When You’re Hot, You’re Hot!

The television station trading market is on fire. It is a great time to be a buyer…or a seller.  Supply and demand are at work and all the stars are aligning to make this the perfect opportunity to own a TV station. TV station consolidation is being driven by the need for scale, increasing retrans revenue, the looming spectrum auction, and low interest rates (or at least, easier borrowing).

If you listen carefully, you’ll hear whispering about the similarity of the current TV market to the radio business boom in the mid-90s. In TV, scale matters and it seems everyone has arrived at that conclusion at the same time. No one is sitting still.  Being big is a big deal.

From an M&A perspective, buyers will pay for scale.  And it is an impressive list of buyers: Tribune, Gannett, Sinclair, and Gannett to name a few.  Peter Liguori (chief executive of Tribune) was quoted as saying, “Our investment thesis is simple:  Scale matters.”

Scale is more relevant than either the network affiliation or geography.  The “scale argument” is very valid with the bigger revenue and expense numbers in the larger markets. When operators have sufficient scale, they have leverage with their vendors across the spectrum.  Plus the scale brings with it more resources to develop top line revenue, more expense savings through consolidation, and generally, a lower cost of capital.

Most of the action happening in the TV business right now is in the top 50 DMAs, with the spectrum auction players focused on the top 35 (and primarily on second tier properties).  The Spectrum Auction has created an artificial floor to TV station values. On September 28, 2012, the FCC adopted the Broadcast Television Spectrum Incentive Auction NPRM. In order for wireless networks to keep pace with the demand for spectrum, the FCC proposed to free up the some of the TV spectrum via an auction.

They will be clearing and reallocating parts of the television spectrum. Owners of TV stations will have the option to voluntarily auction off their spectrum to the wireless industry.  A number of well-heeled spectators are betting on buying “today” and playing the auction “tomorrow.”  The rising tide from the auction is lifting all of the boats.  It, in effect, gives owners a “put” (and therefore downside protection) on prices.

TV may be following the radio consolidation path of the ‘90s, but likely with a better outcome.  TV is more easily scalable than radio.  It is a more transactional type of business model.  Radio has to be very concerned 24/7 with local programming (versus the network TV model).  There are far fewer TV stations than radio, so governance is easier.  TV may wind up looking more like the cable business, in terms of ownership/scale, than radio.

Multiples have moved higher for TV.  Banks are growing more comfortable with leverage on broadcasters’ balance sheets.  I believe that the currently trading multiple is in the range of 8x to 10x.

The icing on the cake may come from badly needed regulatory relief:

• More favorable cross-ownership rules
• Possible relaxation on foreign investment requirements

On the negative side, there is some discussion within the Beltway about eliminating the UHF discount and about tightening the rules on JSAs and SSAs.

There have been nearly $7 billion in TV station M&A so far this year and there’s approximately another $2 billion more projected to come before the end of the year.*  This market is hotter than it ever has been. Now is a great time to buy. Or sell.

*Source: UBS Investment Research

George
Media Services Group

Another FAQ: What is “stick” value?

Q:  "What is “stick” value?"

A:  “Stick” value refers to the value of the station absent any revenue or cash flow. Think “franchise value” of the facility.

It is often calculated by the population covered by the station’s signal. We typically use the 60 dBu contour for FM stations, and the 2.0 mVm daytime contour for the AM facilities.

George
Media Services Group

Another FAQ: Has the spectrum auction impacted the value of my television station?

Q:  "Has the spectrum auction impacted the value of my television station?"

A:  If your TV station is located in the top 35 DMA’s, there is a good chance that the “stick” value of your property has increased. New risk capital has been invested in TV stations with the expected payoff to come from spectrum auction proceeds.

George
Media Services Group

Another FAQ: What are appropriate “add-backs” to Broadcast Cash Flow?

Q:  "What are appropriate “add-backs” to BCF?"

A:  Interest, depreciation, amortization, and taxes should be added back to operating profit to determine BCF.

Buyers and sellers often differ on what additional expenses may be added back to BCF. Usually they are:
1) one-time-only expenses not normally seen in the ordinary course, and

2) owner-related charges which a new buyer would not expect to incur.

George
Media Services Group

When will this (the credit crunch) end?

When will this end?

The credit crunch has virtually stopped station trading. The "When will this end?" question comes up daily. The short answer: When liquidity returns to the credit markets. And clearly, no one, not even the administration, knows the answer.

However, perhaps we can learn something from history. The last major credit freeze took place in the early 1990's. You may remember the "Highly Leveraged Transaction ('HLT')" fiasco. Banks quit lending to broadcasters, and many called their existing loans. Station trading, other than distress sales, ground to a halt. Prices plummeted on those few trades that did occur.

That debacle lasted some 18 months. If you define the "start" of the current freeze at the time banks started pulling back, we have already exceed the 18 months. If you define the "start" as the beginning of the recession (two negative growth GDP quarters), we have a while to go.

But here is a guideline: watch the stock market. Unfortunately, it is best viewed from a rear view mirror. But the market tends to be a leading indicator. Once it appears to have put in a bottom, look for things to improve in the subsequent six months. Market watchers might suggest watching the 200 day moving average of the Dow; once the moving average begins to move north, we could be on our way to recovery.

Those are my thoughts? What are yours?

George