Ladies and gentlemen, thank you for standing by and welcome to the Scripps Conference Call. At this time, all participants are in a listen-only mode. Later, we welcome your answers. Instructions will be given at that time. If you should require offline assistance, you may press star followed by zero. Your hosting speaker Tim King. Please go ahead, sir.
Thank you very much, Kevin, and good afternoon, everybody. Thank you for joining us on this call on short notice. Joining me on the call today to discuss the acquisition that we announced just a short time ago are Rich Boehne, the President and CEO, Tim Wesolowski, making his debut as our CFO, and Brian Lawlor, who runs our growing portfolio of television stations. After a few brief prepared remarks by those executives, we will, of course, open up the call to your questions. Before I start, I should note that the commentary you will hear from our executives this afternoon may contain certain forward-looking statements, and actual results for future periods may differ from those predicted. By reading the 2010 Form 10-K, you can read more about some of the factors that may cause results to differ from what you are about to hear.
Without further delay, I will turn it over to Rich.
Thanks, Tim. Good afternoon, everybody. This week, we took advantage of an opportunity to make a smart investment in a business we already know well and run successfully, and at the same time, enlarge our field of opportunity for new digital and programming businesses by entering several of the country's most attractive media markets. By acquiring the McGraw Hill TV stations, we also gained an entry point into the growing Spanish-language marketplace. Let me step back and answer the big question: why invest more in TV stations? First, it's a strong local media model that benefits from the larger TV ecosystem around it. With a license, a share of valuable spectrum, required carriage on cable systems, and long-term network programming partnerships, local broadcast stations are good businesses today with attractive options for creating more value in the future.
Brian will talk more in a few minutes about how we see these stations having a strong opportunity to be leading providers of local digital news, information, and marketing products. Just last week, we announced a reorganization of our digital resources aimed at accelerating our rollout of digital products. Now we can extend our strategy into markets like Denver, Indianapolis, San Diego, and Bakersfield. We also like TV stations because among the value drivers are local news, enterprise journalism, and community service programming, skill sets on which we focus and excel. In local TV, the best way to increase revenue is by increasing the number of people who consume your news programming. That's our core competency, and we look forward to working with the teams at McGraw Hill to ensure viewers get the very best in those markets.
We already know they have a strong news culture, so the integration should be smooth and enthusiastic. We believe TV stations purchased under the right conditions are businesses through which we can create value for shareholders. We are patient, diligent investors determined to show attractive cash-on-cash returns when we spend the shareholders' money. In this case, our patience paid off. Our new CFO, Tim, is going to talk more about the details of the deal in just a second. Finally, let me say this is an important acquisition and opportunity for Scripps, but it's only part of our story in these fast-moving times. We very intentionally structured the deal to protect our financial flexibility, leaving us cash to invest in new digital businesses both inside and outside our markets, and to continue buying more of the businesses we already know through stock repurchases.
Our commitment to building profitable news and journalism models for the future continues unabated. Now, through a deal that creates value on its own merits, we expand our opportunity into several great markets. We also get a low-cost option, Spanish-language marketplace. Bottom line, we believe we cut a very good deal for our shareholders. Now, here's our new CFO, Tim Wesolowski, to walk you through the details of the transaction. Tim?
Thank you, Rich. You already know the purchase price of $212 million, which we arrived at looking at several metrics. First, the release noted that we intend to make an election under Section 338(h)(10) of the tax code to realize a higher tax basis in the assets, which will result in an estimated present value benefit of $20 million- $25 million. Net of the tax benefits, our valuation is about $190 million. When we netted out the present value of the tax benefit, we ended up with a multiple of approximately 8x first year's cash flows. Considering the future ramp-up of retrans fees and a meaningful pickup in margin from the planned operating improvements that Brian's going to cover in a minute, we expect a multiple on a normalized run rate that is significantly lower than 8x .
