December 14, 2011 - 12:58pm EST by
2011 2012
Price: 7.63 EPS $0.00 $0.00
Shares Out. (in M): 29 P/E 0.0x 0.0x
Market Cap (in $M): 220 P/FCF 0.0x 0.0x
Net Debt (in $M): 625 EBIT 0 0
TEV ($): 845 TEV/EBIT 0.0x 0.0x

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Business Overview:

Nexstar Broadcasting (ticker NXST) owns and operates 65 television stations in ~36 markets. They reach 14 million TV households and hold #1 or #2 market shares in ¾ of their markets. More general information can be found at The company presentations and specifically the August earnings conference call are helpful to understanding the event path.

Approximate Trading Metrics:
Equity Value: 220
EV: 845
EBITDA (2011 Pro-forma for M&A + 2012 Estimated - blended): $122-127mm

Estimated 2012 FCF Generation: $65-$70mm (31% FCF yield)

Situation Overview: Event-Driven / Levered Equity

Right before the summer market melt-down, Nexstar announced that it was exploring strategic alternatives, after a timely leak in the Wall Street Journal suggesting a $1bb transaction.

The language: Irving, TX (July 21, 2011) - Nexstar Broadcasting Group, Inc. (NASDAQ: NXST) announced today that its Board of Directors has decided to explore and evaluate strategic alternatives intended to maximize shareholder value, including a possible sale of the Company. The Company has retained Moelis & Company as its financial advisor and Kirkland & Ellis LLP as its legal counsel.

The Company has not made a decision to pursue any specific strategic transaction or other strategic alternative and there is no set timetable for the process, so there can be no assurance that the exploration of strategic alternatives will result in a sale of the Company or any other transaction. The Company does not intend to disclose developments with respect to the progress of its strategic review until such time as the Board has approved a transaction or otherwise deems disclosure appropriate.

My translation: ABRY Partners, who owns 3.49 million shares / 23% of NXST, would like to exit, and the most straight forward transaction (limiting their legal exposure) is a leveraged buyout or sale to a strategic buyer. A secondary alternative to create shareholder value would be a leveraged recap at the end of 2012 when leverage is closer to 4x. However, this would not create an exit for Abry so I will not focus on that alternative.

Unfortunately, shortly after this announcement, global stock markets fell, credit markets became unavailable for leveraged buyout financing, and the global advertising backdrop shifted from flat to improving to negative (auto growth has slowed somewhat relative to expectations 60-90 days ago, but has since recovered in October and November according to various media companies). After NXST originally traded up from $7.20 to a high of $10.25 (albeit on lighter volume near the top), NXST currently trades near $7.50-7.75, bouncing off the $6 lows. Since the July 21 announcement until the October market lows, NXST was down in-line with peers BLC and SBGI as if the sale announcement had become irrelevant. Since July 21, NXST, BLC and SBGI through early October were down 29%, 30%, and 30% respectfully. Since the lows, NXST shares have recovered somewhat along with the US credit markets bouncing on the margin. In fact, recently NXST has traded more like an arbitrage name.

Entry Catalyst: correlation to 1 market, driven by macro uncertainty in Europe and potentially increased probability of a US recession; strategic alternatives announcement.

Exit Catalyst: sale of the company led by a highly motivated management team that owns ~8% of the common stock and 23% owner, Abry.

Downside: I won't go into the business fundamentals too much, but at the current valuation of ~6.8x-7x EBITDA, the downside is limited (the stock touched 6 recently or 6.5x). That said if broadcast and smaller cap media peers slide, NXST will most likely follow. I am not proposing a pair trade, but it could be a nice opportunity to hedge industry risk and isolate the alpha opportunity on a sale of the company. However, if markets stabilize, a fully hedged pair could be a painful negative gamma trade as an LBO does put a cap on the price. Lastly, NXST attempted to sell itself before the last downturn as well, but unfortunately the financing markets were not available. If you have a view that the markets have material downside from here, the likelihood of a deal is low or shareholders will be forced to take a lower premium because the PE firms as well as management are motivated to transact. I have recently spoken to various lenders, and several private equity firms, and numerous management teams running leveraged balance sheets, and my sense is that credit markets are open for deals including buyouts, refinancings, and neutral/accretive bolt-on M&A. In fact, there are even a few banks willing and able to underwrite reasonable size staple financing. 

