Turning deregulation into profit

Jul 8, 2002  •  Post A Comment

Local broadcasters will be helped more in the long run by pending duopoly deregulation than by the trickle-down boost of the surprise-but not necessarily sustainable-national upfront advertising recovery.
But whether there is a big payoff for local TV station owners from either won’t be known until the second half of 2003. And that raises more immediate questions: Will local TV station owners get any kind of financial relief this year, and how do they survive this prolonged lull dominated by debt refinancing, delayed expansion and sticking to business basics?
One prominent station group chief executive, echoing the sentiments of many of his peers, last week told me, “Thankfully, this year has become downright boring!”
At a time when already deregulated cable operators are wrestling with their own debt, consolidation and digital services slowdown, the meat-and-potatoes broadcasting business doesn’t look half-bad. This is partly because many broadcasters are keeping their heads down and doing what they must to cope with an uncertain economy, a volatile stock market and costly new tech investments with no payoff in sight.
Avoiding scandal
TV broadcasters have gone virtually unscathed by the accounting and disclosure scandals that have crippled some telecommunications, entertainment and other companies. There have been a handful of small company bankruptcies, such as Benedek Broadcasting, that have been carefully and neatly reconciled.
Even the once decimated local ad spending market has started to come back. A temporary boost from political ad spending later this year will give many broadcasters an improved 2002 outlook. Victor Miller, analyst at Bear Stearns, has essentially doubled his estimates for local television revenue growth to 6 percent to 7 percent in 2002, with much of that attributed to political advertising. So far this year, the core TV broadcast business has been flat to down slightly, he said.
Some leading large-market station group owners tell me they see revenues rising 4 percent to 6 percent above 2001 levels during the second half of this year, and increasing by at least 3 percent to 5 percent for all of 2002, compared with a 15 percent decline in local and national spot television revenues in 2001.
What’s missing is the burst of acquisitions and mergers that require robust price-setting cash-flow multiples and sure, defined deregulation-which are six to nine months away.
To be sure, leading broadcasters, champing at the bit to swap their way into new TV station duopolies and acquire peers, have been discussing various alternatives for months and will be ready to move on the first positive signs.
Mr. Miller says he attributes most of the price increases in broadcasting stocks this year to anticipated deregulation-driven deals rather than to any fundamental broadcast recovery.
Many broadcast stocks have been holding their own in a wild, unpredictable stock market. Leading broadcast group owners such as Hearst-Argyle, McGraw-Hill, Tribune Co., Sinclair Broadcasting, Meredith Broadcasting and Gannett have hovered closer to their 52-week highs than their 52-week lows. That compares favorably with 70 percent losses in the stock price, and corresponding market capitalization, of media conglomerates such as AOL Time Warner and Vivendi Universal.
The recent LIN Television initial public offering, the only new pure broadcasting stock to be created this year, also has been holding its own in a tumultuous market at about $26 a share, right in the middle of its trading range since launching in April.
“Some big group willing to pay a premium for another TV station group that offers a perfect fit with its TV markets will break the pricing log jam,” one broker told me.
Some of the first groups to move in such deals could include Meredith, E.W. Scripps and Freedom Broadcasting, brokers say.
Of course, nothing has kept the most powerful station owners from picking off choice properties, as Viacom did buying KTLA in Los Angeles from Young Broadcasting for $650 million or as Fox Broadcasting Group did when agreeing to acquire WPWR in Chicago from Newsweb Corp. for $425 million.
Some of this subtle repositioning may have intriguing long-term implications. For instance, it will be interesting to see how Rupert Murdoch’s ambitious Fox leverages the clout it will wield with UPN stations wrapped into top-market duopolies such as Chicago, New York and Los Angeles.
In fact, Mr. Miller contends the most important deal-making catalyst and single most important event for all broadcasters could be a decision by the U.S. Court of Appeals as early as September to vacate the “eight-voice test” that governs television duopoly. “The most significant structural barrier in television will be removed,” Mr. Miller said “It will be huge for TV business. If [the Department of Justice] is the agency in charge of local TV mergers and not the [Federal Communications Commission], there will be cases where two network affiliates can merge in the same market and the deals will begin to fly.”
