This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Scripps call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you require assistance during the call, please press star, then zero. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Carolyn Michelli. Please go ahead.
Scripps
Thanks, Roxanne. And could you also just let them know how to get in the queue for a question?
Operator
Absolutely. Ladies and gentlemen, if you have questions or comments, please press 1, then 0. Thank you very much.
Scripps
Good morning, everyone, and thanks for joining us for a discussion of the E.W. Scripps Company's acquisition of Ion Media. You can visit Scripps.com for more information and a link to the replay of this call. Also at Scripps.com, you can find a presentation about this acquisition under Investor Information and then Presentations. A reminder that our conference call and webcast include forward-looking statements and actual results may differ. Factors that may cause them to differ are outlined in our SEC filings. The COVID-19 pandemic enhances the uncertainty of forward-looking statements we make about our operations and financial condition. We do not intend to update any forward-looking statements we make today. We'll hear today from Scripps President and CEO Adam Simpson and CFO Lisa Knutson. Also on the call are National Media Executive Vice President, Laura Tomlin, Local Media President, Brian Lawler, and Controller and Treasurer, Doug Lyons. Now here's Adam.
Adam Simpson
Good morning, everybody, and thanks for joining us. Today, Scripps is announcing a milestone strategic acquisition in our ongoing evolution with the acquisition of Ion Media. This accretive acquisition will catalyze the transformation of our company's with the creation of a new powerful Scripps national television networks business. It will boost the EW Scripps company's revenue to more than $2.5 billion annually and double our company EBITDA beginning with our first full year of ownership. And it's for these reasons and more that we'll discuss shortly that Berkshire Hathaway is coming in as a preferred equity investor in support of this transaction. We were pleased that the powerful nature of this transaction drew Berkshire's interests. Their investment in this company comes because they see what we see, a compelling opportunity for this 142-year-old media company to do what we've done so many times before, to look out over the horizon and identify a unique way to significantly transform our business and create value. Over the next few minutes, we'll tell you a lot about Ion Media and its nationally scaled strategy for network broadcast television, for which it has been rewarded with growing revenue, significant cash flow, and high margins. We'll discuss how Scripps is uniquely positioned to seize on this opportunity because the combination of Ion Media, the Cates Networks, and Newsy will create a new, very lucrative business that creates $500 million in total synergies. We'll talk about how Scripps, long a company comfortable in profiting from disruption, is leaning into macro consumer trends accelerated by the pandemic, including the significant opportunity we see ahead in free, over-the-air broadcast television and the critical role our networks will play in the national ad market. Beyond just the terrific near-term opportunity, We'll cover some of our longer-term strategic rationale for the investment. And finally, by the time we open for questions, we think you'll agree that this transaction will be another in the long list of moments in Scripps' history that foreshadow significant value creation ahead for our shareholders. Let's start with Ion Media, because this is a business that may have been mostly under the radar for equity investors, although those of you in the debt market probably know it very well. Ion Media has been owned for 12 years by private equity firm Black Diamond. As you can see from the financial performance details we shared in our press release, Ion Media is, in and of itself, a fantastic business. It has terrific economics with high revenue growth, strong margins, and significant cash flow. In 2019, Ion garnered $587 million in revenue and $335 million in EPIDOC. and its margins have run in the low to mid 50% range for each of the last five years. It's an efficient business built on the back of its national reach. ION Media is a unique asset in today's television landscape. Today, ION owns 71 television stations with FCC licenses to broadcast in 62 markets. It also has affiliation agreements with another 124 TV stations. So altogether, this national network reaches more than 100 million homes through over-the-air and pay TV platforms. Rather than relying on retransmission revenue, ION elects must-carry, a congressional mandate that requires pay TV services to carry a broadcaster's signal. So in essence, ION is a distribution double threat. It looks like a cable network, and it reaches the nation's cable and satellite TV households like a cable network, but at its core, it's an over-the-air broadcast business where it reaches cord cutters and cord nevers on the growing free over-the-air television platform. ION's programming slate focuses on the most successful shows on television in the crime and justice genre, procedural dramas like the Law & Order franchise, CSI, and NCIS. It's a lineup of winners that has driven ION to become the fifth most watched broadcast network in prime time, top five in cable, and top ten across all of television, outperforming the CW, My Network, and many cable networks that you probably thought were bigger. ION almost exclusively sells advertising nationally, like the Big Four broadcast networks, cable networks, and our own Cates Multicast Networks. So despite the fact that it's a collection of broadcast television stations, the economics of the business are built on national scale and allow ION to control its own destiny. In today's fragmented media landscape, ION is one of a select few networks that can consistently deliver mass audience to national advertisers. Unlike the broadcast deals we've done over the last