Upside: sale of the company for $10.50-$14 per share or 37%-83% upside. ABRY's cost basis is in the low teens - ~$12.44/share as a point of reference - 63% premium.

LBO Math example: Assuming an equity check of 30% (management roll of 8% would make the deal cheaper - 22-23% of new equity) of total capital at 6x leverage (could be 6.25x Debt/EBITDA), paying $11 per share would yield a ~22-26% IRR. For every $1 change to the purchase price is only $29mm vs $140mm+- 2012 EBITDA (political year) so there is a lot of sensitivity (helps if there are multiple bidders). NXST should generate ~$60-$70mm in FCF in 2012 or 30% yield and $35-$40mm in the odd years or 24% yield.

Other things to consider: US broadcast deals are actually happening despite the market turmoil. I think this is critical to the thesis. SBGI is buying Freedom for $385mm or 9x, and SSP is purchasing the MHP broadcast assets for 10x. After speaking with various industry participants, Freedom was not well run so the multiple could clearly be inflated (also SBGI is a very good buyer), however, the asset base is probably also inferior to NXST.

Main Risk(s):

  • -continued downturn in media (possible);
  • -NXST is a small cap (true); 
  • -political / election year disappoints (not likely);
  • -levered equity (current leverage is 5.5x); 
  • -ABRY chooses to do a secondary (unlikely)
  • -Abry sells their 23% stake to another PE firm without a premium presenting legal risk to Abry, the buyer and the company (unlikely) or the Board of Directors chooses to stay the current path
  • -Additional risk not to be overlooked: NXST has a concentrated shareholder base mainly with hedge funds, and any redemption that may impact the daily volume by +-20k shares can create unwarranted daily volatility (I think this is why the stock is trading at this range, and I know of a few holders who have had to reduce their fund risk exposure including NXST common stock and bonds). Its worth noting the NXST credit is trading at 101-102 context and is holding up well.

Duration: less than 100 days

Variant View: not sure there is a straight forward variant view here, but I think an interesting way to look at this situation is that an LBO buyer is potentially willing to pay ~$1bb in enterprise value for this business by paying a control M&A premium and marginally increasing leverage (this is already an LBO and the IRR for shareholders is very high in the event there is no deal). If no deal should occur going into a very strong political cycle at the current price what is the downside if the company will be paying down 1.5x of debt that should flow to equity holders with a possible dividend recap in late 2012 or early 2013? In fact, one can make the case that the investment case IRR as a public company is higher than the IRR for an LBO buyer (IRR buying at current levels with 5.5x leverage vs LBO with 6x leverage at 14).

Purchase Price Sensitivity:
$10.50: 302mm equity value; 927 EV; 7.4x
$11.00: 317mm equity value; 942 EV; 7.5x
$11.50: 331mm equity value; 956 EV; 7.6x
Abry Cost Basis $12.44: 358mm equity value; 983 EV; 7.9x

Scenarios Value Probability Implied Value
Credit Crisis / No Deal $5.00 0.33 $1.65
Abry sells for less than cost $11.00 0.33 $3.63
Abry Cost $12.44 0.33 $4.11
Total     $9.39
Adjusted Return     22.68%

 Summary: NXST is an inexpensive, small cap, levered equity that should be trading closer to $9 per share going into a high probability event such as an LBO or dividend recapitalization


Main Catalyst: sale of the company
Secondary Catalyst: massive de-leveraging and / or dividend recapitalization 
Duration: 100 days 
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