. It's actually pushing to upwards of 60%, but we'll get more to that in a second. The core advertising portion, you pay about a 15 % agency fee, because a lot of this business comes through media agencies at agencies, so you pay a 15 % fee to the agencies, and then in terms of the commissions to the local market salespeople, Those can vary, but those can be anywhere between five to 15 % of gross revenue. That gets us to a direct cost, a cost of goods sold. Let's call it about 40 % of revenue. SGNA, all the different bodies that it takes to run the station, that adds another 20 to 24 % of revenue because the local markets, you need people on the ground to do these things.

29:03a lot of these functions can't be centralized. Bring it all together. You have an EBIT margin in the mid to high 20s in some years. And then in terms of EBITDA margins, we're talking anywhere between low to high 30s, EBITDA margins anywhere between 32 % to 38 % is the margin profile you can expect from a business like this. Just to try to provide a little bit more color on the assets that they own. Obviously, when you're talking about regional broadcasters, people think about local news and television, local advertising, and then the retrans that you mentioned. I know that they're working on producing their own content that may be of higher value.

29:47What are some of the assets that they're investing most heavily in? Separate from the local market's sanctions, here are some of the avenues for organic growth that next star is trying to improve. First off, next star acquired from Warner Brothers Discovery approximately 70 % interest in the CW broadcast network. I won't go through the whole history, but for any of those who are familiar with broadcast stations such as the WB and UPN, the CW was a fifth English language broadcast station. They're a distant laggard behind the big for and they have less viewership than even Univision and Telomundo.

30:31But for English purposes, the CW is the fifth major broadcast station. They're all over the country. When Nexar got this asset from Warner Brothers, they basically got it for free because it was underperforming so much. The CW was formed by the mergers, I said, of WBNUPN in 2005, 2006, I believe. and the network was unprofitable pretty much during its entire existence. WB, as well as the consortiums of other companies that had a minority stake in this network, they sold it to a next star for basically nothing. Next star just assumed about $100 million in debt. What next star saw with the CW is next star had this vision.