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Station Deals in Limbo as Cap is Mulled

Sep 1, 2003  •  Post A Comment

The new Federal Communications Commission rules relaxing television station ownership restrictions officially take effect Thursday, but the windfall anticipated by station owners has not materialized.
Instead, the value of individual TV stations, which was expected to explode, remains stagnant.
Buyers and sellers continue sitting on the sidelines awaiting the outcome of challenges both in the courts and in Congress to the new FCC rules, which were approved three months ago. In other words, what was supposed to be a gold rush of station sales and swaps has largely amounted to a bust, as the market sees little incentive to wake from its slumber.
To be sure, some of the paralysis relates to uncertainty surrounding how the ownership laws will be finalized. Indeed, as Congress tries to undo some elements of the new regulations, many would-be buyers and sellers say they aren’t placing any bets until they see the final outcome.
“I think a majority of the people in this business did not see Congress getting involved,” said one media banker. “People are blown away by the momentum stirred up.”
Added Jeff Smulyan, president of Emmis Broadcasting: “No one knows what is going to happen.”
However, the lack of activity goes well beyond waiting for the ownership rules’ final outcome. TV station buyers and sellers are also confronting a raft of other challenges that could make it difficult to see any significant deal flow soon.
Among them: debt loads at some station groups that could prove too much for some buyers to take on, particularly for stations that rank a distant second or lower in a market; regional considerations that are making an improving advertising picture more of a station-by-station story than an overall industry improvement; and-perhaps most important-a persistent chasm between the bid price and ask price of a station. Even if the ownership rules are ultimately sorted out, experts say these other issues will continue to be a drag on the industry.
The biggest challenge will be narrowing the spread between what sellers think their stations are worth and what buyers are willing to pay. Station owners, buoyed by the ownership rules changes and Wall Street’s pumping up of their stock prices, are regularly quoting station values in the 10 to 12 times cash flow range, while buyers, especially those backed by venture capital money, see values as being closer to eight or nine times cash flow.
Price Complaints
Such appears to be the case with Fisher Communications, which has been trying to sell its 10 TV stations, only to be rebuffed by suitors who complain Fisher’s price is too high. Sources familiar with the situation now say some buyers are pushing Fisher to sell its Seattle and Portland, Ore., stations individually, which could fetch higher prices because of the markets they’re in. The other eight stations, meanwhile, could be tough to unload at any price, “because the financial situation [at those stations] is dismal,” the media banker said.
An official at Fisher could not be reached for comment.

But the market might find some direction if TV station and newspaper owner Freedom Communications completes a sale. With upward of 14 parties interested in either some or all of the Irvine, Calif.,-based company’s assets, which include eight network-affiliated TV stations, some experts see this sale setting the tone for future TV station deals. Freedom CEO Alan Bell said he expects bidders to submit a second round of offers in the coming weeks and hopes to find a buyer by early fall.
“A sale by Freedom could move the bid and ask [prices] off the dime, and given that there are multiple parties interested, people want to see what those buyers are willing to pay for those assets,” said a former executive of a station group. The debate over bid and ask is nothing new. “The gap in valuation has always been really high, as the scarcity of spectrum has kept sellers with very high expectations, except those who have to sell,” said Jamie Kellner, chairman and CEO of both The WB Network and Acme Communications, which owns nine TV stations, eight of them WB-affiliated.
Mr. Kellner noted that most buying and selling of stations takes place when the economy is churning along. When the economic engine sputters, buyers are more inclined to exit the market.
Mr. Kellner would like that to change. As he sees it, Acme is positioned to be a huge beneficiary of the new ownership climate, as larger station groups with properties affiliated with the Big 3 networks look to create duopolies with stations that complement their holdings.
But he doesn’t see anything happening until the economy is officially in recovery. “Once the economy starts to clear and people can see further out into the future, that’s when people start to become comfortable making acquisition plans, taking risks,” he said. “Playing it conservatively is not a bad thing when visibility is low.”
In the meantime, the likelier scenario for stations to change hands will be swaps. “There is a reluctance to part with sizable chunks of cash,” the media banker said.
The presence of venture capitalists helps explain part of the slowdown. They have a strategy of buying on the cheap and flipping a property a short time later for a higher price. However, if a seller is demanding a price at the high end, a VC player has little room within which to get a decent return on investment-and perhaps little patience to hold onto an asset long enough to get a desired ROI, added Stephen Benedek, a managing director at Benedek Investment Group and former executive at Benedek Broadcasting, which was sold last year to Gray Communications.
Another factor that could be holding back market enthusiasm for TV stations is a dicey advertising picture. Although the upfronts in May signaled that things were on the mend, analysts note that TV stations have yet to really see any of that money trickle down to them.
James Marsh, an analyst at SG Cowen, said third-quarter TV spot pacings have hit what he described as a lull after coming in flat in the second quarter. And things could get tougher still, given the lack of political advertising that TV stations have come to covet-in some cases like crack cocaine, as one station group executive put it. Mr. Marsh expects spot pacings to slip nearly 6 percent during the third quarter, continuing a trend seen in the second quarter in which the activity starts out strong and then peters out as the quarter comes to a close.
On top of that, there are regional issues to consider. Industry players note that while some markets are experiencing economic recoveries, others remain in the doldrums and aren’t seeing a rebound in advertising activity. In other cases, political advertising spending in a particular market is the key factor. For example, Mr. Marsh said the Phoenix TV market last year benefited from $50 million in spending from Indian casinos seeking public support for a measure that would boost the number of permissible slot machines; that kind of spending is not expected to be repeated.
“It’s month to month for TV stations,” the media banker said. “Networks took advantage of the strong upfront and now there seems to be a backlash by advertisers, and pressure to spend the ad money in other areas.”
A station’s rank in its market could be a factor as well, especially for debt-addled station owners. As an executive at one station group pointed out, unless a station is a No. 1 or competitive No. 2 station in a market, chances are slim that station is attracting much in the way of advertising dollars, and thus it won’t likely lure many buyers.
“There are too many TV stations chasing advertising inventory,” the executive said.