The big squeeze is on for broadcasters who think they want to buy additional television stations or to sell what they own.
Although single and group TV station cash flows have plummeted during this advertising slump, there has yet to be a sizable corresponding drop in station valuations. But most analysts and brokers expect TV station prices to come down off their relatively unchanged highs before a recovery sets in. That could be the second half of 2002, at the earliest.
Although broadcast networks are more interested than ever in buying their leading single-station and large-group affiliates, News Corp.’s purchase of Chris-Craft has been the only recent significant group station deal.
However, the next six to nine months present a window of opportunity for the broadcast networks seeking to opportunistically “buy low” before an advertising and economic recovery restores broadcast cash flows.
“I think you are going to see an aggressive push by broadcast networks to acquire or closely align with their major affiliate groups,” said one prominent broadcasting executive. “It’s something everyone is working on, quietly but diligently.”
The 20 times cash flow multiple News Corp. recently paid for Chris-Craft is considered high, especially for the times. The average multiple generally being sought by would-be sellers, which brokers say is about 12 to 15 times cash flow, could easily collapse into single digits next year if a full-fledged Olympic-year, election-year rebound does not materialize.
On the other hand, would-be buyers are looking to pay deflated multiples, generally ranging from eight to 10 times cash flow in midsize and small markets and 11 to 13 times cash flow in larger markets, based on stations’ vulnerability to advertiser spending and program ratings cycles.
Plenty of interest
No one is sure where station valuations will settle in. They only know they will likely go south, and that will mean something different for every player.
For instance, The Walt Disney Co.’s ABC and General Electric Co.’s NBC are eager to buy up to the regulated 35 percent ownership cap, which they remain comfortably below. In anticipation of deregulation and favorable court rulings in pending cases, Fox and Viacom’s CBS have been exceeding the caps with waivers and station swaps.
The $7.5 billion shelf registration Disney recently filed, while earmarked to finance its $5 billion acquisition of Fox Family and restructure existing debt, could give the company more breathing room for making strategic TV station investments or acquisitions.
Although Disney officials decline comment on specific plans, the company clearly is maneuvering to expand its TV station ownership and management control. Sources say Disney has had discussions with major affiliate groups, including Hearst-Argyle Television and Scripps Howard Broadcasting Co., about acquiring some or all of their TV station groups, or becoming an equity owner with management and programming control of the properties. Disney also has offered to acquire single stations, such as Allbritton Communications’ Washington, D.C., station, WJLA-TV, as well as expressing interest in the company’s entire ABC-affiliated station group, sources said.
Either NBC or Disney could pursue Young Broadcasting’s Los Angeles and San Francisco stations. The right offer at just the right financially challenging moment could make the difference as the January switch of KRON-TV, San Francisco, from an NBC affiliate to an independent will materially change the economics of the station and company, analysts say.
While the companies involved declined comment on how close they are to deals, there will be increasing pressure on broadcasters to make their long-term ownership decisions based on their changing economics.
But it has become increasingly clear that, even in this time of militant network-affiliate relations, broadcasters generally appear eager to buy and sell at the “right” price. The trying economic picture, which is expected to prevail for at least another year, will force the issue for many and begin to close what has been a widening gap between buyer and seller expectations.
Young, Granite Broadcasting Corp. and Sinclair Broadcast Group are among the many broadcast companies that have been engaged in different rounds of refinancing in order to balance debt payments, bank covenants and operating demands. Somewhere along the line, some broadcasters are going to find it more attractive and reasonable to protect shareholder value.
Even family-controlled companies such as Hearst-Argyle, Scripps and Belo may find themselves in enough of a generational swing to consider whether they want to stay in a business of rapidly changing dynamics. Cutting a deal with Hearst-Argyle or Scripps would involve some tricky, although not insurmountable, issues such as the selling of their formidable newspaper businesses and satisfying the interests of controlling families.
