Private Property

Since November, four of the country’s biggest station groups—Ion, Univision, Tribune Co. and Clear Channel—have announced plans to be acquired by private-equity firms.

In February, CBS sold seven of its stations to private equity firm Cerberus Capital Management for $185 million.

And two more groups that aren’t among Broadcasting & Cable’s Top 25 Station Groups—The New York Times Co. and Bluestone Television—are taking shelter under a private-equity umbrella.

More than half of the companies on the annual B&C list changed rank. CBS fell to No. 2 (exchanging places with Fox) because of the sale of seven stations. E.W. Scripps dropped from 11th to 16th because it sold off several stations that were part of the Shop at Home network it abandoned. But on next year’s list at least eight stations will be privately held, double this year’s number.

“Wall Street has walked away from broadcast investments because they don’t see the growth that the industry has had over the past 20-30 years,” says Larry Patrick, president of station brokerage Patrick Communications. “Growth has slowed, but broadcasting is a tremendously high free-cash-flow business. If you are a big hedge fund or a private-equity fund and you have $10 billion-$20 billion, you have to find places to park that. A television company has 35%-40% operating margin. You can’t put your money in anything else that gets that kind of return.”

Privately owned broadcasters don’t have to keep making deals to make their stock grow. The firm can quietly grow its investment for several years and then sell it for a 20%-plus profit, a perfectly acceptable return for private firms.

Second, private equity typically doesn’t invest much cash in these deals. That significantly reduces the risk for the investor, although it can increase pressure on the assets if the deal is over-leveraged.

Private investors tend to approach these deals conservatively, protecting themselves and the assets from excessive risk. “The really good hedge funds don’t over-borrow,” says Patrick. If they do, he says, “then all you’ve done is create a giant bankruptcy.”

For example, he explains, he recently sat in a meeting in which investors were told by the bank that they could invest $150 million in broadcast properties valued at $800 million and have no problem covering the debt. But they decided it was better to put $300 million down and finance the rest.

That example also reveals the trick to the leveraged buyout: Invest the right amount of cash, borrow against a company’s assets and then grow the company while servicing the debt using the assets’ cash flows. If the investors in the example sell their new company in five years for $1.4 billion, as they expect to, they will earn $1.1 billion profit on their initial investment.

TV stations are not like real estate. They have to be well run in order to increase in value. In today’s digital world, that has become a tricky proposition.

Most private-equity firms understand that, says Randy Bongarten, chairman/CEO of Bonten Media Group, which in November teamed with private-equity firm Diamond Castle to buy the Bluestone Television group of eight full-power and two low-power stations for $230 million.

“Private-equity firms own businesses in every segment of the economy,” Bongarten says, “and they are experts at evaluating potential and finding people to run them.”

The move to privatizing stations might be advantageous for some broadcast groups, says Scott Schneider, chairman of media and communications and an operating partner of Diamond Castle: “I think it’s wonderful for TV broadcasters because they are moving into the hands of very strong, dedicated operating management whose sole focus is the rebuilding, rebranding and remarketing of these television stations. For many of the big media conglomerates, these stations were either an afterthought or at best a stepchild.”

Schneider insists that private ownership won’t lead to poor performance. Even under private-equity rule, television stations will continue to be compelled to serve their communities: “Content is still the driver of value in the media business. And there’s been a resurgence in terms of viewer loyalty. I don’t think we have seen viewer loyalty this strong ever; it’s driving American culture. The ability to be the preferred outlet for that content is an opportunity that creates tremendous value.”

How They Were Ranked

The Top 25 Station Groups in B&C’s annual list are ranked according to the percentage of U.S. TV homes they reach. Measured by Nielsen Media Research, this is calculated in two ways. Total coverage assumes the station reaches everyone in the Designated Market Area (DMA). The FCC, meanwhile, discounts by half the reach of UHF stations, those using channels 14 and above. B&C ranks groups according to the FCC method but also shows total coverage. If a group owns more than one station in the market, the additional coverage is not counted.

BIA Financial Network provided baseline data, compiling the list of stations and computing coverage. It also provided affiliate status for stations and channels. The station listing includes BIA data for deals announced before March 8; subsequently announced transactions are noted where possible.

Each group’s list includes wholly owned stations and those run under local marketing agreements. Data for those operated under time-brokerage deals were not available, and they are excluded from the Top 25, as are joint sales and joint marketing agreements. Digital stations, low-power stations, satellite stations, translators, and stations with only cable distribution are left out because their coverage is duplicative. Thus, a group’s station list may differ significantly from that on its Website.

The data for the rankings and listings was compiled from BIA and company sources by Paige Albiniak and George Winslow during a four-week period in March and April.