Bloom Fades Off TV Station Stocks

Aug 23, 2004  •  Post A Comment

As Wall Street braces itself for the day when Cox Communications’ controlling shareholder takes the cable operator private, speculation that Hearst-Argyle Television could be the next company in the television industry to go private is surfacing among some industry players.

Much of that forecasting is fueled by a series of share purchases made in recent months by Hearst Corp., the privately held publishing giant that owns about two-thirds of Hearst-Argyle.

Hearst since April has bought more than 1 million shares of Hearst-Argyle, leading some observers to opine that Hearst might be preparing to bring its station group back into the fold, much the way Cox Communications’ controlling shareholder Cox Enterprises proposed to do earlier this month with a $7.9 billion buyout offer.

However, people familiar with the situation say Hearst is buying the station group’s shares simply because they’re cheap and note that Hearst’s buying spree has had a modest impact on its stake in the station group, boosting it to maybe 66 percent from 65 percent.

Hearst also has a history of these kinds of stock purchases, said Banc of America Securities analyst Jonathan Jacoby. He noted that Hearst in the past has purchased Hearst-Argyle stock when it traded at low prices, and he said that its current stock-buying activity “does not necessarily mean a takeout is imminent.”

Further, while the move by Cox Enterprises all but ensures that Cox Communications is finished acquiring systems, many analysts believe Hearst-Argyle is still interested in buying television stations and will buy once the ownership rules permit it. Having access to the capital markets as a publicly traded company will enable Hearst-Argyle to move forward with those purchases.

Representatives of Hearst-Argyle and Hearst refused to comment.

The Hearst-Argyle speculation is the latest in a string of stories percolating in a sector that is in desperate need of some excitement amid a cloudy regulatory environment, persistent fears about fallout from Washington’s obsession with indecency and an investment community that appears to have lost interest in television station stocks.

Indeed, station group stocks have had a tough year so far, with many posting double-digit declines even as the sector’s fundamentals look strong. Many stations have reported strong second-quarter earnings, boosted by the improving advertising market and heavy political spending. In addition, many station groups are nearing the end of some significant capital investments required to meet the Federal Communications Commission’s digital broadcast deadline, which means a number of stations are likely to see their free cash flow numbers improve going forward.

Still, investors have turned their backs on station group stocks, with Hearst-Argyle shares down nearly 13 percent since January, while Young Broadcasting’s stock is off more than 50 percent, Sinclair Broadcasting is down 40 percent and LIN Television’s shares are off 15 percent.

Much of the blame can be placed squarely on the uncertain regulatory environment, which has left many station groups treading water as they wait for clarity about the future of rules governing the ownership of more than one station in a market or the ability of a single company to own newspapers and TV stations in a single city.

“Free television remains shackled unduly by the limits on local TV ownership,” said Lee Westerfield, a station group analyst at Harris Nesbitt Gerard. He thinks the picture will brighten considerably once station groups are free to merge and achieve enough critical mass to improve economies of scale.

Another culprit is hedge funds, which bought station group stocks on the hope that the U.S. Court of Appeals for the Third Circuit in Philadelphia would give its nod to the new ownership rules and usher in a wave of merger activity. When the court in June remanded many of the new rules back to the FCC, hedge funds dumped the stocks.

“Public investors aren’t appreciating the value of station stocks,” said Sean Butson, an analyst at Legg Mason in Baltimore, who blames a lot of the weakness in stock prices on the uncertain future for ownership rules as well as on the expected revenue decline stations experience during odd-numbered years when there are fewer political races. “With the lack of a catalyst and the expected decline in odd years, it’s difficult to get excited about the sector.”

As the ownership issue works its way through the courts, market participants are trying to create some catalysts of their own to lure investors back-though most are having little success in jump-starting investor enthusiasm.

In addition to speculation about a Cox-like buyout, some market participants are trying to push the notion that TV station stocks are being tarred with the same brush as radio stocks, which have also suffered declines this year.

Gary Chapman, LIN’s CEO, during a discussion of the company’s second-quarter earnings, called on investors to not view TV and radio stocks as equal, noting, among other things, that “the radio sector is now mature” and can no longer reap the benefits of cost cutting that the 1996 deregulation of the sector triggered.

“I am making my case that LIN Television should not be valued as equal to the radio sector, I am making my case that LIN Television should be valued higher than the radio sector,” Mr. Chapman said during the conference call.

But Mr. Westerfield sees that pitch as a tough sell to savvy investors.

“The differences are more profound than the similarities and always at the forefront of investors’ minds,” he said. “Investors do not lump radio and TV together.”