A media conglomerate such as Disney, for which broadcasting is only a piece of the assets pie, can sustain such a post-acquisition shakeout as it demonstrated in acquiring Capital Cities/ABC in 1995. The reduced cost and maximized revenues coming from the amortization of content over the ABC TV stations, ABC Television Network and cable networks such as ESPN, Disney Channel and the soon-to-be-acquired Fox Family Channel will create a powerful economic dynamic going forward.
Disney also could seek a less overt path to increased TV station distribution by entering into strategic equity partnerships with major groups that reach beyond individual market duopolies or local marketing agreements, such as NBC has with Paxson Communications, Granite Broadcasting and LIN Television. Disney could leverage its TV station management, programming and sales expertise in exchange for a graduated ownership stake in a major affiliated station group, according to industry experts. Such a partnership would likely have certain control rights up front and an eventual buyout option, which would assure the expansion of Disney’s TV station distribution footprint.
In fact, many major network affiliate groups may welcome such a transitional arrangement given some of the uncertainties presented by an increasingly fragmented TV universe, the tightening of national advertising and the prospects for generating new revenues from their costly mandated digital conversion. If this year has demonstrated anything, it is that major network affiliate groups’ fortunes are tied to their networks’ performance. It may well be that in the future, that risk is not as easily cushioned by cyclical event-driven ratings or advertising rebounds.
Matters of scale
More than half of Hearst-Argyle’s overall revenues are generated by its ABC affiliates, which has led to a steep decline in the company’s overall revenues and cash flow, said Victor Miller, analyst at Bear Stearns. Likewise, Young derives 26 percent of its revenues from ABC affiliates, Scripps 19 percent and Belo 14 percent, while only 17 percent of Disney’s diversified revenues rely on its ABC network and owned-and-operated TV stations. About 12 percent of Disney’s overall cash flow is generated by its ABC Network and stations, making it an important and fairly stable source of profits without the high capital requirements of its theme parks and resorts.
“If they want to be in the TV business, and they want to survive, and they don’t want to rely on the government to keep them vibrant, the broadcast network companies should take matters into their own hands and create a gigantic affiliate group that reaches 50 percent of the country,” Mr. Miller said. “Scale will matter to the broadcast networks and the affiliates.”
Investment bankers and brokers, who have been itching to do deals, say mergers between Hearst-Argyle and Belo, ABC or NBC; or Gannett Broadcasting and NBC; or Sinclair and Tribune are some of the combinations that make economic sense on paper.
All the brouhaha over Disney possibly buying AT&T Broadband is nonsense since the company doesn’t cons
ider buying cable systems an efficient use of its funds. The ABC TV stations’ 49 percent operating margins are proof of what its management team can bring to other properties, backed by Disney’s content and cable resources. The bottom line is that even in bad times, TV stations represent a low-risk distribution vehicle for content-heavy conglomerates such as Disney, which view them as a decent source of cash flow with low capital expenditure requirements.
That is why NBC has emerged, along with Viacom/CBS, as a bidder for Telemundo. The second-largest Hispanic broadcaster looks like a bargain given the $3 billion price tag discussed and the growing importance of Hispanic demographics.
Bishop Cheen, analyst at First Union Capital Markets, says those metrics imply a $6.5 billion value for Paxson’s nearly 65 million TV home reach. Worst case, NBC would be faced with the same swap or sell of TV stations in certain markets that Fox and Viacom have had in recent deals.
“The Telemundo deal is just the latest in compelling data points that place a value on Paxson in the billions,” Mr. Cheen said. A sudden flurry of deals could have a lot to do with establishing a new floor for individual or group TV station prices separate from grass-roots cash-flow multiples, he said.
For instance, as media conglomerates such as Disney, Viacom and News Corp. wrap their arms around more cable program networks and TV stations, their related cash flows and valuations will be shaped as much by effective content and distribution synergies as by business-specific dynamics such as ratings and advertising sales.
That dynamic is what will drive a new wave of TV station consolidation next year that is sure to be led by the broadcast network companies.