year to strengthen our local media portfolio, The ION acquisition is a transformational opportunity that aligns with our national strategy, specifically the Cates Networks and Newsy. The integration of these three businesses together, ION, Cates, and Newsy into a powerful new Scripps Television Networks business makes for a compelling strategic combination that will reach nearly every American through free over-the-air broadcast, cable, satellite, over-the-top in digital platforms with multiple advertising-supported programming streams. And because we already own the five successful CAITS networks, ION is an even more attractive opportunity for scripts. CAITS and ION are really in the same business with one key difference. CAITS reaches its 93% of the country by broadcasting over the digital subchannels or multicast spectrum that we lease from other broadcasters. And those leasing payments are one of CAITS' largest expenses. ION, on the other hand, owns stations, and it broadcasts primarily on the main HD signals. So without impacting the powerful ION network, we can migrate many of the CAITS networks onto ION's digital subchannels as CAITS' lease agreements expire. And that contractual savings brings about the most significant synergies, what we describe as the distribution synergies. Let's focus now on the key distribution platform that will make this such a compelling combination, the growing marketplace of free over-the-air broadcasting. For a couple of years, we've been telling you that we were tracking a renaissance in over-the-air viewing. While most people are only focused on the variety of internet streaming options for TV, they're missing the reality that over-the-air television has been growing right alongside the digital over-the-top platforms. People are plugging in digital antennas and tuning into broadcast television because free is a compelling consumer proposition. Broadcast linear television is seen by younger audiences as an efficient pairing to streaming subscription services. A Parks and Associates study found that 25% of broadband homes surveyed in 2019 were using a digital antenna to watch over the air television as well. That's up from 15% in 2018. And now, because of the pandemic, that percentage is expected to increase even more dramatically. Three years ago, we acquired the Cates Networks because we saw ahead the opportunity in this growth marketplace. Since then, the strong financial performance of the Cates OTA Networks has affirmed our acquisition thesis. As a reminder, in fourth quarter 2019 and first quarter 2020, Cates realized more than 30% revenue growth on a relatively fixed cost structure. and Cates has outperformed during the pandemic as well, achieving an impressive 14% revenue growth in the first six months of this year. Over the air may not be sexy, at least not yet, but ION and Cates are proof that there is a lot of value being created here. Together, these networks will be exceptionally positioned in the national advertising landscape because over-the-air network television is growing to play an even greater role in the national advertising marketplace. That's another important macro trend that we're leaning into in this transformational transaction. Over-the-air networks like ION and Cates are taking a growing share of the $40 billion national advertising marketplace because they deliver that premium and younger over-the-air viewer, 10 years younger on average than cable as a platform. It's a viewer who is increasingly difficult to connect with elsewhere because with the increase in the time consumers are spending with advertising free subscription streaming services, marketers and agency planners recognize that over the air broadcast networks like Ion and Kate's are a critical component of their television campaign mix. Think about it for a TV ad to hit a cord cutter. requires broadcast television, local and national, viewed by that cord cutter over their digital antenna. And make no mistake about it, television advertising remains the most powerful way brands tell their stories. There is no string of search words, no display advertising, nor any targeted Facebook ads that can command the attention nor evoke an emotion like television advertising. Finally, between our local broadcast portfolio and the ION acquisition, Scripps will become the largest holder of broadcast spectrum. Whether it's by developing new businesses that use spectrum for data casting, to power autonomous vehicles, or for future of television applications, we will use our leadership position to forge a path of value creation and for the benefit of the American people. Now, I'd like to pull all of this together to paint you a picture of the new Scripps. You already know that the EW Scripps company will continue to be one of the nation's largest local broadcast portfolios, reaching 25% of U.S. homes with our big four network-affiliated TV stations. Our local brands serve local audiences and connect them with advertisers on air, online, and on OTT. We execute our mission with an unparalleled commitment to journalism, to community service, and to creating a better informed world. Now, we will once again be known for national networks, delivering ION, Bounce, Court TV, Grit, Laugh, Mystery, and Newsy across the country. Our brands will be ubiquitous for news, information, and entertainment anywhere an American consumer chooses to view us. As a result of this accretive transaction and its significant synergies, our operating profile will be strengthened. We will generate higher and more consistent top line growth, stronger margins, and significantly greater free cash flow. Strategically, we will be well positioned to profit from disruption in the evolving TV marketplace. and create significant value for our shareholders. Back in the spring after the pandemic began, we told you our company would seek out the opportunity in the chaos to continue our transformation into a stronger and more powerful company on behalf of our shareholders and our employees. In acquiring ION Media, we're taking yet another giant leap forward. Now here's Lisa.
