Stations in the Balance

Debt-Ridden and Independent Outlets Run Most Risk

By Jon Lafayette and Andrew Krukowski

With the local advertising market in the tank, everyone knows times are tough for television stations.

The problem is that business conditions aren’t likely to get better any time soon, and that has industry executives talking about more station owners declaring bankruptcy, getting taken over by their banks or, in some cases, shutting down operations.

“There are bound to be bankruptcies in broadcasting as there are in every other industry,” said Frank Kalil of Kalil & Co., a leading station broker. “Certainly there are problems and we’re dealing with them.”

A number of stations can’t support their debt load, said Barry Baker, managing director at Boston Ventures, which owns and operates several stations in small markets.

Beyond over-leveraged operations, those in small markets without major network affiliations are at greatest risk, other broadcast executives said.

“You go much beyond the top five or six [stations in the market] and those are always very difficult,” said Tim Pecaro, founder of Bond & Pecaro, a consultancy that appraises broadcast properties. “If you don’t have one of the top four networks, or Univision or The CW, it’s a tough business. You’re dealing with fractions of the market and you’ve got to be in a pretty big market to live off the crumbs.”

Mr. Pecaro said some big markets have been hit hard as well, including previously fast-growing locations such as California, Nevada, Arizona and Florida. Industrial areas in the upper Midwest also are hurting.

“I’d hate to be running television stations in those kinds of markets today, because the floor has dropped out of advertising. Nobody knows where the bottom is,” he said.

Mr. Kalil said that in some cases, his company has been asked by owners and banks to try to sell troubled stations, but securing financing in the current economic environment is an issue.
“With the current owner being overextended, with advertising revenues tightening up, it’s a matter of how long they can hold on,” he said.

But if they can’t, what happens next? There are some opportunists sitting on cash who could make a go of it where other owners have faltered.

“The question then becomes, do the banks really want to run these things,” said Mr. Pecaro. “Those people who were out acquiring are generally good operators. They’re experienced operators in a once-in-a-lifetime circumstance. And who might be better to run them than these guys?”

For stations that can’t make a go of it as a traditional broadcasting business, other options are emerging with new technologies.

On a panel in January at the National Association of Television Program Executives conference, Warner Bros. Domestic Distribution President Ken Werner mentioned the possibility that the economics of the station business could lead some to go dark. That would open the door for new uses of their signal spectrum.

Amid all the bad news for stations, it’s important to note that stations still represent a profitable business proposition. While growth may stall, Mr. Kalil said most stations remain in the black.
“If they can adjust, they can wait this thing out—and I truly believe that it’s a matter of waiting it out—business will improve,” he said.

“The thing about broadcasters is even though they’re going to be in a lot of trouble this year, many of them are still going to cash flow,” said Mr. Pecaro. “It’s not like the newspapers. Their fixed-cost levels are nowhere near as high. It’s just the cash flows aren’t going to be anywhere near where they were a couple of years ago.”

The list of station groups that haven’t been able to maintain adequate cash flow is growing.
Last year, big station owner Tribune Co. went bankrupt. Tribune, which also owns newspapers, took on massive amounts of debt in a leveraged employee buyout masterminded by financier Sam Zell.

Equity Media Holding, which owns 31 television stations, sought Chapter 11 bankruptcy protection in December after failing to sell its stations. Young Broadcasting, which owns 10 CBS and ABC affiliates, filed for Chapter 11 last month. The company listed liabilities of more than $500 million and said the filing was designed to bring its debt in line with “current economic realities.”

Debt is a problem for many station owners. In a January report, Moody’s warned that with advertising revenue declining, “Many broadcasters will not generate the [earnings] to comply with financial covenants in bank loan agreements, cause them to require waivers and amendments or face default.”

Moody’s predicted banks will be unlikely to amend terms with very highly leveraged companies or those that are burning through cash to fund day-to-day operations, leading to more bankruptcies.

It doesn’t appear the advertising market will turn around to save struggling operators.
Certainly it doesn’t seem that the advertising picture will improve any time soon to bail out local broadcasters in trouble.

BIA Advisory Services last week forecast that local advertising revenues will fall at a compounded annual rate of 1.4% from $155.3 billion in 2008 to $144.4 billion in 2013. Traditional media, which lumps in TV, radio, newspapers and direct mail, will decrease at a 4.5% rate over that period.

Representatives for media companies that own station groups and broadcast networks declined to comment.

Beyond cutting staff, local station managers are trying a number of approaches to meet the financial challenges.

A big chore is compensating for the loss of automotive advertising.

“You’re scrambling to try to make up that revenue that hasn’t come back,” said Tim Larson, general manager of KRDO-TV in Colorado Springs, Colo.

Mr. Larson said a lot of auto ads come from the national side, so stations need to look locally in order to fill the shortfall.

“You try to go directly to the advertiser, particularly the local guy, and say, ‘This is what we can do for you,’” he said. “And you have to sell that hard.”

That’s brought a cultural shift in his sales efforts, with more outbound calls and less order-taking from inbound calls.

“It’s not that way anymore. You’ve got to get out and you’ve got to sell, you’ve got to sell a lot of stuff,” he said.

Mr. Kalil said he believes that stations can help themselves by stepping up their local ad sales efforts.

“I truly believe that the solution, if there is an immediate, automatic solution, would be for every station to hire three to five more salespeople tomorrow,” Mr. Kalil said.

Other companies are looking for ways to spread cost over more stations.

Mark DeSantis, general manager of WEEK-TV in Peoria, Ind., said its owner, Granite Broadcasting, has consolidated certain operations. For example, master control operations have been combined in multistation hubs and his weekend weather is being produced in Fort Wayne and uploaded back to Peoria.

Mr. DeSantis also said he’s talking with other GMs in the area to pool resources on news coverage, for instance, sending one camera crew to gather footage.

“This is the worst business climate that we’ve seen since we’ve been in broadcasting,” he said, adding he’s confident things are going to rebound.

Reducing the number of stations in a market might also make the survivors more financially sound.

“We need duopoly. We need consolidation. There’s no question about that,” Mr. Kalil said. “There are a lot of things that we can save money on in the industry by combining these properties in a given market.”

In many markets, more duopolies can’t be formed because of Federal Communications Commission regulations. Mr. Baker thinks the industry should go even further than duopoly.

“I think ultimately there should be a move to an agency system, where stations just say we’re sharing news, we’re sharing back office, we are sharing everything, otherwise we can’t be in business,” he said. “And hopefully the new FCC will say, ‘You know what, they won’t be in business so we might have less editorial voices in local news, but at least we’ll have three separate sets of anchors.’”

The prospect of stations pushing cable operators to get more money for the retransmission of local signals is unlikely to fill the void for broadcasters.

“I think we’re at a real turning point when you combine viewership lost to online video with the total financial situation and the lack of advertising,” Mr. Baker said. “All the retrans money in the world can’t make up for it.”