Looking to test the stock market's appetite for TV broadcasting, Nexstar Broadcasting is moving ahead with its plan to go public later this month. The small-market station group would use the proceeds to complete the takeover of Quorum Broadcast Holdings, which owns 10 TV stations; stabilize its financial structure; and create a currency for future acquisitions.
Nexstar planned to make its offering more than a year ago. "We just held off because of valuations," said Nexstar CEO Perry Sook. "We think that valuations are at a fair level now."
Nexstar is controlled by Abry Partners, a Boston private-equity fund specializing in media companies. Abry also controls Quorum but is rolling over its stake into Nexstar stock.
Nexstar expects to raise about $150 million, selling 10 million shares for around $15 each. That will account for about 35% of Nexstar's outstanding stock, a relatively large slice for the IPO of an established company. That price would value Nexstar's assets at almost $1 billion.
Nexstar is heavily leveraged. Even after the IPO, debt will run 7.1 times running-rate operating cash flow, high for the cyclical TV-station business. And it has issued some securities costing 12%-16% per year. Sook said leverage should fall to six times by next year and the high-cost securities will be refinanced in the IPO.
A lot of the money is going to insiders. More than a third will go to lead underwriter Bank of America to back preferred stock the company holds for investing in Nexstar earlier.
Sook is getting a $3 million "success fee" for assembling the station portfolio, which he plans to use to repay a loan he took to invest in Nexstar when Abry came in. That loan is from Bank of America.
Another $41 million will go to help finance the deal for Quorum. "There are no proceeds going out to Abry at all." Sook said. "They are rolling over Quorum common and preferred into Nexstar common."
Sook started Nexstar in 1996, aiming to build a TV portfolio outside the top 50 markets. Nexstar currently owns 16 stations and has agreements to manage ad sales for an additional 10. Nexstar's biggest market is No. 53 Wilkes-Barre, Pa. where it owns NBC affiliate WBRE-TV. The company owns or runs 10 NBC, five CBS, five ABC, four Fox and two UPN affiliates.
The recession is crunching Nexstar a bit harder than other station groups. Nexstar has boosted revenues and profits this year, but that's through deals to handle the sales of other TV stations in its markets. With those deals, Nexstar's revenues grew 12% to $68 million for the first six months of 2003. Without them, revenues would have fallen 4%. "Same-station" operating income dropped 13% to $4.5 million.
Sook expects Nexstar cash flow to grow 8%-11% next year. "That would be consistent with our peer group, LIN and Gray Television," he said.
The deal follows a smattering of broadcast IPOs over the past 18 months. Gray Television now trades about 20% above its September 2002 initial price. LIN Television went public last May but has traded down 15%; Journal Communications (which is primarily a newspaper company) is up about 8% since its September IPO.