Station Mergers See Movement

Aug 29, 2005  •  Post A Comment

After months of being largely dormant, the television station mergers market showed signs of life last week. Two station groups announced separate deals, indicating that despite difficulties in the business, there is still interest in TV stations.

The biggest deal came from a place few were probably following closely. Station owner Liberty Corp. announced last Thursday that it agreed to be acquired by privately held Raycom Media in a deal valued at $987 million.

Earlier in the week Emmis Communications announced it has struck a deal with three station groups-LIN TV, Gray Television and Journal Communications-to sell nine of its stations for a total of $681 million.

Montgomery, Ala.-based Raycom will pay $47.35 a share to purchase Liberty, which owns 15 network-affiliated television stations, and will assume $110 million in debt. The purchase price represents a 26 percent premium over Liberty’s closing price last Thursday of $37.45 a share. The deal is expected to close by the end of the year. Raycom owns 37 television stations, covering around 10 percent of the country.

The deal is subject to regulatory approval and must get the OK from Liberty’s shareholders. Liberty officials said that shareholders owning 20 percent of the company’s outstanding stock have already thrown their support behind the deal.

Liberty Chairman and CEO Hayne Hipp said the decision to sell to Raycom came after the company’s board reviewed a range of strategic alternatives.

Raycom President and CEO Paul McTear said the merger is in keeping with his company’s long-term goal to build up its presence in small and midsize markets, where Liberty and Raycom both operate stations.

What Wall Street will think of the price Raycom is paying remains unclear and might not matter much, given the company is privately held.

However, investors and analysts had a range of reactions to the Emmis deal.

On the face of it, Emmis’ announcement that it was selling the stations to LIN TV, Gray Television and Journal Communications was cause for celebration. It provided a big rush of energy to the moribund mergers-and-acquisitions market for television stations as Emmis’ for-sale sign drew interest from many potential suitors and provided evidence there is still a market for TV stations.

But that initial elation was followed by a bit of worry and some head scratching as investors, peeling back the layers of the three transactions, began to conclude that while Emmis got a sweet price for its stations, the three buyers may have paid too much.

Analysts generally concluded that Emmis was able to sell its nine stations at an average multiple of 14 times cash flow-far higher than the 12 times cash flow projection some on Wall Street had projected leading up to last week’s announcement. It has led analysts to predict that Emmis could end up selling off the entire station group for upward of $1.3 billion-far more than the $1 billion that Emmis was initially predicted to get.

In many ways, the multiples at which the Emmis stations sold are good news for the market. For months market players have said that the lack of significant selling activity is the result of the wide gap between what buyers are willing to pay and what sellers are willing to accept. Matters have been made even more complicated by the lack of regulatory clarity out of Washington, where a number of ownership issues remain a question mark more than two years after the Federal Communications Commission voted to ease certain TV station ownership restrictions.

However, in recent months there has been growing evidence the so-called “bid-ask spread” has narrowed. What’s more, several recent transactions have showed that buyers are willing to pay multiples that are even higher than the ones seen in the Emmis deals if a deal involves creating a duopoly in a specific market.

Did Stations Overpay?

While that’s good news for Emmis, which announced the sale in May as part of a move to streamline its businesses and focus on its core radio operations, more than a few observers are saying that what might be good for Emmis might be less so for LIN, Gray and Journal.

“The one concern here is the rich price,” Credit Suisse First Boston analyst William Drewry said in a research note. “Growth rates have eased off significantly for TV station groups, and it seems to be a feast or famine, depending on whether it is a political advertising year. That makes the sector a cost-driven play, especially at these multiples, and that leaves less room for error.”

Another issue for one buyer in particular, LIN, is whether it was worth the company’s increasing its debt load to buy five Emmis stations. Several analysts said LIN would likely violate the terms of its debt covenants with the Emmis transaction. Credit rating analysts seem to have taken notice, placing the company’s debt ratings under review for a possible downgrade, which would result in higher borrowing costs for LIN.

Yet even with those questions, there is a silver lining that comes with the Emmis and Raycom transactions.

“What’s interesting to me is that the three groups that acquired these stations are established operators,” said Mark Fratrik, VP of BIA Financial Network, which provides financial and consulting services to station groups. “They must see something in those operations that they can add to them. Not all station groups are running to sell out.”