In fact, we expect it to be several turns lower than 8x. We plan to finance the transaction with new debt and have secured committed financing for the entire purchase price. As a reminder, we are now debt-free. We chose to make this acquisition with debt for a couple of reasons. The low borrowing costs in this environment are attractive, but we didn't go this route simply because the debt is cheap. A larger driver of the decision to finance with debt is our desire to retain cash for new business development and/or stock repurchases. At the end of August, we had $153 million of unrestricted cash on our balance sheet. That cash, along with our borrowing capacity, are important attributes during a period like this when surging and at a time when intriguing investment opportunities in emerging platforms present themselves daily.
By financing with debt, we have preserved a powerful part of the Scripps story. O ur financial flexibility to weather storms while building for long-term growth, plus, we'll still have the opportunity to invest in the business we know best through our repurchase authorization. To date, we have purchased $39 million of stock, and we still have $36 million left under the current authorization. Let me try to summarize today's news. We've just invested in nine stations with great upside potential in desirable markets. The acquisition broadens our reach, deepens our commitment to television, and will provide substantial cash flow benefits. We didn't pay a great deal for these operations, and we preserved cash. After the transaction, we'll end up in a net debt position of only about $50 million, and the 2012 election cycle should help us generate a great deal of cash.
That's a look at the financial side of this transaction. I'll turn it over to Brian Lawlor for the operational discussion.
Thanks, Tim. As Rich said, we're very excited about this deal, in large part because the culture of the McGraw Hill stations fits so well with ours. In our station visits, it was clear that McGraw Hill employees aren't content to just throw product on the air. They're truly dedicated to the mission of community service, to high-quality journalism, and to meaningful investigative reporting. That's what animates the employees at the Scripps stations, and it's just as true at the McGraw Hill stations. I think these qualities will help make the transition go well. There are so many obvious aspects of this deal that make this attractive to us. These are growing markets. The sizes of Denver, San Diego, and the Indianapolis market are in the sweet spot of our current portfolio, and this strengthens the relationship with our largest network partner, ABC.
There are so many more reasons for us to have gravitated toward these assets. Let me summarize them in just a handful of buckets. First, news organizations. In the most recent major sweep, which was May 2011, seven of the nine Scripps TV stations finished number one or number two in their 6:00 P.M. news, and seven of our nine stations also finished number one or number two in their late news. Our stations are enjoying a high level of success because of our commitment to relevant and responsible story selection and storytelling that is differentiating our products in the Scripps markets. We have aligned our resources to give us more feet on the street and a true commitment to 24/7 multi-platform content distribution.
We believe our approach to distributing news and information, combined with the great investigative focus and strong news brands at the McGraw Hill stations, will differentiate these properties and help them enjoy the same momentum that the Scripps stations are experiencing. Digital opportunities. In the past month, you may have seen us announce that we were the first broadcast group in America to offer live streaming to mobile apps. In addition, we recently consolidated all of our digital operations to advance our web, mobile, and social properties into a digital innovation center supporting our TV and newspaper assets. We see a tremendous opportunity to expand these offerings into these robust and digital-savvy new markets. On the revenue front, for the last several quarters, Scripps has reported some of the best revenue growth in the broadcast industry.
Much of that success is a result of our strategic focus on key category relationships and partnerships. In addition, revenue being created through the development of new- to- TV advertisers and digital mobile clients is expanding our base that is exclusive in our markets. We look forward to capitalizing on McGraw Hill's strong sales teams and their impressive community relationships in each of these new markets to develop top-line growth. Additionally, we are excited to bring our political expertise to several of these markets in 2012, including the state capital cities of Denver. On the cost side, over the last four years, both Scripps and McGraw Hill have been achieving cost-efficient synergies that have improved our bottom lines. We think there is a scale benefit that can go both ways through our larger footprint.
