David Smith, Sinclair: Turnaround Champs

In mid-2009, Sinclair Broadcast Group was staring into a financial abyss. The company’s back was bowed under $1.33 billion in debt and a debt-to-cash flow leverage ratio of nearly six times, pushing it dangerously close to defaulting on loan covenants.

When a strategic ally’s own default threatened to topple Sinclair as well, Sinclair management took the unusual step of warning it might be forced into bankruptcy.

Today, a scant two-and-a-half years later, Sinclair is financially healthy and positioned to capitalize on the improving economy. It has whittled down debt and corresponding leverage ratios significantly, all while steadily upgrading station technology and striking deals that expand its scope and scale.

The strongest evidence of Sinclair’s return to health came late last year when it purchased two other station groups, Four Points Media and Freedom Broadcasting, for a total of $585 million.

The Freedom deal is expected to close this quarter or early next, but Sinclair has been managing the stations since the deal received antitrust approval last year.

Those two acquisitions boosted Sinclair’s full-power station count to 60 in 45 markets, according to BIA/Kelsey. The deals also pushed Sinclair past ABC’s O&Os in terms of television households reached.

Based on Nielsen’s 2011 count of 114.7 million total television households, Sinclair stations reach 25.3% of the market while ABC O&Os reach 21.8%.

Sinclair also operates eight other stations, BIA/Kelsey says. Only Ion, with 69, has more stations.

All the more impressive, Sinclair — among the few remaining family-owned-and-controlled television station groups — has achieved that without a single station in a top-10 DMA.

“Early on in the company’s history, it appears that David Smith [Sinclair president-CEO] made the pragmatic and strategic decision to avoid competing directly against the size and scale of vertically integrated media companies with endless resources,” says Damian Riordan of the M&A advisory firm Peloton Media Advisors.

“He competes and has consolidated just outside that trench.”

Sinclair stock, meanwhile, has benefited from broadcast’s rising economic tide, rebounding strongly from the recession’s depth, thanks in large part to recovery by the auto advertising segment.

Shares had traded as low as 89 cents in 2009’s first quarter. While they had clawed their way back to about $2 shortly before the bankruptcy warning, that red flag drove them back down to around $1.34. Shares currently are trading around $12. That’s still well off a five-year high of $17.26 in April 2007, but all broadcast stocks have suffered a secular decline since then.

All in all, a dramatic turnaround. So just how much of it is timing, luck or savvy management?

“They did an outstanding job refinancing the debt,” says Barry Lucas, senior vice president-research at Gabelli & Co. “And they put whatever free cash there was to paying down debt. … Just a year ago, they were discussing how quickly they brought the leverage down to record lows for them. It was clear to me at that time they were going to buy something.”

Sinclair last year pushed its leverage ratio down to about 4.2 times, and buy it did. The company pulled the trigger first on Four Points Media’s seven stations in September, paying $200 million.

Barely a month later, Sinclair announced it was buying Freedom Communications’ eight stations for $385 million.

The buying may not be over. Sinclair still has a ready supply of dry powder should more deals materialize.

“I think it’s prudent for us to focus on middle markets, as we refer to them,” David Smith, Sinclair CEO said during last week’s earnings call. “If we see opportunities to make acquisitions, we would certainly go after them."

Smith has said he can envision growing the group to 100 stations or more.

David Smith’s company

Four Smith brothers — David, Robert E., J. Duncan and Frederick G. — own and control Sinclair. Together, they hold 96% of the supervoting (10:1) Class B shares and 49% of the Class A shares for a total of 82% of Class A and B shares combined.

But it is David whose name has been synonymous with Sinclair since 1986, when he helped his father, Julian, found the company. Two years later, he became president-CEO. And two years after that, David Smith and his brothers bought out his parents’ interest in the group.

“It’s his company, make no mistake about it,” Riordan says. “I think David, at the root of everything, is a committed and very loyal guy to his people and his company. And he can be fiercely protective.”

“Ninety-nine percent of what he’s accomplished over the last two decades has prompted everyone else to follow,” Riordan continues. “It seems he’s been willing to stand out front and take the bullets. The guy is unique to the industry. David’s always been a catalyst for change.”

People familiar with Smith characterize him as a visionary, iconoclastic, Machiavellian and often outspoken to the point of being brash. He is willing to ruffle the feathers of friends as well as foes if his conscience, and economics, dictate.