Deals in Limbo as Rules Debated

Sep 15, 2003  •  Post A Comment

Television station valuations are in jeopardy as broadcasters wait a year or more for the courts, Congress and regulators to determine the fate of deregulation rules passed in June by the Federal Communications Commission.
Many broadcasters said they expected court challenges to deregulation. But some added that the Third U.S. Circuit Court of Appeals’ stay Sept. 3, just a day before the changes were to take effect, was an unwelcome surprise.
“Broadcasters have just been through a very big head fake,” observed Bishop Cheen, a veteran analyst for Wachovia Securities. “[The] court stay totally stopped rising market valuations,” Mr. Cheen said last week.
In May, investors boosted broadcasting stocks in anticipation of mergers and acquisitions that would occur as a result of the proposed deregulation. “Middle-market and larger-market entrepreneurial companies were clearly commanding a premium,” Mr. Cheen said. “However, investors and broadcasting stock prices generally have been gradually pulling back since June for fear of this very thing happening.”
Some broadcasting stocks are taking the news worse than others. Among the broadcasters being “held hostage” by ongoing deregulatory events, said Mr. Cheen, are Young Broadcasting (whose stock lost nearly $14 a share during the week in which the court stay was announced), Granite Broadcasting (down $2 a share) and Sinclair Broadcasting (down nearly $7 a share). Paxson Communications was down less than 50 cents per share for the week ending Sept. 5.
While not all media companies and their stocks will be hurt by the uncertain, protracted approval process, their values will not be driven up, either, by merger and acquisition expectations, Mr. Cheen said. “M&A activity always is a chance to confirm value.”
At risk are billions of dollars in potential mergers and acquisitions, involving entire station groups or individual properties, that have been on hold while the FCC deliberated changes in the ownership cap and in cross-ownership rules, now the center of a heated debate in the courts and in Congress. Even if the case currently being handled by the Philadelphia-based Third Circuit Court is handed off to the D.C. Circuit, considered more sympathetic to broadcasters, it will take a year to unwind, experts said. They also noted that broadcasters could end up with more deregulation than they were expected to receive from the FCC.
Addressing the recent Television Bureau of Advertising forecast conference, former FCC Chairman and veteran broadcast attorney Dick Wiley said it could take up to 18 months for the courts to explore the issues, conduct hearings and work through appeals. Even a congressional pre-emption could still be subject to court review and challenge.
“This is a highly discretionary action by the Court of Appeals, and it’s likely to be tough to get the stay removed,” Mr. Wiley said.
While some smaller deals and individual station deals still can get done, any transaction riding on changes in the ownership cap or duopoly rules has been put on indefinite hold. The FCC is expected to approve the long-pending Univision Broadcasting acquisition of Hispanic Broadcasting rather than further hold up the transaction in the deregulatory tangle.
For Gary Chapman, chairman and CEO of LIN Television, the delay means having to wait not only on something as simple as securing waivers to convert licensed LMAs in Austin and Providence but also on conversations with other medium-size broadcasters about a possible merger or acquisition that would morph LIN into a bigger player.
“It will stop sellers from doing deals. Sellers are now afraid they will leave money on the table, because more favorable regulations, economic recovery and even next year’s elections would give them higher multiples if they just wait a little while longer,” Mr. Chapman said.
Brokers say TV stations generally have been able to attract a double-digit premium, moving from the past year’s average nine times to 10 times cash flow acquisition multiple to an average 10 times to 12 times cash flow in improving public markets.
Even with a boost from 2004 Olympic Games telecasts and elections, many broadcasters could find themselves no better off in 2005 than they were coming into 2003 in terms of deal opportunities and impetus.
At a Morgan Stanley Media conference in Boston last week, Rupert Murdoch, chairman of News Corp. and Fox Entertainment Group, said while the “cap is outdated and shouldn’t be there,” he is not losing sleep over the prospect of having to forfeit a handful of smaller-market TV stations if the ownership cap is not raised from 35 percent to 45 percent of the country’s TV households.
Fox and Viacom have been betting on such a relaxation in the rules, allowing their ownership stakes to exceed the 40 percent mark as a result of doing a number of large group and single TV station deals. A delay in seeking waivers under any anticipated rule change could jeopardize their retaining some of their current stations.
“The opposition to it is based on hysteria and ignorance,” Mr. Murdoch said. “The idea that a station can do better if it is owned locally is just not shown up by the facts. News services on our stations have increased the past two years by about 50 percent-way ahead of any locally owned stations.”
He said he believes President Bush will veto any legislation meant to block the proposed new FCC rules, and that they will be allowed to stand. “I give them about a 60/40 chance on that today,” he said.
It remains unclear what the rules mean to the “grandfathering” of previous Viacom and Fox duopoly deals and other TV station deals that have pushed the two companies well beyond the current 35 percent cap.
“It may be difficult for Viacom and Fox now to persuade the FCC to grant permanent waivers if the cap is rolled back. The timing of the stay may have closed the loophole for Viacom and Fox to argue holding onto their stations over the cap,” Mr. Cheen said.
Even if the attempt to reverse the entire set of proposed deregulations is successful, the forced sales of stations could be prevented by arranging for strategic station swaps, analysts said.
“This does create a very complex economic situation for a lot of folks. But if you have distressed sellers who might be willing to take the risk that at the end of the day the rules get loosened as the FCC wanted, I suppose that creates a buying opportunity for a lot of well-capitalized buyers,” said Blair Levin, an analyst at Legg Mason and a former FCC official.