Scripps
Thank you, Adam, and good morning, everyone. I have a lot of details to cover with you on the terrific economics of this transaction, so let's dive in. The acquisition of ION Media is immediately accretive to company cash flow and doubles our company EBITDA. ION's 2019 revenue was $587 million, and its EBITDA was $335 million. Over the last 11 years, ION's revenue has grown at a compound annual growth rate of 12%. And over the last five years, ION has consistently delivered EBITDA margins in the mid-50% range as it created an efficient national network with broad audience, reach, and centralized cost. Our purchase price of $2.65 billion represents an EBITDA multiple of 8.2 times based on the last 12 months ending June 30, 2020. When adjusted for the full $120 million of annualized synergies, The multiple is an impressive 5.9 times. We expect our return on invested capital to exceed our weighted average cost of capital associated with this transaction as soon as next year. That's a strong validation of our investment thesis. And in this M&A environment, we think it's quite exceptional. With ION, CAITS, and Newsy together creating a new powerful television networks business, we expect to realize about $500 million of synergies over the next six years post-close. These synergies fall into two main areas, distribution and corporate cost. The distribution synergies center around the cost savings from the transition of the CAIT's networks onto ION's digital subchannels, as Adam outlined. Like the rest of the industry, ION has experienced some revenue and EBITDA erosion associated with COVID-19's impact on the advertising market. But it has been able to maintain its margins. Looking ahead to the full year 2020, ION expects its revenue to be down in the mid-teens range, in line with the national ad marketplace, and to adjust expenses accordingly in order to maintain its margin levels. Through a combination of ratings, reach, and cost effectiveness, ION delivers a very attractive value proposition to national advertisers that provides ION with durable growth trends. For 2021 and 2022, we project ION advertising revenue to grow in the low double digit range. Rolling up these projections into full company performance for the first full year of operation, we anticipate about $2.5 billion of revenue and about double the company EBITDA we would otherwise project for that year. ION also helps to balance our even and odd year revenue and profit. Turning to financing, we expect to finance the transaction with $300 million of cash from our balance sheet, $600 million in the form of a preferred investment from Berkshire Hathaway, and $1.85 billion of committed debt financing from Morgan Stanley. The cash includes proceeds from the sales of Stitcher and WPIX, as well as the ION stations that will debest for a clean regulatory review because of the national and local broadcast ownership limitations. As we said, Berkshire Hathaway is coming in as an investor through $600 million in Scripps Preferred Equity. It is a perpetual preferred stock that will be redeemable starting five years after issuance. The security has a dividend of 8% if paid in cash and 9% if we decide to defer the payments. In addition, Berkshire Hathaway will receive a warrant to purchase up to 23.1 million Class A shares, exercisable at $13. They can exercise the warrant at any time, but no later than one year after all preferred stock has been redeemed. Berkshire Hathaway will receive no board seats and no other governance rights. While the preferred stock is outstanding, Scripps cannot issue a dividend on common stock or repurchase shares. As I mentioned a moment ago, in compliance with Federal Communication Commission's ownership regulations, we plan to divest of 23 select ION stations. We signed an agreement to divest the stations simultaneously with the execution of the merger agreement with ION. The buyer of these stations also has agreed to operate the stations as affiliates of the ION network and has agreed to carry the CAITS networks as they become available in some markets. Finally, I'd like to address the impact of the transaction on our leverage. Managing the company toward a clean, flexible balance sheet is always a top priority and part of Scripps' DNA. The attractiveness of this transaction compelled us to put our balance sheet to work to create a higher performing and more economically durable company. At closing, we expect to have a net debt leverage ratio of 5.2 times on a lagging eight quarters basis. The significant free cash flow generation of the combined company will allow us to move swiftly toward paying down debt. Again, our top capital allocation priority is to work toward having a flexible balance sheet. This transaction is a merger, and therefore there is no step up in basis of the assets for tax purposes. We expect to close the transaction in the first quarter of 2021 pending all regulatory approvals. Now, before we open it up for questions, I'll hand it back to Adam.
Adam Simpson
Thank you, Lisa. This is a big day here at Scripps for all of our employees as we once again embark on another new chapter in the Scripps adventure. It's also a momentous occasion for the team at ION that has built such an incredible business. After closing, we'll enthusiastically welcome these employees into our company. I've spent a lot of time sharing what this transaction does to change Scripps. But let me close by telling you what will absolutely stay the same. To our shareholders, our company remains committed to doing what we said we would do. We're focused on delivering the near-term operating results you expect and the long-term value creation we're known for. I'm pleased to deliver an acquisition consistent with these priorities. To our employees, who continue to work so hard in service to this company and the audiences and advertisers they serve. Our commitment to you as stakeholders in the Scripps story does not waver. A financially stronger company benefits all of us. And finally, to the American people who depend on us every day to inform, engage, and empower them with our journalism and entertainment programming, we will always remain committed to serving you as we have for the last 142 years, because as our company motto reminds us, Scripps exists to give light so that people can find their own way. And now, operator, we're ready for questions.
Operator
Thank you. Ladies and gentlemen, if you wish to ask a question, please press 1 then 0 on your telephone keypad. You may withdraw your question at any time by repeating the command of 1, 0. Again, any questions or comments, please press 1-0. Our first question comes from the line of Dan Kernos, The Benchmark Company. Please go ahead.
Dan Kernos
Yes, good morning. Congratulations. Adam, my first request is that you rebrand this LVOD so you get a nice revenue multiple on it. I think this is a fascinating deal and I'd love to get your sense of you know, programming first, right? ION obviously has very strong viewership already. You know, does this give you the capability to develop some of your own programming here? Do you keep what they already have? You know, obviously because it's worked. And then separately, you've talked a lot recently about, and there's some in your slide deck, about the direct response market. And I'm assuming, I know ION does upfronts like Cates, I'm assuming a lot of the remainder is spotter scatter or general market, but I'm wondering if there's a big opportunity for you to push DR in this channel.
