Bide Time, Then Buy

For three of the top five TV station group owners—Viacom, Fox and Tribune—the likelihood of looser ownership rules is not just critical for expansion plans. Liberalized rules are also necessary for those three groups to keep the stations they already own.

For Viacom and Fox, the critical rule in question is the ownership cap, which now allows a single owner to acquire stations reaching just 35% of U.S. TV households. (The FCC counts only half the household base that UHF stations reach.) For Tribune Co., it's whether newspaper/television cross-ownership rules will be eliminated.

The new rules, whatever shape they take, are expected to spark a new round of station trading.

As BIA Financial Vice President Mark Fratrick notes, anticipation of the new rules has curbed station trading because buyers and sellers want to know how the rules will change before making big new investments. FCC Chairman Michael Powell promises to have the FCC's deregulation positions solidified by June 2. Most believe that the cap will rise to 45% and the FCC will abolish newspaper crossownership rules.

Then it's Katy bar the door.

Says Fratrick, "Assuming the changes are substantive, I would imagine there will be a significant increase in transaction activity."

Most analysts say such activity will occur mostly in midsize to small markets, with looser duopoly rules spurring station trades there.

But there are some big-market acquisition opportunities. Granite's two WB's in San Francisco and Detroit and Young's KRON-TV in San Francisco are on the market. Fratrick says he wouldn't be surprised to see Allbritton or McGraw Hill sell. Others note that Disney/ABC has taken more than one look at both and ultimately passed.

Bishop Cheen, director, high yield group, Wachovia Securities, concurs that loosened duopoly rules is likely to spur station-trading activity. And there's plenty of investment capital waiting for the opportunity, he said: "If you allow for consolidation in the middle markets or if you allow additional crossownership," there's plenty of financing available to support new transactions. "Money is on sale right now."

Viacom stations now reach 38.8% of households, including the UHF discount, while Fox stations reach 37.8%. Both groups and others have lobbied aggressively for a bigger cap. Both groups would unhappy if it isn't raised, although, of all the proposed changes, lifting the cap is perhaps the most politically sensitive.

Viacom President Mel Karmazin has told investors and analysts repeatedly that he likes duopolies (as evidenced by last year's acquisition of KCAL(TV), the single biggest station deal of 2002 at $650 million) and would like to expand the TV group's footprint if the cap is lifted.

NBC would also buy more stations under loosened rules. Sources familiar with the network's thinking say it wants to expand its portfolio of Spanish-language stations (it already owns 15 through its acquisition of Telemundo last year). One of those sources says loosened rules would "provide more flexibility and more options with Paxson," of which the network currently owns just under a third.

Fox sources insist that the company's future station-acquisition plans are limited. "We could end up doing a couple more duopoly deals," said an insider familiar with the current thinking. "I'd be shocked if we entered new markets." Not only is Fox currently over the current cap, but parent News Corp. is trying to buy control of DirecTV, which would eat up a lot of the company's acquisition funds.

At Tribune, the key rule is the current ban on TV/newspaper crossownerships. Two years ago, it bought The Times Mirror Co., giving it new newspaper/TV combinations in four markets (New York, Los Angeles, Hartford and South Florida), anticipating that the FCC would modify or do away with the ban altogether.

"Our key issue right now getting those combinations permanently aligned in our portfolio," said Tribune Broadcasting President Pat Mullen.

Mullen also acknowledged that Tribune would like to buy more stations going forwards. "We like newspaper/TV combinations, and we like duopolies."

And midsize and smaller groups and entrepreneurs are beginning to make some moves now.

Case in point: the sale of WTVW-TV Evansville, Ind. The Fox affiliate has been bought by Neil Smith for $44 million.

Smith, a 20-year veteran of Liberty Corp. (formerly Cosmos Broadcasting), recently decided to go out on his own and acquire TV stations. Guess who is an investor? That's correct: Liberty.

And Liberty owns WFIE-TV, the NBC affiliate in Evansville, too.

Currently, Liberty is simply an investor in Smith's company, GNS Media, although, down the road, Liberty might possibly buy Smith out in Evansville and create a duopoly there if the FCC changes the current rules.

The rules currently don't allow for a duopoly in Evansville, the Nielsen No. 97 DMA, because there aren't enough independent commercial TV "voices" in the market.

But the FCC is expected to adopt another, more liberal litmus test for duopoly.

For now, says Liberty Corp. President Jim Keelor, the company's investment in GNS and WTVW-TV conforms with current duopoly rules. "What further arrangement we might have—and, frankly, I hope there will be one—remains to be seen. Neil will be making a proposal, but we have not seen it yet, and it will depend a lot on what the new rules say."

Liberty, of course, isn't the only group owner trying to sort out its options. "Everybody is," said Keelor, flatly.

Others, like Smith, are looking at station purchases hoping to team up with another station in the market. Keelor says he has been contacted by a handful of entrepreneurs like Smith and is talking to several companies as well.

Exactly how much station trading will be sparked by the new rules is unclear. "I think it's going to be very deliberate," says Victor Miller, broadcasting analyst at Bear Stearns. "I think we'll see a lot of swaps and a lot of LMAs [local marketing agreements] bought in immediately." Most LMAs give the operating station the option of creating a duopoly if and when the rules allow it.

Said Paul Sweeney, broadcast analyst at Credit Suisse First Boston: "I think it will be primarily individual-station-specific" as companies try to create duopoly or multimedia platforms.

Analysts are watching LIN TV Corp., Raycom, Emmis, Liberty and others. Keelor's response: "The market is very dynamic, but we've had no specific merger talks with anyone."

On a teleconference with analysts and investors two weeks ago, LIN TV CEO Gary Chapman confirmed that a merger with another group was one of two main alternatives.

He didn't provide specifics, but Wall Street sources say LIN has talked to Raycom, the 34-station group based in Montgomery, Ala., about merging.

Sinclair may put a handful of stations in play after the new rules come out. Sources say that, in recent presentations to investors, company executives have indicated that more than a half dozen stations, accounting for 15% to 20% of its operating cash flow, are up for "strategic review." The stations include KOVR(TV) Sacramento, Calif.; KDNL-TV St. Louis, and KMWB-TV Minneapolis, in markets where the company has one outlet and can't afford to create a duopoly.

Emmis CEO Jeff Smulyan has confirmed that the company has talked to Fox about buying several of the network's stations in smaller markets.

Granite Broadcasting CEO Don Cornwell told investors and analysts two weeks ago that the company hopes to sell its two WB stations and "re-deploy" the proceeds into Big Three affiliate stations in midsize markets. He said an appraiser evaluated the stations, in Detroit and San Francisco, at $280 million.