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Cap Decision Puts Stations Back in Play

Dec 8, 2003  •  Post A Comment

Next year, it will be different for TV stations.
Thanks to a confluence of events that are certain to cast the value of stations in a more flattering light, many people who follow station sales activity predict that 2004 will be a busier year, as buyers and sellers who spent the better part of 2003 engaged in a staring contest begin to blink and thus get deals done.
The combination of an improving economy, low interest rates, a White House-backed plan to set the station ownership cap permanently at 39 percent and the fact that 2004 is both an election year and an Olympics year is expected to bring some much-needed luster to TV stations and contribute to increased sales and trading activity.
“In the larger markets, where you can duopolize, things may start loosening up,” said Mark Fratrik, a VP at BIA Financial Network, a Chantilly, Va.-based media consulting firm.
He added that the revenue lift many TV stations will get from next year’s political advertising spending and the Olympics won’t necessarily compel sidelined buyers to step up, but both factors could enhance stations’ appeal. “People tend to get optimistic in those years,” he said.
Added Perry Steiner, a managing director of Arlington Capital Partners, a Washington-based private equity firm that buys small-market TV stations: “I think there will be a lot of [mergers and acquisitions] activity because there had been a lack of M&A activity in 2002 and 2003. With the economy looking like it’s picking up, the ad economy looking like it’s picking up and the political and Olympics [ads], it’s shaping up to be a big year.”
While the 39 percent ownership cap addresses the question of whether News Corp. and Viacom would have to sell stations, most market observers say the new cap will have little impact on most station owners.
“Going from a cap of 35 percent to 39 percent is irrelevant,” said one former station group executive. “It doesn’t change anything for News Corp. or Viacom. ABC has its own issues, and [parent Walt Disney Co.] is still trying to digest their Fox Family purchase, so they are unlikely to buy more stations. And NBC is bullish on cable.”
The areas of the new ownership rules that could have the most effect on TV station sales activity, observers said, concern duopolies and newspaper-TV station ownership in a single market-issues that are tied up in challenges to be heard by a federal court. Many analysts believe that when the court reaches a decision, the challenges will fail.
“The Philadelphia court is what is holding things up in small and medium-size markets,” Mr. Fratrik said. “Everything changes if [those markets] are able to duopolize.”
Until that court issues a ruling, few expect any meaningful activity to take place. “What’s the rush?” one station group executive asked. With the case in Philadelphia still an open question, “Buyers will be disciplined if they are going to shell out serious bucks.”
To be sure, the market has had many false starts in recent months. Immediately following the controversial Federal Communications Commission vote June 2 to relax station-ownership rules, industry watchers expected a steady flow of transactions as stations were sold and swapped in an effort to create duopolies or consolidate TV station and newspaper properties into single markets.
However, public outrage, congressional inquiries and legal challenges all but put the FCC’s new rules on hold. On top of that, a shaky recovery that has left some markets gaining strength while others continue to languish has weighed on the market.
Buyers and sellers continue to have differing opinions about the value of television stations, creating what is known in the industry as the bid-ask spread, in which sellers are holding firm in their belief that their stations are worth cash-flow multiples in the mid-teens, while buyers say the multiples are more like high single digits.
Who is likely to break that logjam? Mr. Steiner, of the private equity fund, suggests one look to buyers, who will be more willing to put up more cash if they see the advertising sector gaining strength.
“Unless something is forcing a seller to sell, people in television generally can just hold on to their station,” he said. “However, with the market improving, buyers are more willing to stretch when you feel more confident.”
Helping that along is the current low-interest-rate environment, which enables buyers to borrow more and at cheaper rates to fund an acquisition. Further, as David Schutz of San Diego-based media brokerage firm Hoffman Schutz, pointed out, banks are likely to be more willing to finance an acquisition once they see economic recovery throughout the country.
However, how much a buyer is willing to pony up will be station-dependent, the former station group executive said. “Not all TV stations are created equal. Buyers may be willing to pay more for the No. 1 or close No. 2 station than for the No. 3, 4 or 5 station,” he said. “Established brands will command higher multiples.”