One rarely hears about a station group deciding not to pursue lucrative retransmission consent fees but when E.W. Scripps agreed to acquire Ion Media for $2.65 billion, it said the Ion stations would stick to must-carry.
Analysts initially said they were surprised by the unusual strategy and asked about it during a conference call in which Scripps executives went over details of the transaction.
“Just so I’m 100% clear, there’s no affiliate fees or retrans today from Ion and your plan is that going forward, you’re not necessarily looking for a subscription supported carriage model on the content,” asked Steven Cahall of Wells Fargo. “Is that right?”
“That’s correct,” answered Scripps CEO Adam Symson. “The fees that Ion receives are immaterial and no, we will continue to elect must-carry because Ion’s model, as does [Scripps’ Katz Networks units] depends on the broadest distribution possible in the pay TV ecosystem.”
Cable operators might be able to breathe a rare sigh of relief. Usually the first thing that happens after stations are acquired, the new owner looks to use the leverage of a larger company to force distributors to pay higher fees.
But not Scripps. Not this time.
“This is a unique situation,” said Justin Nielson, senior analyst at Kagan, the media research unit of S&P Global Market Intelligence. “I think it is really because Ion has been unsuccessful in doing its own retrans deals.”
Nielsen said that three years ago Ion tested the market to see if it could get retrans fees, but was rebuffed. Ion’s failure to push harder for retrans scuttled a possible joint venture with 21st Century Fox. Ion affiliates have also been unable to push cable operators to pay retrans fees, Nielsen said.
While foregoing fees, opting for must-carry assures stations that their programming streams will be distributed by cable operators and satellite services. Avoiding a tough negotiation avoids disrupting Ion’s advertising business.
Scripps, which had $382.7 million in retransmission revenues in 2019, up 27% from 2018, is no stranger to retransmission battles. Scripps stations were blacked out for five weeks starting in July in a dispute with Dish Network. Dish claimed Scripps was seeking a 250% increase in retrans fees. Scripps denied seeking a hike that size.
In the case of Ion, distributors might have a good reason for not wanting to pay fees, because they don’t have local programming or local news, Nielson noted.
Under Scripps, they could, especially in areas where Scripps already has news operations. “Instead of saying that’s something they may explore down the line, they state we’re going to keep the status quo--must carry--for distribution," he said.
Angling for retrans also might not sit well with Wall Street. Scripps is pitching its Ion deal as a free-over-the air play, and analysts have been downgrading programmers as the number of pay TV subs erode.
Scripps is pitching the Ion acquisition to Wall Street in part as a bet on an over-the-air TV comeback.
“Over the air may not be sexy, at least not yet,” Symson said. “But Ion and Katz are proof that there is a lot of value being created there. Scripps bought Katz Networks--which runs Bounce, Court TV, Court TV Mystery, Laff and Grit--in 2017 for $292 million.
Symson said that it has been tracking a “renaissance” in over-the-air viewing. “While most people are only focused on the variety of internet streaming options for TV, they’re missing the reality that over-the-air television has been growing right alongside the digital over-the-top platforms.”
Although it owns TV stations that broadcast its programming, Ion is a lot like a cable network. Just 20% of its viewing comes from over-the-air, which is why must-carry is important.
“It looks like a cable network and it reaches the nation's cable and satellite TV households like a cable network, but at its core it's an over-the-air broadcast business that reaches cord cutters and cord-nevers on the growing free over-the-air television platform,” Symson said. Ion “outperforms The CW and many cable networks you probably thought were bigger," he added.
One way Ion is like a cable network is its profit margin, which is 50%. “It's an efficient business built on the back of its national reach,” Symson said.
The Katz Networks are similar, being broadcast on TV stations’ secondary digital channels but increasingly getting carriage on cable and dependent on national advertising for revenue.
The Katz Networks will be a big beneficiary of the Ion deal because Ion stations will broadcast the Katz Networks in their markets, instead of Katz paying stations to carry its signals. Those payments are one of Katz’s biggest expenses. Eliminating those costs are a big part of distribution synergies Scripps said will be worth $120 million a year in six years, when all the existing agreements lapse.
Scripps is pinning its hopes on the national advertising market. Despite the drop in the economy caused by the pandemic, Katz’s revenue have been up 14% during the first six months of the year. The company said it expects Ion’s revenues to grow in the low double digit range.
“There is no string of search words, no display advertising, nor any targeted Facebook ads that can command the attention nor evoke an emotion like television advertising,” Symson said.
Scripps said it has no plans to begin investing in expensive original programming for Ion. “I wouldn't forecast any near-term changes in the programming strategy because it's been very very effective,” Symson said, endorsing the strategy of buying successful off-network shows instead of trying to create its own hits.
Symson didn’t say what roles Ion CEO Brandon Burgess would have in Scripps’ new national television group, including Ion, Katz and Newsy.
“Over the next couple of months we’ll kick off a project working with Ion's leadership team, the leadership team at Katz and in the leadership team at Newsy to create an integration plan so that we can really build a new Scripps Networks business, inclusive leadership and culture from across all of the different businesses,” he said.
Scripps will be selling off 23 of the Ion TV stations to a buyer who will keep them as Ion affiliates. It recently sold off its Stitcher podcast business and WPIX-TV, New York.
But it has no plans to sell its spectrum--now combined with Ion, the biggest collection of spectrum in the industry.
“We would be monetizing it as an operator. Not as a seller,” Symson said of the spectrum. “Being the largest holder of broadcast spectrum in the country puts us in a very good position to play a leadership role as the industry develops new ways to reach the American consumer, with data with programming, through our existing multicast and new programming strategies.”
Scripps stock jumped from Wednesday’s close of $10.47 to $13.90 after the deal was announced Thursday. It lost some steam and closed Thursday at $11.27. On Friday, Scripps share edged up to $11.62.
“First impressions on E.W. Scripps’ deal for Ion Media is that it is a transformational acquisition combining the local station and network assets into a nationwide TV platform with a reach of over 100 million homes,” said Kagan’s Nielson in a note. “This large a deal is a big gamble given current market conditions, but could pay off big for E.W. Scripps and it’s investors including Warren Buffet’s Berkshire Hathaway.”