Adam Simpson
Good morning, Dan, and thanks. I presume LBOD is linear broadcast on demand. Yes, exactly. We'll start working on that right away. Let me take your questions as they came. uh you know uh first uh you know from a programming perspective the thing i think we we believe primarily is um the the the uh programming strategy at ion is working it's working very well and you know you have a network that is the fifth most popular network uh based on that programming strategy and so you know we'll certainly work together with the ion management team over over time to identify ways that we can mutually grow our programming strategy our ratings and of course our revenue across the entire networks business but i wouldn't forecast any near-term changes in the programming strategy because it's been very very effective on the question about dr dr has been a very very strong category of the national advertising marketplace particularly during this pandemic and you've seen that show up in our results in the CAITS networks. I do anticipate that there's some room for us to see some improvement in the combined businesses' revenue yield as a result of bundled solutions to advertisers, additional ways to impact pricing, and more work in the DR marketplace. You know, one thing I think it's important to keep in mind as a result of its significant presence for audiences, while ION is the fifth ranked broadcast network during Prime, there's some room for it to grow on the revenue yield side where it ranks on the advertising side. And there has already been a plan in place developed by ION management to narrow and close that gap. and we would expect to continue on that path of growth.
Dan Kernos
Got it. That's super helpful. Does ION get any political dollars, Adam?
Adam Simpson
Great question. You know, ION does not get any political dollars, and we did not put political dollars on our modeling. As you know, political dollars are mostly allocated by geography in order to reach likely voters in swing states. However, we have seen some political dollars now flowing in to some of our more niche programming streams bounce, for example, reaching the black American audience, uh, Newsy, which we have the ability to both geo target and reaches younger audiences in OTT. So we'll certainly identify a strategy. You know, there's no company that I think is better at executing political advertising than we are with our, you know, 365 day a year political office and strategy out of Washington, DC. So we would expect to take a good hard look at it. But as far as our modeling and as far as the numbers we've shared with you, we are not forecasting, uh, ion moving into the political realm.
Dan Kernos
It feels like a, it's sort of a key way for me to ask if there's any update just on sort of your core political, uh, at the moment, Brian, if you have it. Yeah.
Brian
Hey Dan, it's Brian. Um, yeah, we do have an update actually, I think based on the bookings and, uh,
Dan Kernos
um where we see revenue going we now expect our political advertising on the local side to be north of 230 million for the year got it um and maybe just some housekeeping it's a nice number by the way and maybe some housekeeping leads just on the synergies just to be clear it's not that ion goes from 3 30 to 8 30 right that's it's your, your synergized number is 120 million run annualized run rate. I know you just did your next star deal. This is all contractual stuff with spectrum leasing and then probably some cost cuts, right? That's where the synergies come from.
Scripps
Yeah. So Dan, you're right. It's run rate synergies. I do want to make sure that I point out that all of the financial highlights that we've given are post divestitures. So that's, But the $500 million, it builds over time to $120 million of annual run rate.
Dan Kernos
And just one last one, if I could, is what's the free cash flow conversion is better than or similar to the television business?
Scripps
So, Dan, it's actually better than the, if you're referring to local television business, certainly with the metrics that Adam and I outlined today, it's a higher free cash flowing business.
Dan Kernos
Got it. All right. Well, thanks for answering all of that. Appreciate it. Congratulations on the footprint size and excited to see where you guys go next.
Adam Simpson
Thanks so much, Dan.
Operator
Our next question comes from the line of Kyle Evans, Stevens. Please go ahead.
Kyle Evans
Hi, thanks. Congratulations. I'd like to dig down a little bit on that $120 million synergy run rate. You broke it into components in terms of the cost side, and I think everybody understands the lease component there. Could you roughly split that 120 between cost synergies and revenue synergies, and then have some follow-ups?
Adam Simpson
Hey Kyle, the vast majority of that comes as contractual synergies associated with what we described as distribution synergies.
Kyle Evans
And what is the rough timeline, maybe the blended average for the lease agreements that you guys have so we can kind of think about how to run that forward?
Adam Simpson
Yeah, those lease agreements expire naturally over the course of the next six years. Now be mindful, and I think this is important to recognize, that we are able to yield synergy as we transition Kate's multicast programming streams onto ION stations in ION markets. There will still be, of course, agreements in place with our partners on the broadcast side where ION doesn't have a stick. And so that represents, I think, the vast majority of the synergy.
Kyle Evans
Great. And I think I think it's fair to say that most investors were confused by Cates and Newsy going into this deal. We're now kind of sitting here trying to figure out how those two assets tie into Ion. Adam, could you take a minute and just talk about at a high level where you see the most obvious revenue synergies between those three assets?
