The Rise of the Station Super-Groups

The current frenzy of local TV acquisitions may ultimately leave as few as 10 big station groups standing—and a completely remade industry landscape

Local TV brokers knew it was only a matter of time. The recession
would finally be licked and then, faster than you could whisper "Is it safe?"
the transaction floodgates would spring open.

But even the more bullish ones could not have imagined just
how violent the torrential flow would be. Station groups that were an
established part of the local broadcast landscape, including Newport
Television, Freedom Broadcasting, New Vision and McGraw-Hill, were gobbled up,
as the likes of Sinclair Broadcast Group, Nexstar and LIN got larger.

And the hyperactive mergers and acquisitions activity of the
past 18 months may just be the beginning. Addressing investors in November,
Perry Sook, Nexstar president and chairman, outlined his vision of the local broadcast
landscape in 2020: 10-12 "major" station groups, comprised of the four
network-owned outfits, and a half-dozen other players reaching 20% or more of
the U.S., and booking around a billion in revenue.

The rest-the family owned, the minority held, the
"sub-scale," as Sook puts it-may not be long for this world, relics of a "big
eight accounting firm"-type era, and gone amidst a competitive landscape that
demands, more than ever, massive leverage when dealing with networks,
syndicators and vendors. "I would think within 2-5 years, you'll see the
emergence of what I call three or four super-groups, and I think you'll see a
couple emerge sooner rather than later," says Sook. "Those companies will
continue to drive the business, while the companies that are sub-scale will
look in the mirror and choose not to be a house by the side of the road, as the
parade passes by."

Which begs the question of what would that new neighborhood look
like, and-property values aside-what will the lack of those smaller houses mean
in the long run?

Feeding Frenzy

It is, in popular parlance, the perfect storm for station
transactions. There was over $700 million in local broadcast deals in 2009,
according to BIA/Kelsey, which plummeted below $200 million in 2010. Sales
broke the billion-dollar mark in 2011, and nearly doubled to $1.9 billion last

There may not be a better time to sell. About $2.9 billion
in political spending went to local TV last year, according to the trade
association TVB. Equity groups, rarely ones to sit on properties for long, are
eager to get returns on broadcasters such as Barrington and Communications Corp.
of America (CCA). Others, such as Tribune, are in the hands of creditors
following their reorganization, and may not stay there for long.

To this one can add the fact that the shrinking margins of
the business make it tougher than ever to survive. Following Fox's hardball
lead, the networks are demanding a bigger and bigger piece of the
retransmission consent cash stations extract from the cable, satellite and
telco operators that air their content. It was the smaller groups crying the
loudest when Fox began tightening the screws on its affiliates a few years ago.

"They're saying, Nexstar and Belo and Sinclair get a dollar
a month [per sub] and we get 60 cents," says one industry observer who asked
not to be named. "[Subscription operators] know we can't stomach a big fight."

Tipping the Scales

While The Oprah
Winfrey Show
has been off stations' books for a few years, the recent
string of underperforming syndicated debutants has done little to stem their
substantial price tags. Boasting a bit of scale when negotiating with the show
suppliers helps soften the blow. "You're in a much better position to set your
own rules on syndication and first-run programming," says Paul McTear,
president and CEO of Raycom, one of the more active groups in creating its own
shows to replace syndicated ones. "Others are pushed further down the line in
those markets from a price standpoint."

The leverage also comes in handy when negotiating with talent,
equipment vendors and Nielsen. Larry Patrick, managing partner at brokerage firm
Patrick Communications, says a consolidated group enjoys 10-20 more points in profit
margins than a standalone counterpart.

"I think people are coming to grips with the concept that scale
matters," says Sook.

Even the White House, and its signature healthcare
initiative, figures into the discussion, with a small army of employees
required to keep corporate health insurance costs in relative check. Sook, for
one, says Nexstar has not increased employee healthcare costs in four years, but
it's getting more difficult.

"It's almost a runaway train in terms of expense," notes
Patrick. "It's the single biggest and fastest growing cost year after year. An
employer with 3,000 employees, instead of 100-200, can negotiate better deals."

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Merger Mania

Recent M&A trends show the most active buyers to be pure-play
broadcasters, with the private equity firms that dominated station deals pre-recession
mostly steering clear. Sinclair, following acquisitions of Four Points Media
($200 million), part of the Newport TV group ($412.5 million) and Freedom
Broadcasting ($385 million), among other smaller grabs in the past 16 months,
now owns or operates 87 television stations in 47 markets.

