TV station owner Sinclair plans to branch into nonbroadcast business through billion-dollar private-equity fund – The Mercury News

Lorraine Mirabella | Baltimore Sun (TNS)

Media company Sinclair may be best known for its empire of television stations and local news programming across the United States, its founders’ conservative bent and its recent failed foray into regional sports network ownership.

Now, officials say the Hunt Valley-based company’s future will become more tied to industries outside broadcast.

Instead of buying more television stations, the company is shifting its investment strategy to acquire growing, nonbroadcast businesses, Sinclair President and CEO Chris Ripley said in a recent interview.

It plans to pursue acquisitions of companies that stand to benefit over the next decades from trends such as the aging of the population, the expanding decarbonization of the economy, the increase in pet ownership and spending, and the “do-it-for-me” sector.

“Our core business and our legacy might be in media and broadcasting, but at the end of the day we’re looking to make Sinclair a success in any industry that it’s in,” Ripley said. “If there are better investment opportunities in other industries, then we should pursue those rather than just blindly saying we’re a broadcaster, and this is all we’re going to do.”

The nation’s largest owner of TV stations still believes in the future of broadcast. The company is investing $65 million this year alone in its broadcast division, in areas such as next-generation television, a broadcast standard designed to improve video quality, reception on mobile devices and interactivity.

But, “as we looked at our business, it became increasingly clear that from a regulatory perspective, broadcasting is not in a good position,” facing far-less-regulated competitors such as Big Tech and Big Media, Ripley said.

“The investment was going to have to go somewhere else,” he said.

The shift is likely aimed at reinvigorating Sinclair stock, which has languished over the past few years. It’s lost two-thirds of its value since 2020 began, closing Friday down 43 cents at $9.71 a share.

A Motley Fool report in April noted that the stock finished the past three calendar years down and has a five-year annualized loss of 6.8% per year.

“The stock is dirt cheap, trading at less than earnings,” said the report by Dave Kovaleski, who covers financial stocks for Motley Fool. “It has had a rough past few years, dealing with cord-cutting and a shifting television landscape.”

Buying into new businesses comes with other risks, but Sinclair has the advantage of experience running businesses, said Jeff Hooke, a senior lecturer in finance at the Johns Hopkins Carey Business School. The merger and acquisition market, however, is competitive.

“The main risk of diversifying is you’re overpaying or you’re getting into something you don’t know very well,” Hooke said.

Finding suitable companies with strong management teams will take time, but Sinclair aims to make two to four acquisitions through its private-equity fund over the next five years, Ripley said. They would become independently managed sister divisions to the broadcast division. The first acquisition could happen by sometime next year.

Under the theme of aging population, the company plans to take a close look at sectors such as nursing homes, retirement communities, and assisted living or aging-at-home services.

“We know demographically that the world and specifically the U.S. will become older over time and there are certain businesses that will benefit from that,” Ripley said.

For instance, “we know that demand for nursing homes is going to be going up because of the population’s aging,” he said. “Now we’re going in and we’re identifying specific industries … that would benefit from that megatrend.”

The company also will look at businesses such as pet insurers or dog day care services that benefit from the increase in both pet ownership and spending on pets.

It will consider businesses as well that benefit from decarbonization, “another trend that we’re very certain will be strong and enduring for decades to come,” in areas such as geothermal, alternate energy plans or recycling, Ripley said.

And the “do-it-for-me-trend,” could involve maintenance or other services people want to outsource, he said.

Ripley said Diamond Sports Group’s difficulties did not play into the decision to shift investment strategy. Diamond, a subsidiary Sinclair created to hold the 19 sports networks it acquired from The Walt Disney Co. for $10.6 billion in 2019, filed for bankruptcy reorganization in March, burdened by more than $8 billion in debt. Late last year, Sinclair took a large loss on the value of the networks for the second time since buying them, writing off $1 billion of the rebranded networks’ book value.