Adam Simpson
Yeah, I mean, the first thing I think that it's important to recognize is the significant distribution synergies. So Ion and Cates are essentially in the same business. Both are broadcast outlets that use national scale to sell like a cable network. So you have obvious opportunity for bundled solutions with advertisers during upfront presentations. And that's something we have a lot of experience with at Cates already. As we've grown all five of those networks, as each network grows large enough to be included in the upfront and then scatter process, we're able to work with our advertisers to create solutions across all of our networks. Ion has already a significant advertising footprint. And working together, we think there's some upside there. But, you know, you've got the distribution synergies. I think you've got some significant revenue synergies. There could downstream be some programming synergies, certainly. But I would say they work together because they're really the same business. On the Newsy side, you know, what we think already is Newsy has really become a leader in the monetization of OTT. And we're already moving many of our Cates Networks brands into the linear OTT space. We're seeing some of the benefits of that with OTT advertising with Bounce and Court TV, for example. So we also think there's a lot of opportunity. But at the end of the day, this is all national television. It's all network television. And as we think about the evolution of the television marketplace, you all have heard me say many times before, At the end of the day, we don't think it's going to matter whether or not our signal hits your screen, no matter what size that screen is, if it comes in over Wi-Fi, over broadcast, or over a coax cable. By identifying this distribution opportunity and identifying a way for us to secure transmission in the over-the-air marketplace, which is growing right alongside OTT, we believe we develop a networks business that, you know, as I like to say, is a double threat in distribution. Very well deployed in the pay TV ecosystem, continuing to be further deployed in OTT and ubiquitous in over the air.
Kyle Evans
Great. Two more nitpicky type questions and then maybe I'll hop back in the queue. Maybe any commentary around seasonality and then on the sales side, how much of the roughly $560 million in trailing 12-month revenue was sold externally versus internally, and what are the opportunities to maybe make changes there? Thank you.
Adam Simpson
So, yeah, let me take the first question, and then I'll let Lisa tackle the second. On the first question, seasonality, like all networks, and just like we've experienced with Cates and in some respects Newsy, we do have – some seasonality. So, you know, fourth quarter, typically a very strong quarter. Sometimes there's a little bit of a lag in the summer. But one thing I think it's really important to point out, as a profile, our company will no longer have such a significant swing in non-political years as a result of the smoothing effect we have with the significant revenue and cash flow generation that the news scripts, television networks business is able to generate.
Scripps
Hey, Kyle, can you repeat the second question?
Kyle Evans
Yeah, if I look at the $560 million trailing revenue number, how much of that was sold by internal sales reps and how much of that was sold by external firms where you're paying a commission? And then what are the opportunities to maybe change that makeshift going forward? Thanks, guys.
Scripps
Yeah, so... Primarily, most of it was sold internally, but we can get you the split on that a little bit later.
Kyle Evans
Okay. Thank you.
Operator
Our next question comes from the line of John Jandice, Wolf Research. Please go ahead.
John Jandice
Thank you. Adam, you talked about disruption and chaos in your remarks, and you've always taken a longer-term view of the business. So as you look at the growth of direct-to-consumer platforms, some owned by the broadcast networks. How do you think the viewership trends and demand from national advertisers of ad-supported television evolves over time? And then on programming, not sure if you were alluding to this, but you talked about or talked to CSI and others. There's been a lot of chatter over the years around pricing of syndicated programming. Does that present another opportunity for you over time?
Adam Simpson
Good morning, John. you know, with respect to the importance of linear television broadcast television in particular, we're really big believers that, uh, free is an incredibly compelling proposition for the audience. You know, if you go back and look at, we have a slide on this in our deck. If you go back and sort of look at, um, what the, what the television, particularly the pay television marketplace look like, let's say back in 2010 you saw, significant consumer prices around the pay TV bundle and then as you know new platforms emerged that provided consumers opportunities to cut their cord they were able to cobble together what they saw as more economically efficient skinny bundles more lately as every brand develops its own DTC DTC platform and begins to carve out its own digital footprint we're seeing essentially the net amount that consumers are being are paying going up so in essence you know they're now paying potentially as much as they used to pay but rather than paying that in one bill to their cable company or to their satellite company today it's being split up by multiple different multiple different programmers and So we really see free both on the local broadcasting side as well as the national network side as an incredibly important and compelling consumer proposition for the audience. What that means on the advertising side is as you sort of forecast forward more and more American consumers looking towards subscription video on demand services for their entertainment and plugging in digital antennas, for their linear entertainment, for their discovery, for their news and information. We expect marketers and brands to continue to recognize that the greatest opportunity they have to reach this cord cutter, cord never audience will be through broadcast television. And this doesn't just come from our notions. We've had a lot of conversations with the leaders at the agencies who have described how important it is for them to identify ways for them to reach those younger consumers with their messages. And that's why we think broadcast, particularly linear national broadcast, is going to play a very, very important role in the future of the network, in the future of the national TV ad marketplace.
John Jandice
That's helpful. And can you speak to programming? Meaning, is there the potential for, as you renew Ceylon Order and others that you see some benefits on pricing going forward?
Adam Simpson
Sure, there's always that opportunity. But, you know, I think the first thing to recognize is that ION enjoys long-term relationships with the programmers and long-term contracts that allows us to secure our programming strategy. It's the same strategy we have with Kate's. I mean, one of the beautiful things about this strategy is in acquiring these shows that are already proven hits. you know what you're getting, which is not necessarily the case, for example, in the big four network arena where they're developing shows and aren't really sure whether they're going to be a hit until they're brought out to market. So we're able to make very, very efficient buys already, and I expect that will continue.
