Are TV values winding down?

Clear Channel's takeover of Ackerley Communications holds mixed news for broadcast station owners. Some analysts and bankers examining the $800 million deal see Clear Channel as using valuation multiples at least 15% less than the market would have dictated a year ago: 13.5-14.5 times cash flow. Even worse news: The valuation was set before the Sept. 11 terrorist attacks turned a sluggish ad market into a scary one.

But media and Wall Street executives are gratified to see some activity in what has been an anxious deal market for TV and radio stations.

Noting that negotiations began in July, Bear Stearns media analyst Victor Miller says he wasn't surprised that Clear Channel Chairman Lowry Mays decided to go ahead with the deal. He has been pursuing Ackerly for more than three years and has a habit of buying into rocky markets.

"Remember when the market was crashing in October 1998 after the Russian debt crisis?" Miller asked. "That was when they were announcing the Jacor takeover at 16 times cash flow. Lowry has again and again demonstrated that he has a long-term view."

The deal fills in a couple slots in Clear Channel's geography. Ackerley controls five radio stations in Seattle, one of only two top-50 radio markets where Clear Channel—despite owning 1,200 stations—is absent (Kansas City is the other). Ackerley also has near monopolies on outdoor advertising in Boston, where Clear Channel has a major radio presence, and Seattle, plus a major presence in Portland, Ore.

Ackerley also owns or operates 18 television stations, in small markets in upstate New York, California and Oregon. Its biggest is 54th-ranked Fresno, Calif. Clear Channel operates 19 TV stations in larger—but not huge—markets, including Tucson, Ariz.; Memphis, Tenn.; and Jacksonville, Fla.

Clear Channel TV President Richard Moll notes that his company owns radio stations in 15 of Ackerley's TV markets. "We like the synergies in that."

He adds that the deal, assuming it clears the FCC, will probably spur a restructuring of the TV division's management, most likely into the kind of regional structure Ackerley already has. "I can't have three dozen direct reports," Moll says. He does not expect to sell any of Ackerley's stations.

San Antonio-based Clear Channel will pay 0.35 Clear Channel shares for each share of Ackerley. That values Ackerley shares at $14.11. That's a 28% premium over where Ackerley was trading last week but far less than the 50%-60% premium its executives were expecting when the latest round of negotiations started in July.

And, with Ackerley's stock rising 21% on news of the deal, to $15.20, and Clear Channel's dipping slightly, the premium narrowed to zero.

"It was obviously more in August," Ackerley Chairman and controlling shareholder Barry Ackerley says. But competing against larger, consolidated media companies was getting too tough, he says. "We're not a very big company. We've chosen well and wisely a partner in consolidation."

Some Wall Street executives, however, note that, despite earlier selling his Miami billboard operation and Seattle Supersonics basketball team, Ackerley is uncomfortably leveraged—6.5 times cash flow—for an ad-supported company heading into a recession.

The Clear Channel-Ackerley deal does not value the TV stations very highly. Miller pegs the deal at 13.5 times Ackerley's annualized cash flow, with Clear Channel valuing the billboards and radio stations at 15 times but the TV stations at 10-11 times cash flow. Miller says that's 15%-20% less than similar properties went for a year ago.

The TV-station values, though, may not be comparable to those of a company that's more of a pure play. TV accounts for less than 3% of Clear Channel's revenues. "You know that Clear Channel is not paying up for TV stations," Miller says. "That's not their priority."

First Union Securities analyst Jim Boyle sees Clear Channel's bid as more generous, 14.8 times 2002 cash flow, with the TV stations valued at closer to 12 times.

On the other hand, some industry executives expected the valuation multiple to be higher because Ackerley has plenty of room for improvement. TV accounts for about 47% of the company's revenue but just 24% of cash flow. The TV group's cash-flow margin was a mere 13% during the second quarter ended June. Even when times were better, during the first half of last year, Ackerley TV ran with just 18% margin. Margins for small-market stations like Ackerley's are more typically 30%-40%.

"In terms of margins, they are subpar to the rest of the industry," says one analyst. "They blame it on their investment in their local news operation. But, at some point, you have to monetize your ratings."