Sinclair shares decline 7 percent

Loss reported in 1Q

forecast predicts revenue weakness

May 03, 2007|By Hanah Cho | Hanah Cho,Sun reporter

Sinclair Broadcast Group Inc. shares dropped 7 percent yesterday after the television-station owner said weak automotive advertising and low ratings for its MyNetworkTV stations are mitigating its successes in winning retransmission fees from cable companies.

It was the largest stock drop in more than a year for the Hunt Valley company, which had gained investor favor after winning a string of showdowns over its insistence that cable companies pay it for the right to carry Sinclair-owned local stations. Since the beginning of the year, the stock has climbed more than 50 percent.

The company also reported yesterday a first-quarter loss of $2.4 million, or 3 cents per share, compared with a profit of $10 million, or 11 cents per share, in the year-ago period. Sinclair attributed the loss to $15.7 million in one-time charges related to early extinguishment of debt.

Sinclair's shares lost $1.22 to close at $15.33 yesterday after the company said that it expected second-quarter broadcast revenue to range between a 0.3 percent gain and a 1.5 percent decline for the three months ending June 30.

Sinclair executives attributed the forecast to four factors: continued weakness in automotive advertising; decline in national advertising buys on MyNetworkTV stations; and decreases in political advertising and network compensation revenue of $1 million and $2.6 million, respectively, in the second quarter.

Of the 58 television stations Sinclair owns or operates, 17 are MyNetworkTV affiliates.

"Despite the higher retransmission revenue guidance, a slower than expected turnaround at its MyNetworkTV affiliates is pressuring core ad growth," John Blackledge, an analyst at J.P. Morgan Securities, wrote in a research report yesterday.

Sinclair said yesterday that revenue from retransmission fees is expected to grow 132 percent to $59 million this year compared with $25.4 million last year. It was the second time this year Sinclair has revised that estimate upward.

In the first quarter, $11.2 million in retransmission revenue helped offset a 5 percent decline in national advertising revenue. That decline was attributed to lower Super Bowl ad spending, weak spending in automotive, retail, services and fast food markets, a sluggish Ohio market and a 14.3 percent decrease in sales for MyNetworkTV.

Net broadcast revenue in the three months ending March 31 increased 1.5 percent to $150.2 million.

"The TV business has been struggling like most media," said Edward J. Atorino, an analyst at Benchmark Co., who does not own Sinclair stock. "The key area that's dragging all media down is the auto business. [Domestic auto] sales are lousy, and they're losing tons of money, and they've trimmed ad budgets."

Atorino said Sinclair has been "ahead of the pack" in developing another source of revenue to counter declines in national advertising spending.

Sinclair said it reached retransmission consent agreements with 80 percent of cable television and video providers in its markets.

Weak automotive advertising aside, Sinclair executives expect strong spending for telecommunications and medical advertising in the second quarter.

By the end of the year, Sinclair said it expects improvements for MyNetworkTV, whose ratings have been disappointing since the Fox-owned network was created last fall for WB and UPN affiliates that were left without programming when their networks merged to create the CW network.

"I believe we have hit pretty much the bottom in terms of MyNetwork in the second quarter, and we'll begin to build this back up, and it will be a work in progress," Sinclair Chief Executive Officer and President David D. Smith told analysts.

"As I said, I think we've seen the worst of what we're going to see in that network, and we'll begin to work it up in the third quarter. The back half of the year will be better than the first six months."

Sinclair also announced yesterday that it will offer about $300 million of convertible senior notes. The company will use the net proceeds, combined with available cash on hand and bank debt, to finance the partial redemption of notes related to Sinclair Television Group Inc.

Executives said the move would save $15 million a year in interest. The company said it will take a $14 million charge related to the redemption in the second quarter.

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