Additionally, our commitment to developing Scripps-owned programming, such as RightThisMinute , which debuted nationally last month, reduces our dependency on syndicated programming and can be leveraged quickly across all these stations. Finally, the potential of mobile. We like that the new partnership or the new stations expand our footprint in the Pearl Mobile DTV partnership. While the business benefits of mobile broadcasting are longer-term in nature, it'll be good to bring this new to consumers in the McGraw Hill markets. We have a lot of work to do in the months ahead on the operational side, but we're energized by the addition of good people at good stations in good markets and the knowledge that there are many ways in both the short and long term that we can make meaningful improvements in the performance of these operations.
With that, why don't we go ahead at this point and open up the lines for questions?
Thank you. For questions, please press star followed by one on your touch-tone phone. You will hear a tone indicating that you are in queue. You may remove yourself from queue at any time by pressing the pound key. Once again, for questions at any time, please press star followed by one. First question is from the line of Alexia Quadrani, JP Morgan. Please go ahead.
Thank you. A couple of questions. Could you give us a sense of the profitability of these stations? If you could give a bit more detail on the retrans opportunity?
Hey, it's Rich. I will let Brian talk about retrans. What was your first question, Alexia?
If you give a sense of what the profitability is of these stations, the margins.
Let me let Tim or Brian touch on that as well. Go ahead, Brian. Why don't you talk about retrans?
Okay. Alexia, you know , our current agreements, as you know our company pretty well, is that our existing retrans deals are tied to some of our Scripps Networks. Two of those deals come up. Those are for our existing television stations. We have engaged in specific negotiations related to this and our ability to capture retrans with companies. I can't give you specifics inside those negotiations as some of them continue, but it's safe to say that retrans is going to be net positive for us with this deal.
Okay, thanks. Could you give a sense of EBITDA for the group or the sense of profitability?
We think that the profitability of this business going forward can be enhanced significantly by some of the things that Brian talked about in terms of the operational improvements that we'll be making to these businesses. When you really look at that compared to the purchase price that we're paying, particularly in 2012, which is a multiple that we looked at, you can see that when it comes out to an 8x multiple and sort of where that relates to in terms of 2012 EBITDA. Really going beyond that, we see room for significant improvement going out further where we can reduce that multiple from 8x to something well below that.
Alexia, it's Rich. McGraw Hill was public and didn't break out those numbers. If you're talking about looking back, if you're looking for a trailing 12x or a 2010 number, we just didn't feel like we could break out their numbers and give them to you.
I guess put a different way then, the 8x , that assumes $190 million, right, t aking into account the tax deductions, not the $212 million?
That's correct.
Are you assuming some sort of profitability improvement in 2012 from 2011?
Yes, we are.
Okay, thank you.
Remembering that we're not exactly sure when in 2012 we'll take over, but yes.
Okay, thanks.
Thank you. Next question is from the line of Michael Kupinski, Noble Financial. Please go ahead.
I would imagine that McGraw Hill didn't really focus on these stations for some time and was just wondering if there are some easy cuts and/or improvements that you guys feel that you can make fairly soon and what the prospect for the timetable might be for that.
It's Rich, and we'll let Brian talk about it a little bit. Not sure exactly when we're closed, so we could be talking some months ahead, but I'll let Brian talk about how he looks at the operations the day we walk in.
Hey Michael, it's Brian. There are expected synergies that we see as we model out the business. I think first and foremost, the biggest opportunity is on ratings growth, and I think that's the biggest upside to drive revenue through the organization.
We do see an opportunity in each of those markets to be able to improve the rating performance of the television station, and I think that's the thing that can make the most significant difference. Beyond that, I mentioned in my earlier comments about the programming, we've been very proactive in developing Scripps-owned programming that we've been able to leverage across our group, and we do see opportunity to integrate that into stations where there may be programming opportunities in specific holes. Beyond that, as it relates to expense, more scale gives you more opportunity. I mentioned earlier, both of our companies have been proactive in exploring this opportunity, and I think we'll take a look at some of the things we've done and they've done and see what sort of a scalable leverage can be created through those.