Its clout may increase, as David Smith, Sinclair president
and CEO, is looking to launch a new group focused on smaller markets with Steve
Pruett, a veteran operator and the chairman of the Fox affiliates board. The
Barrington and CCA groups (Pruett is the CEO of the latter) are said to be a
target of the new venture, which would presumably add to the scale of Sinclair,
and enjoy the massive group's efficiencies.

Nexstar has been very active too, claiming a dozen Newport
stations for $285.5 million, while other acquisitions and operating agreements
will bring the group to 12% of U.S. coverage. Sook, mentioning a trio of prospectus
books on his desk in mid-January, wants to expand. "We believe in the business,
we believe in its long-term future and we believe that we're in a
position, [in terms of] balance sheet, cost of capital and
availability of capital, that is the most advantageous for our company in its
16 years of existence," he says.

According to Sook's bankers, there's around $2.5 billion worth
of TV station inventory on the market, or soon to arrive. Brokers say the likes
of Belo, Dispatch Broadcast Group, Post-Newsweek, Gray Television and Media
General get their tires kicked frequently. Family-run groups, a cornerstone in
local broadcasting since its earliest days, may go the way of the nightly
station sign-off.

"There's also
a generational element to it," says Bill Hague, senior VP at consulting firm
Frank N. Magid Associates. "The children of a group head may say, screw it-I don't care about the business as much as my father did. We want out and we'd like our money."

Some take issue with Sook's prediction, saying a smaller
group with well-run, top-flight stations possessing unique connections to their
community will continue to thrive. Ed Ansin, owner of Sunbeam Television, says
the calls from would-be buyers have subsided over the years-and not because the
assets, WSVN Miami and WHDH-WLVI Boston, are unattractive. "They know I won't
sell," he says.

Dispatch is in a similar situation, with two stations that
are undisputed market leaders, in WBNS Columbus and WTHR Indianapolis. Michael
Fiorile, broadcast group vice chairman and CEO, says quality, not quantity, will
sustain a local television group. "When you have very dominant stations, the
syndicators want to be with us, the reps want to be with us," he says. "We
don't have trouble making deals with retrans. We've rarely been at a loss with
two stations."

Similar to Ansin, Fiorile says Dispatch too has no intention
of cashing out.

What It Means for

Time will tell if Sook's prediction plays out, though
numerous industry watchers found merit in his forecast. Time will also tell
what the emergence of a half-dozen super-groups means for the unique relationship
between stations and viewers. Sook says the mega-groups, which he describes as
"holding companies" for dozens of individual local businesses, may be good for broadcast
television and the communities it serves. "You have more capital to spend on
technology and local news improvements than a one-station owner or a small
group might," he says. "If anything, I think it strengthens the business

Some nonetheless wonder about the super-groups exerting
influence from corporate. Sinclair famously met with a whirlwind of controversy
after a documentary questioning John Kerry's honor ran before the 2004
election, and stirred things up again this past November when an election
special that many deemed to be anti-Obama ran in key battleground states. Mark
Hyman's on-air commentaries, called "Behind the Headlines" and typically
targeting the federal government, run around three times per week on Sinclair
stations around the country.

Some lament the rough road ahead for minority owners,
already poorly represented in local TV. "When you cut back on diversity, it has
a bad impact on the public," says Angela Campbell, director of the Institute
For Public Representation, which speaks to the FCC on behalf of non-profits.
"You get more and different viewpoints from different owners."

Others are concerned about the fate of the groups featuring
sterling journalism reputations, but lacking vast reach. "The business has
always been part art and part finance," says one GM at a smaller but
prestigious group who asked not to be named. "When you go down [the
consolidation] road, it's pretty much all finance."

Despite the increased challenges to the business, and
cutthroat competition for eyeballs and ad dollars on the wide range of digital devices,
local TV continues to be an essential source of news for U.S. residents. In
September, a Pew Internet study, "In Changing News Landscape, Even Television
is Vulnerable," reported that 48% of those polled watch local TV news
regularly, topping online (46%) and well ahead of newspapers (38%) and cable
news (34%), but way down from 80% 20 years ago.

With several decades on the local TV anchor desk, Larry Kane
knows firsthand the relationship between local TV outlets and those who consume
their breaking news, weather, sports and lifestyle content. He hopes the
relationship can survive the mass merging. "Local stations are very special to
people," says Kane, a fixture on the Philadelphia TV news scene until his
retirement in 2002. "The question is, will these companies continue the
tremendous power they have in serving the public? Will there still be that
commitment to the community?"

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