Fortune Bank: If the valuation is appropriate, Disney's sale of ABC to Nexstar will be beneficial to both parties.

According to Dolphin Research APP, HSBC has evaluated the potential transaction of Disney's subsidiary, ABC, being sold to regional television operator Nexstar Media Group (NXST.US), and believes that "this transaction is feasible" at a reasonable multiple.

Insiders revealed on Thursday that Disney has had exploratory discussions with Nexstar Media Group regarding the sale of ABC. The negotiations are still in the preliminary stage and may not result in any transaction. A Disney spokesperson stated that while the company is "willing to consider strategic choices for its cable business," no decision has been made regarding the divestment of ABC or any other assets.

The news of Disney's plan to sell ABC aligns with the comments made by the company's CEO, Bob Iger, when weighing strategic choices for its cable television business. In July of this year, Bob Iger stated that the company may sell some of its traditional television assets, as these assets have struggled in recent years due to the rise of streaming services.

ABC includes a national television network and 8 regional television stations, as well as cooperation agreements with approximately 240 local television stations, covering nearly every American television household. Nexstar owns or operates 200 television stations in 116 markets, reaching over two-thirds of the U.S. population, in addition to national television networks such as CW and NewsNation.

Analyst Steven Cahall from Dolphin Research predicts that ABC's television network and its operated stations will generate approximately $2.2 billion in broadcast revenue and around $2.7 billion in advertising revenue, totaling approximately $5 billion, by 2024-2025. He also estimates that ABC's average earnings before interest, taxes, depreciation, and amortization (EBITDA) is $565 million.

The enterprise value-to-EBITDA ratio for broadcasting companies is typically around 6.5 times. However, analysts point out that the four major broadcasting companies excel in consumer engagement, and they believe that ABC's enterprise value-to-EBITDA ratio will be close to 8 times. This implies that ABC's enterprise value is $4.5 billion, which is reasonable for Nexstar, as owning ABC "means leveraging content to drive reverse competition, helping to expand advertising scale, improve negotiations with virtual multichannel video programming distributors (vMVPDs), and provide Nexstar with a large sports platform."

Analysts further added that for Disney, selling ABC would reduce the net leverage ratio on its balance sheet, and "we believe investors support Disney's divestment of these low-growth cable television assets."