I would imagine that the cash flow contributions from some of the larger stations are much more significant than maybe some of the Azteca America affiliates that you have. I was just wondering if you can just kind of, I guess, identify what are the prospects for the large stations versus the smaller station group? Also, if you are contemplating at least at some point rationalizing some of the stations that you're picking up from the McGraw Hill group.
Hey Mike, it's Rich. Obviously, as I said at the beginning, we looked at the Azteca stations as just a very low-cost option on that marketplace, but most of the cash flow and profitability today, the overwhelming amount of it comes from the three big markets. Do you want to add anything, Brian?
No, I would agree with that. Again, the three big markets are what drive the cash flow of this group. I would tell you I'm pretty excited about Azteca , though. I think it gives us an opportunity to leverage the investment and the infrastructure we have, the commitment we have in these communities. It's an opportunity for us to serve and monetize a whole new audience. While the broadcast properties were where the value was initially assessed, I think there's huge upside in a growing population in some markets with heavy Hispanic and Mexican influence. We think that by getting in there and being serious about that audience, that will continue to drive big success on our overall broadcast side. I think there's huge upside on the Azteca side as well.
Great. Congratulations, you guys.
Yeah, you might remember, we over the years have done a lot of work on the Spanish-language market, starting primarily looking at it in newspaper markets and then through the cable networks. This was the first time we saw an opportunity where you could go into a large market with a scale product and a network partner. Yeah, we like the opportunity.
At one point, you were even thinking about doing a whole network, so.
Boy, you've got a good memory. I spent a lot of time on that. Yeah, now you can call and ask Ken and those guys about it.
Exactly. All right. Congratulations again. Thanks.
Thanks, Michael.
Thank you. Next question is from the line of Barry Lucas. Please state your company name, sir.
Gabelli. A couple of items, Rich, if you don't mind. It's sort of housekeeping, but affiliation agreements, are they in place, and when do they go out to?
I'll let Brian give you those. Go ahead, Brian, on the ABC affiliations.
Hey, Barry. Their ABC contracts were renewed for five years at the same time ours were. I believe that goes through the end of 2014, if I'm not mistaken.
Do they contain reverse comp?
Their model is consistent with the model we have.
Okay. Do most of these stations have Oprah or no Oprah, and are you including the absence of Oprah in a synergy calculation?
None of them had Oprah, which provides great opportunity for them to be able to take advantage of the new landscape in that time period leading into news.
Totally separate subject, and maybe it's a little bit early. Y ou may prefer to punt on this, but Toyota's back in the marketplace. Maybe you could talk about the current state of the business and how it all works .
Sounds like good news. Go ahead, Brian.
Oh my God, I haven't even thought of that in 48 hours, Barry. Yeah, you know, they're back and we're seeing many of the foreign and especially Japanese car manufacturers come in aggressively for the fourth quarter. I don't have those numbers in front of me, I apologize, but it's safe to say we feel pretty good about the strength and competitiveness that they'll bring to the fourth quarter landscape.
Great, thanks. That's very much the last issue. You're sort of unclear on timing, Rich. You have any kind of feel for how long this will take since you have no overlap and really should pretty much sail through, you would think?
You would hope so. I mean, it's really up to the FCC, so it could be a few months. I think we're realistic in thinking it could take some time into 2012. We'll try to get it closed just as quick as we can. You're right, there are no significant issues, no overlaps. We should be able to get this one done pretty quick.
Great, thanks very much.
Once again, if there are additional questions, please press star followed by one at this time. At this time, we have no questions in queue.
All right, Kevin, we thank you for your help this afternoon and thanks to everyone who jumped on the line. It was a pretty impressive number of callers who joined us, so I appreciate that. If you have additional questions, my phone number is in the press release. This is Tim King speaking. My phone number is in the press release. Feel free to give me a call and thanks for your attention this afternoon. Take care.
Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining. We're using AT&T Executive Teleconference. You may now disconnect. Have a good day.