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Halcyon days over for broadcasters

Apr 2, 2001  •  Post A Comment

Depending on how long and how deep the current economic slump goes, some broadcasters may find themselves wrestling with tough questions about how or if they can go on.

So far, broadcast executives, analysts and brokers generally appear cautiously optimistic.

They point out that even in bad times, broadcasting is a high-margin, strong-cash-flow business that has endured worse advertising lulls and recessions. They make all the right arguments about local television still representing a unique, cost-effective audience-targeting opportunity.

So what is different this time?

Plenty.

Though broadcasting remains a solid business, it clearly is not the same business it was.

The advertising and audience pie was never more fragmented among targeted options-such as local cable and satellite, newspapers and the Internet-that in some ways have become nearly as efficient and cost-effective as local broadcast television.

Something solid

As long as local broadcasters continue to play to their strengths, such as their local news and promotional tie-ins with local advertisers, they should be able to weather the storm.

But there are other factors to consider.

Some broadcasters have overleveraged their balance sheets by expanding through station acquisitions in good times and complying with costly digital conversion mandates.

The recent refinancing pulled off by Granite Broadcasting was a clear indication that some broadcasters-with the right stations in the right places-will be able to secure the support of lenders who still consider TV stations to be strong collateral.

Bankers who supported new financing and the restructuring of existing debt at Granite know that even with some TV station values dropping to eight or 10 times cash flow, TV stations still are solid, liquid assets.

Bishop Cheen, veteran broadcast analyst at First Union, expects Granite to sell its WB affiliated TV station in Detroit.

“Granite is taking the biggest capital challenge of its corporate life at a time when the advertising economy is in a recession,” Mr. Cheen recently wrote in a report to clients. “It may last for only a few quarters this year, or it may last well into 2003.”

Granite’s situation is different than most broadcasters because it is joined at the hip to NBC, to which it will pay reverse network compensation for the next decade. But NBC also has the option of taking ownership of the company. Granite’s valuation is secured because it is the San Francisco backstop for NBC, which walked away from its longtime affiliation at Young Broadcasting’s KRON-TV.

Young also is frequently viewed as a takeover candidate. Its strategically located larger-market California stations would command inordinately high multiples even in a depressed market. Ethnic broadcasters also are sitting easier than most because they play to targeted viewers and advertisers.

Small isn’t beautiful

But those are exceptions. There are many smaller broadcasters in less desirable markets who will increasingly find it difficult to hang on, even though broadcasters generally are not as heavily leveraged as they were in the early 1990s, experts say.

Their operations may be humming along, but declining ad revenues are making it difficult to make debt payments. Short of securing waivers to their lending covenants or restructuring their debt at lower interest rates, some broadcasters eventually may be forced to sell assets to raise cash if an economic recovery doesn’t come fast enough.

“Television is a late-cycle business,” said Richard Bilotti of Morgan Stanley Dean Witter. “If you believe the economy will recover in the fourth quarter of this year, you shouldn’t expect to see broadcasters recover until the second quarter.”

Even with the scarcity factor and past performance working in their favor, it could be awhile before small- and middle-market broadcasters can realize the full value of their properties if selling out becomes the only option in a depressed market.

“I know we would see more deals out there right now if sellers could get their price,” said one broker.

Merrill Lynch analyst Jessica Reif Cohen said changes in cross-ownership or the lifting of station caps could set off a new flurry of transactions. She suggested that The Walt Disney Co. could seek to acquire Scripps Howard Broadcasting Co. or Hearst-Argyle Television; NBC could pursue Post-Newsweek or McGraw-Hill, even though it is already in line to scoop up Paxson Communications and LIN Television; CBS could eye Meredith Corp.; Fox could chase Sinclair Broadcast Group or Meredith; and Tribune could resume its pursuit of Granite and Acme Communications.

However, even then, smaller broadcasters could find themselves once again lost in the consolidation shuffle. Even now, private market values for TV stations are declining to where smaller-market stations are trading at around seven times cash flow, Ms. Cohen said.

“The big, vertically integrated companies are responding with more reductions in the work force and a scale-down of Internet operations, but the smaller operators have nowhere else to go,” she said.

