Sinclair Paints Rosy Financial Picture Despite Record Fine, Revenue Hemorrhages Due to RSN Investment

Sinclair Broadcast Group was hit with a record $48 million fine by the FCC Thursday morning, news of which was strangely absent from the company’s Q1 earnings call later in the day. Except that it’s not strange at all since such calls are supposed to be like pep rallies. And when your team has been losing as often and as badly as Sinclair over the last few months, it’s important to accentuate the positive.

The company did address the fine publicly, tweeting out a statement from president and CEO Chris Ripley that thanked the FCC for its diligence in resolving the matter. Ripley said Sinclair was “pleased…to be moving forward” and is “committed…to full compliance” when it comes to regulatory affairs. In other words, just typical corporate eyewash.

The fine came as the result of Sinclair’s botched attempt to purchase the Tribune Company in 2018, so we can at least draw anecdotal ties to the Cubs. After all, the Tribune Company owned the Cubs up until 2009, when Sam Zell’s purchase of the former led to spinning the latter off to the Ricketts family. The media conglomerate still had a 5% stake in the team in 2018, though it was sold back to the Ricketts family in for an undisclosed sum in January of 2019.

Back to the Sinclair fine, which came as the result of attempts to deceive federal regulators in order to facilitate its failed $3.9 billion purchase of Tribune Media. Sinclair, which owns hundreds of television stations across the country, had to sell off some of those stations in markets where it would have owned multiple properties. However, the companies to which those stations were sold had deep ties to Sinclair’s founders.

“Sinclair’s conduct during its attempt to merge with Tribune was completely unacceptable,” FCC Chairman Ajit Pai said via a statement Wednesday. “Today’s penalty, along with the failure of the Sinclair/Tribune transaction, should serve as a cautionary tale to other licensees seeking Commission approval of a transaction in the future.”

Though the $48 million fine is double that of the previous record, it’s a pittance compared to the revenue numbers Sinclair reported for the first quarter. Consolidated revenue increased 123% to $1,609 million over Q1 last year, driven primarily by the acquisition of 21 regional sports networks. The company also reported a 248% increase in year-over-year consolidated operating income to $327 million with a 69% increase in adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to $281 million.

Finally, the company announced a $0.20 per share quarterly cash dividend, which means a roughly $1.8 million windfall for anyone who owned a 10% stake in the company. Not that many folks are likely to have such a cache, even before Sinclair repurchased 10 million shares of common stock, roughly 11% of its total shares, during the first quarter. But that was as much about the stock price going in the tank as anything.

SBGI was trading at $16.06 per share at Thursday’s close, which would have been a five-year low had we been talking a month ago. As you can see from the chart below, however, the new bottom was $13.90 on April 22. What’s more, the one-month high of $18.80 is still $0.53 below what had seemed like the floor back on March 10. For even better perspective, you’ve got to zoom out a little further.

Sinclair shares peaked at $61.81 back in May when that massive RSN acquisition was announced, after which the values have engaged in a steady march down to the valley. While the impact of COVID-19 hastened that trend in March, things were looking pretty dire well before sports shut down. That $0.20 per share probably doesn’t look as great when the stock price is half what it was on January 1 and nearly a quarter what it was in May.

Keep in mind that this is only the beginning, since Q1 ended with March and only included a little over two weeks of the nationwide moratorium on sports. You know how those RSNs, including a 20% stake in YES Network and a partnership with the Cubs on Marquee, that were cited as Sinclair’s primary revenue driver? The company reported a $31 million shortfall in first-quarter media revenue relative to the “low end of guidance,” which would have come almost exclusively between March 12 and the end of that month.

We can reasonably assume, then, that revenue has remained at least as depressed in the time since and will continue as such until college and professional sports resume. Sinclair has removed all fiscal guidance as a result of the unknown future, understandably so, but they’ve got to be hemorrhaging money at this point. And that’s just from ad revenues, since television providers are still paying carriage fees for the networks in question.

Ah, but that too could come to an end in the event that minimum thresholds for games played are not met. Sinclair might have to refund some or all of those carriage fees to providers should the respective teams or leagues not have enough games broadcast to merit the cost. As you have surely deduced by now, it’s not just the teams and players that want to get MLB and other sports rebooted ASAP.

This would all be bad enough on it’s own were we simply viewing Sinclair as a giant propaganda machine getting its comeuppance for decades of shitty business practices. However, the partnership with Marquee means that the overall company’s livelihood could have a direct impact on the Cubs. Remember how a new TV deal was supposed to net wheelbarrows full of cash, resulting in “much larger revenue” that would be “available immediately” for team payroll?

Yeah, that ain’t happening. The Cubs had been saying even before sailing into these choppy waters that the startup costs associated with getting Marquee off the ground meant it’d be a while before the network turned the kind of profit that would have significant impact on the team itself. Then came contentious, protracted carriage negotiations with several cable and streaming services, the largest of which still isn’t on board.

A Bloomberg Business report in March held that the absence of Comcast in Marquee’s stable of providers could mean underperforming by $100 million against revenue projections. Even given the likelihood that Marquee’s leaders would be willing to accept significantly reduced carriage fees at this point, Comcast has no reason to pick up a channel that won’t be broadcasting games until July 1 at the earliest.

If there’s a potential silver lining to this, it’s that ad rates will rebound massively once games do start back up again. Just look at the record ratings for the NFL Draft or the number of people treating The Last Dance almost like it’s a live sporting event. Of course, even an incredible recovery can’t make up for the losses being suffered in the meantime. I truly have no idea what that means for Sinclair, Marquee, and the Cubs, but I know it’s not looking good at the moment.

Should the status quo be maintained through June, I am willing to be the Q2 earnings report is going to require a helluva lot more spin to avoid reading like an obituary.

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