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LIN TV Corp. to Exploit Duopolies

Sep 22, 2003  •  Post A Comment

LIN TV Corp. plans to make money from digital video newspapers and broadband wireless, while exploiting markets where it holds station duopolies, as it seeks to double profits over the next five years-with or without deregulation.

Call it the-little-engine-that-could syndrome.

LIN TV Chairman and CEO Gary Chapman is used to succeeding without outside support such as the government’s recent attempt at broadcast deregulation. He has seen LIN through public and private incarnations and growth spurts over the past decade.

Having spent an estimated $60 million on a digital upgrade of its entire TV station base the past five years, Mr. Chapman, one of the industry’s most prudent and well-regarded managers, said he is focused on realizing early returns on that investment with or without government regulators’ help.

LIN is embarking on trials in creating local interactive video newspapers. It will offer a new digital subscription service model consisting of the local news and sports components of stations’ local TV newscasts and the classified job ads that could be coordinated with local newspapers and existing local Internet sites.

However, LIN will bring to all of this a new brand of wireless broadband service using its own analog spectrum, which it recently bought back for $4.2 million at a government auction. The spectrum is located in markets such as Providence, R.I.; Austin, Texas; and Grand Rapids, Mich., in which LIN generally commands its core Big 3 network-affiliated station plus an upstart broadcast network (such as UPN) affiliate and a third outlet, typically low-powered. By bundling the three market stations, LIN can snare more than 40 cents of every advertising dollar spent in each of those markets and collectively boost the ratings of its own local TV newscasts through widespread cross-promotion.

Even at this early juncture, one thing is clear: LIN TV knows how to profitably operate duopolies.

Nearly three-quarters of the company’s revenues are generated by markets in which LIN owns and operates two or more stations. “It’s a model that works,” Mr. Chapman said.

As it develops four additional duopoly markets, LIN said it will continue to cherry-pick and swap for individual stations as an alternative to doing a larger merger or acquisition of another station group if the right kind of deregulation ever occurs and allows it. Sources said LIN could become a buyer of Young Broadcasting, Nexstar Broadcasting Group, Granite Broadcasting Corp. or any number of other smaller operators. LIN, which declines comment on speculation, already is in serious acquisition discussions with at least one other TV station group, sources said.

“We have no difficulty going back to our banks to raise more capital to do deals,” Mr. Chapman said, pointing to the $400 million equity recently raised to reduce debt and interest payments, freeing $2 million in free cash flow.

“[The federal appeals court’s stay on TV ownership deregulation] won’t stop the discussions, but it will stop sellers from doing deals. Sellers are now afraid they will leave money on the table because of 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.

LIN is destined for bigger things, if for no other reason than it has a 47 percent owner in Hicks, Muse, Tate & Furst, a Dallas-based leveraged buyout company that, while content in its current investment, eventually wants to cash out at a big profit. “They believe LIN will be a consolidator, and they want to participate in that value creation,” Mr. Chapman said.

LIN would likely be among the first midsize broadcasters to take advantage of new deregulation, leveraging its strong balance sheet and management to grow through duopolies, station clustering and even a major merger.

But the morphing of smaller players into new, bigger broadcasters has been put on indefinite hold while deregulation works its way through the courts.

“I think at the very least, it will give us the opportunity through swaps or acquisitions to fill in markets and create more duopolies. It gives us more room, although not as much as I’d like,” Mr. Chapman said. “Eventually, it could lead to a merger or acquisition of another company.

“We have to let the dust settle. We don’t know how exactly this is going to turn out. These new rules probably are going to be tested in more court cases,” he said. “But we’re constantly in acquisition mode.”

Even without the deregulation it needs and seeks, LIN seeks to double its profits over the next five years, just as it has since 1995.

But that effort could immediately be hurt by the persistent gap between buyer and seller price expectations that has arrested station deals for more than a year. Just before the lull began LIN acquired the Sunrise stations early in 2002 for $250 million, or 10 times cash flow. Hicks, Muse acquired LIN in 1997 for $1.7 billion, which was a 12.7 times cash flow multiple.

