Station Brake

Battered broadcasters no longer a hot commodity

Bob Pittman isn't someone you'd expect to be interested in the TV station business.

Before he became a founding member of private investment firm Pilot Group, the highlights of his career came in cable as a co-founder of MTV and the Internet as president and COO of AOL.

But there Pittman was Tuesday at NATPE in Las Vegas analyzing the prospects of local TV, having snapped up 21 stations in recent years through Pilot-controlled Barrington Broadcasting Group.

If the price is right, he would expand his portfolio further. But it's not as easy as it used to be.

"Financing has tightened up a lot," Pittman says. "There's been some compression in the multiples, but they've held up pretty well, considering."

With Super Tuesday set to rain down record revenue from political ad spending on the U.S. TV station business, the sector is in a very good place in terms of business momentum.

But analysts paint a more complicated picture of the future, especially after an election- and Olympics-fueled 2008 give way to an uncertain 2009. The summer's credit crunch is already causing an ebb in the flow of private equity-backed station sales, which hit an all-time high in 2007.

"2007 was definitely a watershed year for TV broadcasters and M&A," says Chris Ripley, head of broadcast investment banking at UBS, which says it was the most active underwriter of sector deals last year. "And valuations were on the rise so that there was a little bit of a (price) bubble."

Stations were attractive acquisition targets for much of the past two years. In 2007 alone, 294 stations changed hands in deals worth $4.6 billion, according to Bear Stearns.

Among some of the more high-profile deals: In May, the New York Times Co. offloaded its entire group of nine TV stations for $575 million; CBS Corp. last year agreed to sell seven of its smaller market stations for $185 million; and Clear Channel in April agreed to sell all 56 of its TV and digital multicast stations for about $1.2 billion.

The buyers in all these cases were private-equity firms, which before the recent global credit crunch had easy access to historically cheap debt and liked the steady cash flows and possible untapped financial upside of TV stations.

PE executives are still drawn to the basic attractions of the broadcast business model, including high margins, loads of cash flow and tough barriers of entry for competitors.

"Plus, some PE players wanted to get stations under their belt to ride the 2008 wave of political advertising," Ripley says.

But the station business is being threatened by a disruption of the traditional network-station arrangement, with new market entrants in broadband video taking a growing number of eyeballs away. The 2009 ad market also is shaky amid a possible U.S. recession, with particular signs of trouble in the biggest spot TV ad category, automotive.

JPMorgan analyst John Blackledge in early January said that broadcasting stocks were about 50% below their highs of April 2007, when his firm's industry stock index was up 31% over the start of 2007. The stocks also were about 37% below mid-July 2007 levels.

Blackledge also predicted possible further stock downsides. "It's unclear if a recession is fully priced in to the stocks," he says. "For the most part, consensus Street estimates have not really reflected a recession," meaning they might have to come down along with stocks before shares stabilize.

The sluggish stocks, reduced deal expectations and the looming U.S. recession have made potential sellers among TV stations more reluctant to divest in a softer market.

Case in point are Nexstar Broadcasting and LIN TV, two station groups that last year saw the growing value of their holdings and put themselves up for sale.

"(The values were) so high that we thought, oh my gosh, this is definitely worth exploring if someone would pay us a very, very high number for these valuable assets," LIN TV CEO Vincent Sadusky says. "It would probably make sense for our shareholders to at least explore it." But when the credit markets seized in the summer, LIN TV, like Nexstar, pulled back (HR 8/4).

The shaky credit market also likely was a factor in lowered valuations for News Corp.'s recently closed $1.2 billion sale of eight Fox stations to Oak Hill, which fetched less than some originally had expected. Miller Tabak + Co. analyst David Joyce had eyed a $1.4 billion price tag but says the final figure was lower "due in part to the nervous credit market situation that likely resulted in a lower level of bidding activity for these assets."

That doesn't mean that select sales of TV stations won't happen in this market or that deal activity won't reignite soon, but it's certainly an indication that the market has deflated a bit.

"I wouldn't be surprised to see these guys come back to the market once sellers have become used to the idea of more normalized prices again and the debt market stabilizes later this year," one banking source says. "But for now, the boom is behind us."

RBC Capital Markets analyst David Banks echoes that sentiment. "Most of the deals getting done today are really representative of prior commitments, with a few exceptions," he says. "I suspect that if/when multiples compress, you could see more activity, but the 'onslaught' is probably done."

Some financial pressure likely led Young Broadcasting, which paid a record $823 million in 2000 for KRON-TV in San Francisco, to recently put the station on the block. But the company also cited strong interest from various parties, showing there still is room for opportunistic dealmaking.

Indeed, deal momentum might not be completely lost. After all, sellers like to put their stations in play following a strong year for political ads, and the lowered stock prices could bring strategic buyers or other TV groups back to the M&A space.

There also is still the feeling that the traditional broadcast industry is ready to reap the benefits from the digital TV conversion (most of the expenditures are in the rearview mirror). And even if audiences are smaller than in local TV's heydey, stations still can deliver more eyeballs than the alternatives.

"Television beyond 2009 will continue to be a viable medium in terms of being able to deliver audiences in an increasingly fragmented market," says Mark Fratrik, analyst with BIA Financial Network.

Adds Debra Sharon Davis, a media strategist who is president and CEO of Davis Communications Group, "The wise executives will utilize the 2008 revenue increase as a way to ignite new local television business models to drive actual revenue and value on their own terms and ingenuity."

Under the lead of private-equity execs, some station groups are seeking efficiencies by cutting costs and combining technical and programming operations. Others, like Oak Hill, focus not on cutting expenses but on growing revenue.

UBS' Ripley says deals might be influenced by the theory that "size now matters" in TV broadcasting. Larger companies can get better retransmission-fee deals and spread the cost and technology for pushing into online and mobile more aggressively over a broader asset base.

The Oak Hill deal for the Fox stations illustrates this advantage, as does a recent pact between Oak Hill and Tribune Co. to create a management company that will provide shared services to both firms' stations.

"Since this bulks up the TV station ownership of Oak Hill, operating synergies could be realized over time, making it a bit more palatable for the banks involved in the financing," Miller Tabak's Joyce suggests.

The life cycle of most private-equity deals is three to five years, but MediaVenturePartners managing director Brian Pryor says the decision to sell will be driven by the bigger picture of how the market is going. Patience can pay dividends, he says.

BIA's Fratrik believes that a PE company has to make the asset more attractive than it was at purchase time before selling it.

"I don't think you can play games by cutting costs and showing more cash flow without a potential buyer kicking the tires and noticing what a slash-and-burn PE would do," Fratrik says.

And on the horizon, Ripley predicts there could be some station group initial public offerings as PE firms looking to exit investments after the current economic and sector stock malaise dissipates.

"2011 feels to me like it could be a big exit year for many," Ripley says. "Generally, you need a growth story for an IPO, and broadcast has some of that built in with its areas of upside potential."

Andrew Wallenstein contributed to this report.