Let The Consolidation Games Begin

Jun 9, 2003  •  Post A Comment

The modest deregulation finally announced last week is enough to assure some significant media change over time: more TV duopolies, numerous single TV station sales and swaps, and some station group mergers.
While the rule changes don’t go far enough to allow the biggest players to buy each other, they do allow more mid-sized and small players to get in the consolidation game-especially those with WB and UPN affiliates that can see two- to three-point hikes in their sale multiples now, brokers said.
Implicit in the laws being relaxed or eliminated by the Federal Communications Commission is a redefinition of TV station values that is part of a broader redefinition of media values due to increases in scarcity, competition and scale.
That means established television stations that generally have traded between 11 to 12 times 2003 cash flow multiples during the past 18 months suddenly will be worth more as sought-after properties whose values have been unleashed by deregulation. Multiples could reach toward 20 times, although Hearst-Argyle Television and Belo have suggested they regret paying as much as 15 times cash flow for Big Three network-affiliated station groups.
But as we have seen in the recent advertising upfront market, media values can be a tricky thing.
The broadcast networks lost another 3 percent to 10 percent of their value last season, depending upon the way you cut the numbers, and were edged out by cable in overall audience share; they still commanded a 14 percent hike to $9.2 billion in overall spending commitments by advertisers, who say they are paying a premium for critical mass. Go figure!
Likewise, no one knows where TV station values will go from here. Some brokers tell me middle market stations that suddenly become acquisition options due to changes in duopoly and cross-ownership rules could gain two to three multiple points in value. For some choice large market outlets now acquisition prospects, “The sky is the limit,” one broker told me.
Duopolies will be the initial deal catalyst. There currently are 119 TV station duopolies in the top 100 markets, concentrated in the top 25 markets, according to a new report by JPMorgan analyst Spencer Wang. He estimates that the rule change allows for the potential creation of 473 duopolies and triopolies that could be created in 158 markets, generating an additional $748 million of broadcast cash flow. When you add in the cross-ownership opportunities, Mr. Wang has doubled his earlier estimate for the creation of $1.08 billion in new deregulation-related cash flow.
The best example of the power of duopoly economics is in the nine major market duopolies Fox has bought and built, boosting Fox TV station profits to a record $1 billion this fiscal year, allowing for cost cuts and news amortization. Although it is constrained by its $6.5 billion acquisition of a 34 percent stake in DirecTV, Fox Entertainment Group could seek duopolies through swaps or acquisitions with Tribune Broadcasting in Seattle, Cox Enterprises in San Francisco and others.
Tom Wolzien of Bernstein Research estimates Viacom could generate $160 million in 2004 station cash flow if it selectively buys an estimated $3 billion more worth of TV outlets to create more duopolies and triopolies. Viacom’s logical acquisition candidates include Raycom Media’s Cleveland station and Meredith Corp.’s CBS-affiliated group, and swapping for CBS affiliates owned by Sinclair Broadcast Group in Sacramento or LIN in Indianapolis.
TV station values will be shaped by the same supply and demand and strategic dynamics that ultimately will price a second tier of deals emerging this year, driven by conglomerates’ need to deleverage. Already we’ve seen wildly different media values as a result. Of the $4 billion in assets AOL Time Warner has pledged to sell this year to reduce $30 billion in debt, it has yanked its book unit off the sale block due to a lack of high enough bids, but sold its 50 percent stake in Comedy Central for $1.23 billion, or 32 times 2003 cash flow, to Viacom, despite cable network viewing and ad erosion.
Vivendi Universal seeks $20 billion for its U.S.-based Sci-Fi and USA cable channels and Universal Studios. Even with aggressive bidders NBC, Viacom, MGM and investor groups led by Marvin Davis and Edgar Bronfman, Jr., .a complex, creative, tax-free signature offer from Liberty Media Corp. more likely could indirectly boost the values to new highs.
In fact, the estimated $30 billion of such potential bigger mergers and acquisitions, while not directly deregulation-related, will comprise a second tier of media deals that will set overall media deal momentum and lift values. At a time when so much content and distribution is held by so few, the concentration of any kind of power-even a challenged platform such as over-the-air broadcasting-is a valuable commodity.
The rule changes will allow broadcasters to more effectively cluster their TV and other media properties much the way cable operators have, driving their values to between $3,200 to $3,500 per subscriber, with Comcast at the high end of $4,200 per subscriber even as the industry is challenged by basic subscriber growth, new service adoption and satellite. Tribune Co., Gannett, Hearst-Argyle, Belo, E.W. Scripps, Sinclair and LIN Television will lead the “market-by-market, station-by-station” deals. Publicly traded pure-play TV companies and family-held newspaper-TV hybrids will disappear. In better times, AOL Time Warner can try to acquire Tribune Co. or Clear Channel to create the raucous in TV that it has in radio.
But, even as players have aggressively refinanced and deleveraged to be stronger buyers or sellers, local station economics are generally lagging and will retard some deals. Disney, sacked with slow-growing businesses and debt, could increase the reach of its ABC TV network and stations by buying Allbritton Communications or E.W. Scripps; but won’t.
Should GE finance NBC’s pursuit of VUE by creating a majority-owned spin-off of NBC, it could use that new deal making currency to secure NBC’s alignment with affiliated hybrids such as Post-Newsweek, Gannett, or Hearst-Argyle.
Merrill Lynch analyst Jessica Reif Cohen said multiple network operators such as Viacom/UPN and NBC/Telemundo/ Paxson Communications must digest what they have to build out their secondary distribution systems and use cable “must-carry” rights, which are stations’ “hidden assets.” While cable operators resist, rival satellite operators have started to pay broadcasters between 10 cents and 17 cents per subscriber in retransmission fees, sources tell me. Emergence of that potential new second revenue stream also will shape future TV station values big time.
Still, Mr. Wang sounded a proper note of caution to clients last week, saying, “The economic benefits of the deregulation are modest. … Mergers, to be important for investors, would probably have to deliver benefits beyond those gained from TV duopolies, or TV/newspaper cross-ownership thus far.”