The advertising antidote
Duopoly economics are the ultimate antidote for a television station industry locked into counterproductive dependence on advertising. A larger market duopoly can generate 50 percent to 60 percent earnings margins before interest, taxes, depreciation and amortization “when you combine programming and news elements with time shifting and you have the ability to get a whole other group of audience,” Mr. Miller told me. Throwing large-market newspapers into the mix can make things all the more economically compelling, he said.
Tribune has signaled it would like to get ahead of the slowed deregulation curve, much the way it did with its Times Mirror acquisition several years ago, and other groups also have analyzed potential combinations.
One broker salivating over the deals to come reminded that a combination of Hearst-Argyle and Belo TV station properties, or Hearst-Gannett TV stations, would blow away all other broadcasters with more than an 11.6 million-viewer reach and compatible same-market newspaper and TV station synergies.
Of course, there continues to be speculation about how, under the right kind of deregulation, Gannett would be a prime takeover target for the likes of NBC; and that Disney’s ABC could pursue Hearst-Argyle, Allbritton Broadcasting, McGraw-Hill and/or Scripps Howard due to their high concentration of ABC affiliates. CBS could likely chase a regional player such as Media General while continuing to cherry-pick individual station markets, and Fox could pursue Fox-affiliated groups such as Sinclair and Raycom, industry sources say.
Such potential powerhouses could begin to shift broadcasting’s power base of advertising, program acquisition and clearances, and centralize operations in meaningful ways, industry executives say.
Major broadcasters have talked about bringing together their new digital spectrum-and creating an ad hoc, cable-like, subscription-supported platform that would feature the 40 or 50 most popular basic and niche cable services-to develop a second revenue stream.
Even with all of their woes, some cable operators, such as Paul Allen’s Charter Communications and Cox Communications, which already is dominant in both broadcasting and cable, may move this year to acquire stations in markets where selling local ad inventory on cable systems and TV stations in the same market could be a powerful competitive tool.
Given the strength of their own balance sheets and dual revenue streams, cable operators may be more inclined to pay the 13 times to 15 times cash-flow multiples local TV stations owners are seeking, even though the depressed cash flows off of which they are selling are dictating prices more at 10 times to 12 times cash-flow multiples.
Some broadcasters and cable operators-such as Belo and Time Warner Cable in Texas-already are working together to mine regional riches, despite rocky starts to their relationships.
A number of New York City TV stations, including some owned by the broadcast networks, have been in to
uch with Cablevision about pursuing advertising and content joint ventures in that market.
Leveraging inventory
But what cable system and TV station owners are after in the next wave of broadcasting deregulation is a way to quickly and profitably leverage the 20 percent of local ad inventory on which cable operators have a sure hold as a result of their carriage agreements for major program services.
“A lot of cable systems have seen 10 percent to 20 percent growth based on that business,” Mr. Miller said. “If you are a TV station with a well-entrenched sales force, why wouldn’t you want a cable operator to draw on your expertise, boost your own prospects and split the difference?”
Mr. Miller, who analyzes and tracks local broadcasting and Washington-based regulation with an almost academic intensity, says TV stations will never have as many strategic options as they will have by the end of next year. And still, one of their most immediate opportunities lies within their reach, even in a slow year like this one.
“The most pressing issue TV broadcasters face right now is improving and leveraging the network-affiliate relations,” he said. It is the one much-overlooked holdover from a bygone broadcasting era that many broadcasters could do something about today in order to improve their financial performance-not by expecting cash compensation, which will be virtually non-existent in another year, but by pursuing new business opportunities and cost synergies with their affiliated broadcast networks.
“It’s the reason why the radio and cable industries have done so well under deregulation,” Mr. Miller said. “They have learned to speak with one voice.”