The Top 25 M&A Forecast

The climate is cooling for TV station mergers and acquisitions, as recession fears linger and the credit crunch makes financing more costly and difficult to obtain.

But there are some warm spots: Election-year advertising is proving solid, and M&A deals still get done. The $1.1 billion sale of eight Fox O&Os to an affiliate of private equity firm Oak Hill Capital Partners changed the landscape. It pushed Fox from first to third in B&C’s ranking of the Top 25, and made Oak Hill’s Local TV LLC a new member of the Top 25. Lincoln Financial received $583 million in the disposal of three stations to Raycom Media in November, and helped take Raycom from 17th to 15th on the list.

“Stations will sell if they are priced correctly,” says Frank Kalil, president of Kalil & Co., a major TV stations sales broker. “The chickens are running around crying that the sky is falling, but it’s not true.”

These days, the TV station sales market is divided into haves and have-nots. M&A execs say that TV stations with strong local news are still desirable because it’s expected they’ll negotiate improved retransmission fees from cable operators. Such gains flow straight to the bottom line because there’s little associated expense.

Also, SNL Kagan indicates TV stations in metro markets No. 76 and under are fetching good prices. Such small-market stations sold in 2007 at an average of a 12.5 multiple of cash flow, which is near a recent high, and SNL Kagan now groups small-station sales near the multiples for bigger-market stations, after lagging in recent years. Audiences are less plugged into the Internet in rural America, making them more dependent on traditional media in small cities, and small-market stations often are not aggressively managed by sellers, so buyers expect more upside.

But recession fears and tight credit make financing more difficult to obtain and more costly. “Prior to five months ago, it was a strong though not overwhelming market for TV stations,” observes Mark Fratrik, VP at BIA Financial Network. “Until this credit cycle ends—and I don’t see that in 2008—I don’t see a strong market returning.”

With higher financing costs, buyers ratchet down their estimates of what stations will earn in future years. That lowers prices they will pay. “If the macro environment improves next year, it’ll result in a better pricing environment for sellers,” says Robin Flynn, senior analyst at SNL Kagan. That’s not a pipe dream. Many analysts think things will improve in the second half of the year as the Fed floods the financial sector with cheap money.

In the meantime, the inventory of TV stations for sale piles up or properties are withdrawn. A major-market TV station languishing for a buyer is Young Broadcasting’s KRON San Francisco.

Smaller stations not affiliated with a Big Four network are perhaps the weakest segment. Spanish-language broadcaster Equity Media Holdings announced the sale of five small stations April 4 for $8 million, days after alerting its stockholders that it faced a cash crunch. M&A executives expect more forced sales of small stations. Also, some new broadcasting private equity investors “are just panicked now” and could flood the auction block, said Larry Patrick, media broker at Patrick Communications, speaking at a recent SNL Kagan conference.

Sellers often hope deregulation will help them. In December, an FCC rulemaking loosened the newspaper-broadcast cross-ownership ban, but the FCC did not change rules that would allow TV duopolies in smaller markets, which disappointed many broadcasters. And cross-ownership change is in doubt because opponents immediately filed suit.

Still, with stations holding on to advertising dollars in the fragmenting media landscape, one broker figures TV stations should always find buyers despite any economic gyrations. Says Kalil, “When TV stations don’t sell, it’s because of an unrealistic price by the seller and an inept sales effort.”

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. This potential audience reach is calculated in two ways: by total coverage and by FCC rules. 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, an increasingly important measurement in a TV landscape where the vast majority of homes get their broadcast programming via a cable, satellite or telco multichannel provider. If a group owns more than one station in the market, the additional coverage is not counted.

BIA Financial Network provides the baseline data for this ranking, with a listing of each group's stations, the affiliate status of those stations and their channels. The station listing includes BIA data for deals announced before March 10; subsequently announced transactions are noted where possible.

Each group's list includes wholly owned stations and those run under local marketing agreements and joint sales agreements. Digital stations, low-power stations, satellite stations, translators, and stations with only cable distribution are also left out because their coverage is duplicative.

Only groups that own three or more stations are included. That means WRNN License Company LLC, which owns WRNN in the New York DMA and WTVE in the Philadelphia market, is excluded. The company's stations, which cover 7.86% of all TV-homes coverage under FCC rules and a total coverage of 9.16%, would have otherwise ranked No. 18.

The rankings also assume that all currently announced deals are completed. As a result, the acquisition of the eight Fox stations by Oak Hill Capital Partners that was announced in December is included in coverage figures for Local TV LLC even though the deal is not expected to close until the third quarter of 2008.

This year's rankings include two new companies. Thanks to the Fox deal, Local TV jumps onto the ranking as the 14th largest station group (and Fox falls from first to third). Multicultural Television Broadcasting, which acquired six stations from E.W. Scripps last year, is ranked for the first time at No. 16.

Two others fell out of the rankings. The sale of the Clear Channel stations to Newport Television was finally completed in March, bumping Clear Channel off the list.

However, Newport Television is selling a number of stations or has put them into a trust, and its remaining stations do not have enough coverage to make the list. Gray Television, which was ranked No. 24 last year, also drops off the rankings.

The data for the rankings and listings was compiled from BIA data and company sources by George Winslow during late March.