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

Sinclair is best known for its empire of television stations and local news programming throughout the United States, its conservative founders, and its recent failed foray into regional sports network ownership.

Officials now say the Hunt Valley-based company’s future will be more tied to industries other than broadcast.

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

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

“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 in a statement. “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 country’s largest TV station owner remains optimistic about the future of broadcasting. This year alone, the company is investing $65 million in its broadcast division, including next-generation television, a broadcast standard designed to improve video quality, reception on mobile devices, and interactivity.

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

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

The change is most likely intended to revitalize Sinclair stock, which has been stagnant in recent years. It has lost two-thirds of its value since the start of 2020, closing Friday down 43 cents at $9.71 per share.

According to a Motley Fool report from April, the stock has finished the previous 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 Dave Kovaleski, a Motley Fool contributor who covers financial stocks. “It has had a rough past few years, dealing with cord-cutting and a shifting television landscape.”

Investing in new businesses carries additional risks, but Sinclair has experience running businesses, according to Jeff Hooke, a senior lecturer in finance at the Johns Hopkins Carey Business School. The merger and acquisition market, on the other hand, is highly competitive.

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

It will take time to find suitable companies with strong management teams, but Sinclair expects to make two to four acquisitions through its private-equity fund over the next five years, according to Ripley. They would operate as independent sister divisions to the broadcast division. The first acquisition could take place as early as next year.

The company intends to investigate sectors such as nursing homes, retirement communities, and assisted living or aging-at-home services under the theme of aging population.

“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,” he said.

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

The company will also investigate businesses such as pet insurers and dog day care services that benefit from an increase in both pet ownership and pet spending.

It will also consider businesses 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, alternative energy plans, or recycling, according to Ripley.

According to him, the “do-it-for-me” trend could include maintenance or other services that people want to outsource.

Diamond Sports Group’s difficulties, according to Ripley, had no bearing on the decision to change investment strategy. Diamond, a Sinclair subsidiary formed to hold the 19 sports networks purchased from The Walt Disney Company for $10.6 billion in 2019, filed for bankruptcy reorganization in March, burdened by more than $8 billion in debt. Sinclair took a large loss on the value of the networks for the second time since purchasing them late last year, writing off $1 billion of the rebranded networks’ book value.

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

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

Sinclair Inc. became a public holding company of Sinclair Broadcast Group, which includes subsidiaries Sinclair Television Group and Diamond, on June 1. Diamond, which broadcasts games for 14 Major League Baseball teams, has sued its parent company, alleging fraudulent asset transfers, unlawful distributions and payments, contract breaches, unjust enrichment, and breaches of fiduciary duties.

Sinclair believes the claims are unfounded.

The split also resulted in the formation of the subsidiary Sinclair Ventures, which will house a $1.3 billion investment portfolio comprised of cash and minority stakes in private equity, real estate, and other direct investments.The Tennis Channel, marketing technology firm Compulse, intellectual property used in broadcast technology, and technical and software services companies are all part of Sinclair Ventures.

The company is selling its minority investments and intends to reinvest the proceeds, which amount to $316 million of the total portfolio, in acquisitions or majority control of nonmedia companies.

Sinclair had amassed a sizable portfolio of nonlocal media assets. Separating them would allow the company to demonstrate to Wall Street their undervalued value and provide shareholders with visibility into the performance of the company’s investment portfolio, according to Ripley.

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

According to Ripley, this does not take into account the value of the Tennis Channel, the potential of Compulse, or the investment portfolio due to the minority investments. Despite this, the $1.3 billion portfolio has generated an annual rate of return of about 20% over the last ten 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 went on to say.

In an August report, a J.P. Morgan analyst stated that Sinclair’s television stations and cable networks face challenges due to the risk of a recession and the potential for cord-cutting to reduce distribution revenue.

The report also mentioned Sinclair’s investment portfolio, noting an increase in cash balance.

However, “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 arising from the Diamond bankruptcy process,” according to David Karnovsky, a media, entertainment, and advertising analyst, in the report.

Sinclair stated that it wishes to emulate the few publicly traded holding companies, such as Berkshire Hathaway, the multinational conglomerate led by Warren Buffett in Omaha, Nebraska, or Graham Holdings, which has 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 a sort of model like that,” Ripley said, referring to operations like Tennis Channel and Compulse. “In June, we just cleaned it up and said, ‘Yes, it’s official.'” We truly operate in this manner, and we are opportunistic.’ We’re not going to confine ourselves to a single industry.”

Such business models can work in many cases if the successful leadership teams of the acquired firms are retained, according to 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,” he said.

She claims that conglomerates frequently end up selling off divisions over time because the values of individual businesses are not realized apart from the larger structure.

In Sinclair’s case, “they may have excess capital that they are attempting to invest in order to create value for shareholders… “And the industry they’re in isn’t doing so well right now because there’s just so much competition,” she explained. However, any future acquisitions should be accompanied by the following questions: “Why is Sinclair the right owner for these companies… and what value are you bringing to these firms?”

In the current environment of rising interest rates, Ripley believes Sinclair’s timing is ideal. Private-equity funds have generally found it more difficult to proceed with acquisitions, a trend that could eventually depress valuations and lead to better and increased opportunities.

“People who can buy through this period should do better in general,” he went on to say.