For a would-be buyer of television stations, 2004 provided a lot of compelling reasons to like the TV station business.
Thanks to a number of heated political campaigns, including the hotly contested presidential race, a number of stations booked record political advertising revenue. NBC affiliates got an additional lift from the strong advertising revenue generated by the network’s coverage of the Summer Olympics. And while the overall ad market remained soft, some core advertising groups-in particular automotive, telecommunications and pharmaceuticals-began to show signs of life during the course of the year.
So why hasn’t the market seen the sort of deal-making that one would expect to find in an industry full of positive signs? Blame it on Washington.
With the dark cloud that is regulatory uncertainty continuing to loom over station groups, would-be buyers and sellers remain on the sidelines-and are likely to remain there well into 2005, some observers say. As long as the rules governing the ownership of stations and newspapers and the creation of duopolies remain in a regulatory purgatory, sources said, buyers and sellers will stay out of the market.
To be sure, there were some transactions in 2004. Sinclair earlier this month struck a deal to sell its CBS affiliate KOVR-TV in Sacramento, Calif., to Viacom for $285 million, creating a duopoly with the UPN station Viacom already owned in the market. Sinclair also sold for $33.5 million its WB affiliate KSMO-TV in Kansas City, Kan., to Meredith Broadcasting, which already owned a CBS affiliate in the market. Young Broadcasting sold its ABC affiliate WTVO-TV in Rockford, Ill., to Mission Broadcasting for $20.75 million.
However, none of these transactions signaled a change of heart in the minds of buyers and sellers. Indeed, most observers described them as one-off deals done either because of too-good-to-pass-up opportunities or because of extenuating circumstances on the part of a seller.
“People are still worried about what’s going to happen” from a regulatory standpoint, said Mark Fratrik, VP at BIA Financial Network, a financial advisory services firm for broadcasters. He described the industry as being in a “holding pattern.”
On top of that, television stations in 2005 are likely to look a bit less attractive to some buyers thanks to the odd-numbered-year effect. Even-numbered years tend to have the most robust revenue results as stations benefit from political campaign spending and the Olympics, while stations in odd-numbered years miss out on those contributors. While most buyers of TV stations are aware of the odd-even trend, odd-numbered years tend to generate less enthusiasm among potential buyers, experts say, and thus less willingness to pay higher prices.
The year-to-year revenue swings have spurred a number of station groups to step up their efforts to diversify their revenue bases by mining other types of businesses, such as direct mail and online advertising. While no one expects these new revenue opportunities to replace lost political dollars in the odd-numbered years, the hope of some executives is to have these alternative revenue streams eventually smooth out year-over-year fluctuations.
Besides preventing deals from getting done, the regulatory uncertainty has taken a toll on station group stock prices. Sinclair Broadcast Group has seen its shares tumble more than 40 percent since the start of the year, while Hearst-Argyle’s stock price is down 6 percent, though it had been off as much as 18 percent over the summer. LIN TV Corp. shares are off 26 percent.
Wall Street analysts and company executives say the stock-price declines are the direct result of investors, particularly hedge funds, initially buying up station group shares on the belief that regulatory relief would come in 2004. When the U.S. Court of Appeals for the Third Circuit in Philadelphia in June remanded back to the Federal Communications Commission many of the new ownership rules approved by the FCC a year earlier, investors dumped the stocks.
And relief isn’t in sight. FCC Chairman Michael Powell said in early December that it could be five to seven years before new media ownership rules are established, which means the marketplace will likely remain in a holding pattern for years to come.
“There are precious few deals to be done out there,” one station group executive said.