But its crowning achievement was the formation a decade ago of a unique partnership with NBC that includes its Dallas NBC affiliate, KXAS-TV, and NBC-owned KNSD-TV in San Diego. LIN sold 80 percent of its Dallas station for more than $800 million while taking on a 20 percent stake in NBC’s San Diego station. LIN receives 20 percent of the annual profits of the joint venture, which NBC owns and manages and which is valued at more than $1 billion.

Analysts generally estimate LIN TV’s market capitalization to be around $1.3 billion, with its stock trading consistently at a fairly strong $25 a share.

LIN TV has 7 percent clearance of all U.S. TV households with its owned stations and another 2 percent coverage through duopolies and local marketing agreements, making LIN 25th among the 25 biggest broadcast station owners, said Victor Miller of Bear Stearns.

“The issue of how to value a company has been complicated by the cost, potential losses and payback from the digital upgrades,” Mr. Chapman said.

So while many Wall Street analysts and industry brokers are placing LIN TV in the “buyers” column when ranking broadcast company prospects under deregulation, a lot will depend on the specific properties and deal-making partners to be had, he said.

“Near term, LIN walks and talks like a better buyer, but longer term, LIN could be a better seller,” said Bishop Cheen, analyst for Wachovia Securities.

“The company has reduced its leverage and created the availability of low-cost capital to do more deals and take advantage of the new rules,” Mr. Cheen said. “Right now I see LIN as a shaper and a buyer. Ultimately, they could find the right strategic fit and become a much larger player. That’s what this deregulation is all about.”

Most immediately LIN has sought waivers to acquire stations it has managed under LMAs and to acquire second stations in growth markets where its network affiliates have built a strong local news presence. That effort has not come to a halt and is now jeopardized by the recent court stay of proposed deregulation. LIN was prepared to meet with the Federal Communications Commission Sept. 4 about its waiver requests, but the meeting was canceled because of the stay.

LIN is in the process of acquiring LMA stations in Providence and Austin, which it would operate as duopolies under the proposed rule changes. On the flip side, LIN recently raised $8.5 million from the sale of two Texas stations and is looking to sell its Flint, Mich., NBC affiliate.

LIN’s biggest market presence includes Big 3 network and UPN affiliates in Indianapolis; Hartford-New Haven, Conn.; Buffalo, N.Y.; Providence; Norfolk-Portsmouth, Va.; and Grand Rapids.

Another more immediate opportunity may be for LIN to assume management or partial ownership of some of the Paxson stations from NBC, which is 35 percent owner with a right to acquire more. Discussions are ongoing.

Those or other stations eventually could be integrated into LIN’s existing joint partnership with NBC.

Even after making an unsuccessful run to acquire Fisher Broadcasting earlier this
year, LIN continues in conversations with a number of broadcasters about potential station swaps, acquisitions and even broader mergers. Some analysts said it is most likely to morph through another series of smaller mergers and acquisitions or maybe one big strategic merger.

Publicly traded small cap companies on the order of LIN TV include Sinclair Broadcast Group, Young Broadcasting, Gray Television, Fisher Broadcasting, Granite Broadcasting, Liberty Corp. (not Liberty Media Corp.) and Acme TV.

Sinclair Broadcast Group, Meredith, McGraw-Hill and Hearst-Argyle Television are among the other groups also looking to immediately double up in their markets under the proposed rule changes-any of which also could be merger partners for LIN, analysts said.

LIN suffered a jolt earlier this year when its traditional broadcast business revenues faltered in the aftermath of the war in Iraq. Having missed its first-quarter earnings targets, LIN withdrew and has not restated financial guidance for the year.

Drew Marcus, an analyst at Deutsche Bank who lowered his 2003 earnings estimate but is generally bullish on LIN, views it as a blip. The primary news stations that account for 60 percent of LIN’s revenue were down in the low single digits in first-quarter revenue, with NBC affiliates suffering from negative year-ago Olympics comparisons, though CBS affiliates were stronger.