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Sinclair Broadcast Group stock nosedives 8.76% due to ROH purchase


I knew that the Sinclair Broadcast Group purchase of Ring of Honor with plans for expansion seemed like a bad idea.  I didn't expect it to kill Sinclair's stock (SBGI on the Nasdaq).

SBGI stock dropped 5.5% yesterday and then another 1.9% today.  Overall, they're down a whopping 8.76% from the close of the market on Friday, closing today at $9.54 per share.  You can check out all sorts of interesting graphs of the drop at Google Finance.  The Nasdaq as a whole was down 2.73%, and you can see a comparison graph here.

According to RBR, Wells Fargo analyst Marci Ryvicker, Wall Street overreacted.  In a note to clients, she said that "ROH is one of the three major wrestling franchises in the US (TNA and WWE are the other two), and was acquired by SBGI for what we believe to be an immaterial amount."  She estimated that the purchase price was under $10 million.  She added that "Based on our conversations, investors are not comfortable with an acquisition outside of SBGI's (or any TV company's) ‘core business' but we actually view ROH as a unique opportunity that could benefit SBGI's primary operations (i.e. advertising)."  She also noted that new ROH COO "has hands-on experience managing wrestling content" according to a quote reworded by RBR.

She thinks the purchase is a good move because "Wrestling tends to attract the hard-to-reach young male demographic, which is already a cornerstone of SBGI's Fox, CW and MY Network stations.  SBGI is now a content owner, effectively controlling its own destiny and potentially generating additional revenue by syndicating this content to other distributors."  She added that Sinclair's programming costs could go down since they are now producing content in-house instead of just buying from syndicators.

Ryvicker added that she doesn't believe that SBGI has any other non-station purchases planned and feels that buyers should focus on the stock's dividend payout of over 4.5%, which was reinstated in February.  "To be blunt, we do not believe that this acquisition has any adverse impact on the current dividend or the potential for future increases in the dividend."  She's advised clients to buy the stock and given it an "outperform" rating in a target range of $15-$17.  RBR agreed with her assessment, as did Gabelli Funds.

Having said that, there is clearly a fundamental lack of understanding of the wrestling business at hand.  The points about the low purchase price, owning content vs buying from syndicators as a general concept, the dividend, etc. are all valid.  That said...

  • Wrestling does terrible advertising rates, probably about 50% of shows with similarly sized audiences and demographics, so it will not benefit SGBI in that sense and also offsets the decreased programming costs to some degree.
  • Syndicating the content to non-Sinclair stations won't work because local broadcast TV stations now expect to be paid to carry pro wrestling shows.  You can thank Vince McMahon's methods in 1984 for changing the game from barter agreements (where stations got the show for free and kept all of the ad money, while the wrestling promotion got time to air localized interviews promoting house shows) to that.  This is a different game from WWE's deal with USA and TNA/Impact's with SpikeTV.
  • Thanks to the first two points, live events and merchandising need to be the focus, which the analysts are missing completely.  ROH's live events have generally broken even and lost money throughout much of their existence, with the idea that the DVD sales would make up for it.  DVD sales (both in ROH and in general) in the US have gone way down due to spending changes when the US economy imploded.
  • Yes, ROH is the #3 wrestling company in the US, but that's by default, just like TNA is #2 by default.  It's just the biggest independent and has been largely bleeding money for years.  ROH also targets much more of a niche audience than WWE and TNA.  In their best days, they never sold more than 10,000 copies of a single DVD.  They've only run a few shows that drew more than 1,500 people.  They've never run a full-time schedule.
  • Joe Koff's hands-on experience managing wrestling content amounts to a vaguely defined TV-side role in Championship Wrestling from Florida's three syndicated Battle of the Belts live specials in '85-'86.  Not only did he probably have nothing to do with the wrestling side, making him the next Jim Herd, but it was twenty five years ago with no wrestling-related experience since.

On the stock market side, it could very well be an overreaction, and I can certainly understand that position given the relative drop in the bucket that this is to SBGI as a whole.  I don't really know enough to say much more than that about the stock side.  Still, the sale has already proven disastrous to them in the short term and the advice to buy now is based partially on flawed logic, so there are plenty of reasons to be very wary.

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