At the height of the coronavirus pandemic in 2020 after national sports leagues canceled games and cut seasons short, Sinclair took a $4.2 billion charge to goodwill and intangible assets related to the sports networks. Diamond also has struggled in an environment in which viewers are increasingly turning to streaming services instead of paying for cable.

Sinclair began laying the groundwork for the new investments when it split the company in a corporate restructuring earlier this year. It dropped “broadcast” from the former Sinclair Broadcast Group name in a bid to highlight and unlock value in its nonbroadcast business.

On June 1, Sinclair Inc. became a public holding company of Sinclair Broadcast Group, which houses subsidiaries Sinclair Television Group and Diamond. Diamond, which airs games for 14 Major League Baseball teams, has filed a lawsuit against its parent company, alleging fraudulent transfers of assets, unlawful distributions and payments, breaches of contracts, unjust enrichment and breaches of fiduciary duties.

Sinclair says the claims are without merit.

The split also created the subsidiary Sinclair Ventures to house a $1.3 billion investment portfolio made up of cash and minority investments in private equity, real estate and other direct investments. Sinclair Ventures includes the Tennis Channel, marketing technology firm Compulse, intellectual property used in broadcast technology, and technical and software services companies.

The company is selling off its minority investments and plans to redeploy that cash, now $316 million of the total portfolio, into acquisitions or majority control of nonmedia businesses.

Sinclair had built a significant base of nonlocal media assets. Separating them would allow the company to show Wall Street their overlooked value and give shareholders visibility into performance of the company’s investment portfolio, Ripley said.

“Mostly Wall Street looks at us as just one, a TV broadcast company,” he said.

That does not take into account the value of the Tennis Channel, the potential of Compulse or the investment portfolio because of the minority investments, Ripley said. Yet the $1.3 billion portfolio had an annual rate of return of about 20% over the past 10 years.

“By separating it out and enhancing the disclosure around each one of those elements, we’re able to better show and disclose our value to Wall Street,” Ripley said.

An analyst for J.P. Morgan noted in an August report that Sinclair’s television stations and cable networks face challenges because of the risk of recession and the potential for cord-cutting to hurt distribution revenue.

The report also commented on Sinclair’s investment portfolio, noting that the cash balance has increased.

But “we continue to believe investors will not give full credit for value here until the assets are converted to cash or there is clarity on any potential liability from the Diamond bankruptcy process,” said David Karnovsky, a media, entertainment and advertising analyst, in the report.

Sinclair said it wants to follow the example of the few holding companies that are publicly traded, such as Berkshire Hathaway, the multinational conglomerate headquartered run by Warren Buffett in Omaha, Nebraska, or Graham Holdings, with operations in educational services; home health and hospice care; television broadcasting; online, print and local TV news; automotive dealerships; and manufacturing, hospitality and consumer internet companies.

“We already had sort of a model like that,” Ripley said, with operations such as Tennis Channel and Compulse. “What we did in June was just clean it up and say, ‘Yes, it’s official. We really do operate this way, and we’re opportunistic.’ We’re not going to just pigeonhole ourselves to one industry.”

Such business models can work in many cases when the acquired firms’ successful leadership teams are retained, said Karyl Leggio, professor of finance at Loyola University Maryland.

“It’s definitely a model that has been attempted by a lot of companies, not all of them successful, but there are firms that have done it successfully,” Leggio said.

Conglomerates often end up selling off divisions over time when values of individual businesses are not realized apart from the larger structure, she said.

In Sinclair’s case, “they may have excess capital that they’re trying to invest and create value for shareholders … and the industry they’re in is not doing particularly well right now, there’s just so much competition,” she said. But questions for any future acquisitions should be, “Why is Sinclair the right owner for these companies … and what value are you bringing to these firms?”

Ripley said the timing may be right for Sinclair in the current climate of rising interest rates. It’s been generally more difficult for private-equity funds to move ahead with acquisitions, a trend that could ultimately depress valuations and lead to better and increased opportunities.

“People who can buy through this period should do better in general,” he said.

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