John Jandice
Okay, maybe one last quick one. To what extent, if at all, are you attributing value to either ATSC or Spectrum, or is that potential upside?
Adam Simpson
It's potential upside. As we look at our models, especially around the financials that we've shared with you today, we haven't put any additional value from a modeling perspective on ATSC 3.0. However, I would tell you that the company is working very proactively at identifying ways to put that spectrum to use in a way that's both good for shareholders and good for the American people. And I'm hopeful that it won't be too long before we're able to share some of that information with the investment public. Great.
John Jandice
Thank you.
Adam Simpson
Thanks, John.
Operator
Our next question is from Stephen Cahill, Wells Fargo. Please go ahead.
Stephen Cahill
Hey, thanks, and congrats. So, Adam, just so I'm 100% clear, there's no affiliate fees or retrans today from ION, and your plan is that going forward, you're not necessarily looking for a subscription-supported carriage model on the content. Is that right?
Adam Simpson
That's correct. The fees that ION receives is immaterial. And no, we will continue to elect must carry because ION's model, as does Cates's, depends on the broadest distribution possible in the pay TV ecosystem.
Stephen Cahill
Great. And then can you talk about how you're thinking about the digital aspect of that? Like, is there an ION app now? And will you be able to put that together with your national networks into something more integrated?
Adam Simpson
I think that's one of the opportunities that we'll work together with the ION management team to track and to lay a course in for. I do think there's opportunity for us to continue to pursue additional distribution through virtual MVPDs as well as through on-demand services for the programming that ION has the rights to distribute in an ION app later down the line. There's some work to be done on that first. But you've already seen us do that, obviously, very aggressively with the content that we control in our local markets. With respect to Newsy, that's certainly where the vast majority of Newsy's revenue is generated and why we think Newsy is a leader in the space. And certainly with Court TV and Bounce as well. Also with the on-demand platform that we own through Bounce Brown Sugar.
Stephen Cahill
Cool. And then when we think about Berkshire Hathaway's involvement, do you expect them to take a board seat or be involved in management or strategy? Or at this point, are they a very important but nonetheless passive investor in the company?
Adam Simpson
Berkshire Hathaway will be a very important but nonetheless passive investor in the company. Obviously, I'll enjoy a continued relationship with Ted Weschler, who I think will continue to provide good counsel to the company, but there is no governance associated with the investment.
Stephen Cahill
And then just last one for me, a housekeeping one. When you talk about, you know, having double the expected EBITDA in the first year, if we're thinking about like the Scripps EBITDA number to use, is that just 2021 or is that a blend of 2020 and 2021 as we would kind of currently think about, you know, TV broadcast two-year rolling EBITDA?
Scripps
Hey, Stephen, it's Lisa. I would think of it in terms of just a single year, like 2021, 2022. Okay, great. Yeah, if we close in first quarter of 21, first full year after closing.
Stephen Cahill
Okay, thank you very much.
Michael Kopinski
Thanks, Stephen.
Operator
And our next question is from Michael Kopinski, Noble Capital Markets. Please go ahead.
Michael Kopinski
Thank you, and congratulations. First, Adam, I was wondering if you can talk a little bit about the management at ION and whether or not there will be any changes in management, and especially what is the structure? Who do they report to and so forth?
Adam Simpson
So today, ION is essentially run as a wholly-owned subsidiary controlled by Black Diamond, and the leader is Brandon Burgess. an incredibly talented executive who's built this business really from the ground up to be the powerful business that it is today. Over the next couple of months, we'll kick off a project working with ION's leadership team, the leadership team at Cates and the leadership team at Newsy to create an integration plan so that we can really build a new Scripps Television Networks business, inclusive of leadership and culture from across all of the different businesses.
Michael Kopinski
Gotcha. And then aside from the 23 Ion stations that it sounds like you've agreed to sell, are there other assets that you may monetize at this point?
Adam Simpson
We don't have any plans to monetize any other assets as a result of this transaction.
Michael Kopinski
Gotcha. And then there's been some thought that there might be future broadcast spectrum sales. Has broadcast spectrum sale possibilities played a part in the value proposition at Ion?
Adam Simpson
No, I would actually say, as an operating company, we love the ION network. And while we certainly think there's going to be opportunity to monetize the spectrum, I would say we would be monetizing it as an operator, not as a seller. I think being the largest holder of broadcast spectrum in the country puts us in a very good position to play a leadership role, as I said during my prepared remarks, as the industry, and we in particular, develop new ways to reach the American consumer with data, with programming, through our existing multicast and new programming strategies.
Michael Kopinski
Gotcha. That's all I have. Thank you and congratulations. Thanks so much, Mike.
Operator
Our next question is from Craig Huber, Huber Research Partners. Please go ahead.
Craig Huber
Thank you and congratulations as well. I got a few nitpick questions, but let me start big picture if I could first. Just curious, first, was this an auction process? Can you tell us about that a little bit?
