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Station Deals Wait in The Wings

May 19, 2003  •  Post A Comment

Station groups and private investors itching to buy TV stations are waiting on the sidelines, uncertain about how far the Federal Communications Commission will go in relaxing media-ownership rules and embroiled in an industry debate about just how much TV stations are worth these days.
The paralysis comes as interest in TV stations has begun to show signs of life. With an economic recovery seemingly around the corner, and many networks and station groups reporting rises in first-quarter advertising revenue, even against the backdrop of the Iraq war, market participants say there is a sense that the money sloshing around in many buyers’ pockets could be put to work soon.
Helping matters further is the expectation by many in the media industry that the FCC at its June 2 hearing will raise the national ownership limit for TV stations, permit duopolies and triopolies in many markets and allow companies to own stations and newspapers in the same market.
“I don’t think anyone would be a seller until after June 2, or if there’s a change in the rules, mainly because they want clarity about what the rules are going to be,” said Gary Chapman, CEO of LIN TV, which owns 24 stations.
Indeed, few deals have taken place ahead of the FCC’s June 2 hearing. According to BIA Financial Network, a Chantilly, Va.-based media consulting company, just 13 stations changed hands through the end of April. A year ago, that figure was 46 and went on to total 92 for all of 2002.
“The biggest challenge will be getting a lot of capital into the business,” said Jeffrey Smulyan, CEO of Emmis Broadcasting . “There are a lot of people on the sidelines.”
Some suggest that given tax considerations, a likely scenario is that largely the big-name station groups and the broadcast networks will drive much of the activity in the form of station swaps that permit companies to move pieces around to capture efficiencies, increase a presence in a particular market or create duopolies in cities where it strategically makes sense.
Others suggest outright sales could be triggered. “If the rules go through, it would effectively allow buyers to be out there for similar properties. Bidding could happen,” said Stamos Nicholas, a partner at Deloitte & Touche who specializes in TV station valuations. “
Either way, the outcome is largely predicated on the extent to which the FCC relaxes the rules, observers say. “It seems we are coming to a point in time where if [FCC Chairman Michael Powell] has his way and changes the rules it could set the landscape for the next 20 years,” said Barry Thurston, a partner at media brokerage firm Associated Media Partners.
For example, News Corp. and Viacom, both of which currently exceed the current 35 percent cap of national viewership a single company can reach through the stations it owns, could realize an immediate benefit if the FCC ups the cap to 45 percent, as many expect it will. Such a ruling also could spark fierce competition in the nation’s top 20 markets as the networks rush to snatch up stations.
If the rules change to permit a single company to own a TV station and a newspaper in a market, it would be a boon to companies like Tribune and Gannett, both of which have newspaper and TV holdings and are pushing for the FCC to end the restriction on cross-ownership.
Companies likely to miss out are those with stations in smaller markets, where it won’t make sense for large companies to scoop up stations in a bid to boost national viewership, sources say.
Enthusiasm Up
Another wrinkle for smaller players: As enthusiasm for TV stations rises, prices across the board might too. “If anything,[a change in FCC rules] might make it harder, at least in some markets,” said Gene Loving, CEO of Max Media, a Virginia Beach, Va.-based station owner, which last week acquired two stations in Michigan from Scanlan Communications Group.
That pricing issue could be a sticking point for large players as well. One former station group owner noted that for several years TV stations were garnering prices in the neighborhood of 12 to 14 times earnings before interest, taxes, depreciation and amortization, better known as cash flow. Station owners interested in selling today still want those prices, even as buyers argue a more accurate range is between eight and 10 times cash flow.
But LIN’s Mr. Chapman doesn’t see multiples rising much. He noted that with the government’s requiring stations to go digital, the cost of that conversion has to be factored. “I spent $57 million to build out our digital,” he said. “If I buy another station group, will I have to spend another $57 million? That has to be factored into the acquisitions.”