Before the panic

Other analysts such as Mr. Bilotti have cautioned against broadcasters expecting advertiser spending rates and revenue growth rates to ever return to their record high levels because of dramatic changes in competition and technology.

Analysts and brokers concede that though there is no panic yet, all that could change if this situation is the same six months from now.

The huge gap between buyer and seller price expectations could actually force some struggling broadcasters into bankruptcy as an alternative solution, some experts say.

“I don’t know who it will be. I don’t know when it will be. I only know there will be some bankruptcies out of all of this,” said one leading station broker who asked not to be identified.

“Now that major advertising agencies and the owners of major broadcast networks are laying off thousands of people, what are grass-roots broadcasters going to do?”

Some analysts are raising questions about how far Ackerley Communications will go beyond potentially selling off a handful of stations to generate proceeds to pay down debt. Despite the sale of its unprofitable Seattle SuperSonics pro basketball team, Ackerley continues to struggle with earnings weakness and high debt leverage. Mr. Cheen estimates the company’s earnings before interest, taxes, depreciation and amortization will decline 13 percent on a 3 percent drop in revenues this year, with its television station cash flow falling as much as 41 percent on an 11 percent decline in net TV revenues in 2001.

Analysts are raising questions about whether larger broadcasters such as Sinclair, Young and Granite will be prompted to do the same, since they also are underperforming and straining for growth capital.

For instance, in its struggle to develop more resilient local advertising revenue to replace less dependable national ad expenditures, Sinclair is headed for an 18 percent decline in broadcast cash flow to $280 million on a 9 percent decline in revenues to $670 million for the year, Mr. Cheen said.

The next quarterly earnings reports, reflecting broadcasters’ first-quarter performance and outlook for the remainder of 2001, will go a long way in telling where things stand. Some say the worst is yet to come this year as broadcasters head into difficult comparisons to last year’s election- and Olympics-pumped revenues.

But broadcasters clearly do not have many of the relief options already being exercised by their larger brethren.

In an environment where ABC’s corporate parent Disney announces an unprecedented 4,000 job cuts and its counterparts Fox, CBS and NBC have quietly and steadily been doing much the same, smaller local broadcasters appear limited in helping themselves.

Doing things differently

There is only so much head-count reduction and cost-cutting TV station owners can do before they hit bone.

“There’s no question the smaller-market stations are getting clobbered,” Mr. Cheen said. “They simply have fewer places to cut than the big br
oadcasters. So much of their spending is fixed.”

Since the last big economic squeeze in 1991, broadcasters generally have dramatically reduced and changed their spending. But since then, stations also have lost affiliate compensation and have been required to invest in digital conversion.

In many cases, survival will require local broadcasters to simply do things differently. They must learn how to use the Internet as an advertising and marketing tool, make smart alliances with companies that can lease their digital spectrum to offer noncompeting services and products, and join alternative programming consortiums that provide affordable and effective alternatives to the major broadcast networks.

In the end, cleaning up the balance sheet, altering business practices and battening down the hatches won’t be much of a defense against the larger forces at work in this economic quagmire. Relentless drops in the stock market, in advertiser spending and in the economy in general are being driven by forces over which businesses and broadcasters-big and small-have no control. Bigger-than-life forces such as corporate and consumer confidence and spending will dramatically shape a recovery or further decline.

For all the hand-wringing about television broadcasters’ situation, there are analysts who see a silver lining. Tim Wallace, of Banc of America Securities, acknowledges a decline in top-line performance that will stretch into 2002 until an economic recovery or more deregulation comes to the rescue. Ethnic broadcasters appear somewhat insulated from the declines.

Up until the most recent market decline, television stocks were up 8 percent for the year, well ahead of the S&P 500 (which was down 7 percent and trading at a 4 percent premium to historic levels).

Continued interest-rate cuts by the Fed will be a positive for broadcast TV stocks, which will take longer to rebound from advertising bad news.

However bad the advertising forecasts were at the start of the year, they are the same or getting worse.

Groups such as the Television Advertising Bureau and Universal McCann expect local television ad revenues to be flat to up by just 3 percent this year after being negative in the first quarter.

“The sad truth is we just don’t know where or what or when the bottom of this cycle is,” lamented one prominent broker. “All we can do is to just cope and wait.”