Adam Simpson
Sure. Black Diamond actually did initiate an auction process around the beginning of the year, and we were participating. But as COVID-19 took hold and the capital markets weakened, they suspended, essentially terminated that auction process. A couple of months ago, we made an unsolicited bid for the business, and that's where we are today.
Craig Huber
Okay, it's just the timing. This is not a derogatory question, please, but the middle of a pandemic doing a transformational acquisition like this at the dollar price you're doing that here, I assume you must be feeling increasingly good about the U.S. economy, specifically about your advertising revenue outlook at your TV stations and stuff. Can you just talk about that, the timing of this? I mean, obviously, none of us know how this pandemic is going to play out here. Hopefully, it goes away sooner rather than later, but if it doesn't... It's just the timing of it. I just want to touch on that, please.
Adam Simpson
Yeah, sure. I mean, first of all, I would say that the company has a long history of identifying opportunities in the midst of crisis, in the midst of chaos. And this is just another example of this company doing that. Relative to the pandemic, I would tell you we are feeling better about the advertising marketplace. A couple things, I think, lead us to that. First of all, obviously, the insight we see into our into our results. continued strengthening. I guess I would also share with you, we seem to have moved into a period in which the governments have recognized the need for them to manage through the pandemic without completely shutting down the economies. And that makes us feel, I think, pretty darn good about where things are bouncing back. Let me ask Brian in particular to give you a little insight maybe into on the national side, how Kate's is performing as we look at third quarter, Brian, Brian, I think you're muted.
Brian
Sorry about that. Um, Hey Craig, uh, you know, as Adam said a couple of times here, you know, Ion and Kate's are really closely aligned in the business and how they sell, uh, advertising in the national marketplace. I can tell you your questions about, you know, how do we feel relative to the pandemic? Cates has performed extremely well as we do see the economy improving and the national ad space coming back. In the third quarter, Cates revenue is up high single digits in Q3. So you can see why we're not at all spooked to do a deal now when we see that kind of growth and strength in the national marketplace as it begins to recover.
Craig Huber
Brian, while we're on that subject, could you maybe update us on the third quarter core advertising trends for your local TV stations?
Brian
Yeah, sure, Craig. You know, I think it's very much in line with the core advertising commentary that we gave, what was that, in our early August Q2 earnings call. We still expect to end the third quarter with core advertising down in the mid-teen range compared to Q3 of 2019, and that's if you back out picks losing Major League Baseball. But It's recovering exactly as we had forecasted and modeled.
Craig Huber
Maybe a few percentage points worse than if you include ticks, I guess you're saying, right?
Brian
Yeah, that would be true. I mean, they broadcast right to the Yankees and the Mets, and so the shortened season really changed that.
Craig Huber
Right, okay. Maybe this is too early to ask this question. Brian, are you going to be running this division, or is it going to be a separate line item on the financial statements here? I'm just curious. Is it going to be lumped in with your TV stations, or is it going to be totally separated out? You may put Newsy and Cates with it. How do you guys think about the segments for your company for financial reports?
Adam Simpson
Hi, Craig. It's Adam. I'll take that. You were right. It is probably too early to answer that question. But I do think we'll be able to share some news about the structure of the company as well as the way the leadership organization comes together and as we move through that process I described earlier, which will be focused on really integration and developing the leadership team and the structure of the new company with its culture and everything set based in the long-standing culture of the EWScripts company.
Craig Huber
I also wanted to ask you if I could, you talked a lot about over the air. I'm curious for ION, what percent roughly of the viewership today or most recent period is over-the-air versus through the MVPDs out there?
Adam Simpson
Hey, Craig. Today, you know, we still see about 20% of the growth or 20% of the viewing coming through over-the-air at ION and the rest through the MVPDs. But that 20% is headed in the direction of the growth marketplace as more people turn to digital antennas to... you know, complement their subscription video on demand services with free broadcast television.
Craig Huber
A couple more if I could. I think you said you're going to divest 23 stations out of this ION group. What percent of revenue REBA does that represent? Can you help us with that?
Adam Simpson
I can get some of that information for you later, Craig. But the fact of the matter is that we will not be divesting of the revenue because the divestiture buyer has signed an affiliation agreement that will allow us to keep those stations as a part of the ION network. But, you know, generally speaking, the 23 stations would represent, you know, a very low amount of the direct revenue in EBITDA.
Craig Huber
Okay, my last question.
Scripps
I just wanted to make sure that you... heard me earlier talking about that the financials that we presented looking forward are post-investiture. So as Adam said, they'll stay in the national network, but obviously they are out of any of the financial highlights.
Craig Huber
I appreciate you saying that. I definitely missed that then. And my last question, if I could ask, just what's your interest rate assumption on this deal here for the $1.85 billion of debt you're taking on, 4.5%, 5% when you kind of run your ROI seizure modelings? What were you running it at?
Scripps
In terms of the weighted average cost of capital, as I indicated on the call, that we would achieve a ROIC above that related to this deal is about 6%. In terms of the debt, it would be approximately four and three quarters.
Craig Huber
Great. Thank you very much.
Operator
And our last question is from the line of Andrew Mori, LCMCG Investments. Please go ahead.
Andrew Mori
Yes, hi. Thank you and congratulations. A couple housekeeping. I think you mentioned the shape of the ION revenues. I want to say it was either first half 2020 or Q1 2020. I just missed that, so could you repeat that? And then I think on the distribution synergy, It was mentioned maybe the average life left on those was five or six years, and they're expiring kind of naturally, I think. Should we think of that as kind of ratably, and when we say naturally, like kind of just a fifth of fifth of fifth, or are there any chunky years where you get more or less distribution synergies? And I have a follow-up.
Adam Simpson
Yeah, good morning, Andrew. Let me give you both answers here. 2019 revenue was $587 million. 2019 EBITDA was 335 and then on a last 12 months through June of 2020 look it revenue was 558 million and EBITDA was 323 million as for the synergies it's not an average of the contracts going out five years six years it's actually you know out through six years so really It ramps up, and by the time we get to the sixth year, the synergies are at $120 million run rate.
Andrew Mori
Great. That's really helpful. And can you just – this may be an ultra-basic question, but can you remind us a little bit how you think of the differences of Cates and Ion versus, you know, some other, you know, free over the air, you know, whether it's – you know, Roku or some other part where they have slightly different models. Maybe they've got some equipment, maybe they've got some different distribution channels. Do those make a big difference or this all plays in that, in that kind of free over the air, you know, broadcast. And then, sorry, very less followed. Um, you mentioned 50% margins. Um, should we think of free cashflow conversion in traditional ways versus what we've been used to at scripts or would, free cash flow conversion on Ion be better or higher or lower in terms of a percent of that EBITDA generated? Do they have other capital expenditures or not necessarily? Thank you.
Adam Simpson
Let me take the last question. The free cash flow performance of Ion will improve our company's free cash flow conversion. So conversion should be higher than you're accustomed to seeing at Scripps as a whole prior to this transaction once we close. On the question of broadcast or over the air, so Roku is an OTT platform. It's essentially a set-top platform that allows programmers to create apps and distribute their programming through that app. And so consumers are going to Best Buy, they're going to Amazon, they're buying a Roku box and then they're downloading specific apps and they're watching on demand and in some cases, linear television through that app experience. You can watch YouTube TV through a Roku. Broadcasting, but there's a lot of economic effect that consumers are having to pay for in order to use, for example, YouTube TV on a Roku box. They've had to buy the Roku box. They've had to download the YouTube TV app, for example, or the Hulu app. They've paid a subscription service fee. At the same time, those same consumers are receiving through their integrated antenna in their television or through digital antennas they're plugging in free over-the-air television. And so there's no cost to American consumers to receive HD television through free over-the-air broadcast television. And what most people don't recognize is there's an entire marketplace that's developed around broadcast television. And in many cases, you plug in a digital antenna and you find 30 to 40 high-quality programming streams. To start with, you've got your big four stations. Those are the local affiliates that we own in our local media portfolio, transmitted over HD. Then you find the five Cates networks that we own, right? Court, Court TV, Grit, Laugh, Escape. So they very much look like the early days of cable. You find ION, which is a full-power television network in that marketplace. You find PBS, and several other PBS affiliates. You find a couple other multicast networks. And so an entire ecosystem has developed around free over-the-air television. What we like about the ecosystem, first of all, is there are barriers to entry. Unlike a Roku box where you can just develop an app and put it in the store, not everybody can develop a programming stream, get the carriage into over-the-air, and then control the distribution of a programming stream. The additional thing we like about it as opposed to the paid TV ecosystem, it's relatively tight. There's, you know, 30, 40 channels at most in a market of quality programming. And so a television consumer that use a free over-the-air television consumer that uses OTA is, you know, being exposed to a tighter bundle of quality programming that they use for linear television in addition to their SVOD services. So it's a compliment to the digital subscription and the OTT platforms that you described.
Andrew Mori
Very last question. Is there any detail you could give on where you put the strike price for the Berkshire Hathaway warrants? Was it just more mechanical of up, you know, 25 or 30% from recent trading levels? Just any comments there? Thank you.
Adam Simpson
Yeah, I would position it as a mechanical calculation.
Michael Kopinski
Thank you again.
Adam Simpson
Thanks very much, Andrew.
Operator
And at this time, there are no other questions in queue.
Scripps
Thank you, Roxanne. I want to thank everyone for joining us today and remind you that we have quite a few of the financials of this transaction outlined in the press release this morning, which you can find on our website. And we also have an investor presentation at Scripps.com under investor information and then investor presentations that outlines the strategic rationale for this deal and the financials. Thanks so much for joining us today. We look forward to talking more about this in the near future. Take care.
Operator
Ladies and gentlemen, this conference will be available for replay after 11 a.m. today through September 24, 2021 at midnight. You may access the AT&T replay system at any time by dialing 866-207-1041 and entering the access code 800- International participants may dial 402-970-0847. And again, the access code is 800-3632. That concludes our conference for today. Thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.
Disclaimer