Calm Before the Storm

The past 12 months did not produce any major shifts in among the country's Top 25 TV-station groups. Several companies changed positions from last year, but all of this year's 25 are returnees from 2002. "There wasn't a lot of trading activity last year," says Mark Fratrik, vice president, BIA Financial Network. "In fact, the number of sales and the dollar volume of sales in 2002 were less than in 2001, which was less than previous years."

FCC Coverage, 2003
Rank Group % of U.S. TV Homes
*Formerly Shop At Home
Sources: Broadcasting & Cable, BIA Financial Network, Nielsen Media Research
15Clear Channel8.6
21Media General7.0
22Summit American*6.8

Says Bear Stearns & Co. Senior Managing Director Victor Miller, "It was not a year marked by consolidation; that's for sure." That was partly due to 9/11, he says: "A lot of people's balance sheets became a lot more precarious in 2001, and I think it sent shock waves through the industry." Companies were concentrating "on how to just operate, not acquire."

BROADCASTING & CABLE ranks the Top 25 by audience reach: the percentage of the nation's 106.7 million homes with TV sets. We use the FCC method for calculating reach—that is, we assume that VHF stations (chs. 2-13) reach every home in their markets but UHF (chs. 14-83) stations reach only half. And, like the FCC, we don't count the reach of groups' second stations in a market.

Topping the list once again is Viacom, whose former CBS and UPN station groups give it coverage of 39% of the country through 39 stations. Second is Fox with 37.8% coverage from 37 stations; third is GE-owned NBC (33.5%/29 stations), which moved up one spot from last year at the expense of this year's No. 4, Paxson (61/30.9%). Tribune rounds out the top five (27/31.5%), in the same spot as last year.

A different ranking

The FCC caps a station group's reach at 35% but has allowed Viacom and Fox to exceed the cap, pending review of the ownership rules this spring.

The ranking would be different if the FCC's UHF discount were not taken into account. Based on total household coverage, Paxson is No. 1, followed by Viacom, Fox, Univision and Tribune.

Paxson's one-slot drop from third in the 2002 Top 25 (B&C, 4/8/02) to fourth came after it sold a number of what it called "non-core" TV assets last year to raise its liquidity to approximately $100 million. The largest, WPXB(TV) Merrimack, N.H. (officially part of the Boston DMA), was bought by NBC for $26 million.

Tribune Broadcasting almost surpassed Paxson for fourth place, thanks to its purchases of KPLR-TV St. Louis, KWBP-TV Portland, Ore.; and WTTK-TV Indianapolis and its satellite, WTTV-TV Kokomo, Ind.

The biggest mover was Santa Monica, Calif.-based Entravision, which jumped from 25th last year to 14th this year on the strength of adding company chairman Walter F. Ulloa's KJLA(TV) Ventura-Los Angeles to its holdings in addition to three time-brokerage agreements in the San Diego market. In addition to its television stations, Entravision's holdings include 53 radio stations, a radio network, newspapers and outdoor displays.

Most of the other moves from last year were small, up or down only one, two or three slots, and were due to changes in Nielsen's coverage numbers for the DMAs, not from station sales or acquisitions.

Total Coverage, 2003
Broadcasting & Cable ranks stations groups by percentage of TV homes covered as calculated for compliance with the FCC ownership. In that method, groups' UHF stations are credited for covering just half their markets. Here, the same group is ranked for total coverage, in which UHF stations are given full credit for their markets.
Rank Group % of U.S. TV Homes
Source: Broadcasting & Cable, Nielsen Media Research, BIA Financial Network
14Summit American13.6
15Clear Channel12.6
20Media General8.8

That there are no new companies in the Top 25 "doesn't mean a thing," says Phoenix, Ariz.-based broker Frank Kalil. "For whatever reason, [the station groups] haven't found something to add to their portfolios, and I don't think it means anything more than that. Will they add? You can bet that they're looking at everything all the time."

One company changed its name in the past year. Shop At Home Inc. became Summit America Television last November. The Naples, Fla.-based firm owns five stations (in San Francisco; Boston; Cleveland; Raleigh-Durham, N.C.; and Bridgeport, Conn.), putting it at No. 22. Last year, it sold 70% of the Shop At Home Network to E.W. Scripps for $49.5 million.

Although the past year was not filled with blockbuster deals, the next 12 months could be interesting. With the FCC set to consider relaxing media-ownership rules, Fratrik says, "everyone is thinking about acquisitions.

Awaiting new rules

"Television groups are waiting to see the new rules, see what the new lay of the land will be, where they will play, what their business strategy will be," he continues. "I assume a lot of these groups have plans for what they will do, who they're looking at acquiring in the markets they're in or expanding into other markets. The commission is going to decide soon, and, once that happens, I don't think there will be a rush to the door, but there will be a nice stream of TV acquisitions that won't be surprising and that will make TV a stronger industry."

Kalil agrees. "Two things are inevitable: the [35%] ownership-cap change and duopoly. Both of those are a matter of when, not if. It flies in the face of logic to think otherwise. There are a lot of people who are trying to buy television stations. The real push we're going to see is from people who know television, are successful in television and want more television."

Bear Stearns's Miller says a prolonged Iraq war could slow down a post–rule-change boom in station sales. "Otherwise, I expect there will be swaps—newspaper for newspaper, TV for TV. I think another big wave of duopoly will happen in markets if they loosen the ownership rules. That really needs to be done, especially in the smaller markets. The margins of a top-10 ABC, CBS or NBC affiliate are in the 60% range. When you get down to markets 121-130, that drops down to about 31%-32%, so it's a much different marketplace."

If the FCC loosens up the duopoly restrictions, Miller says, "people are going to focus initially on strategic asset swaps and on trying to double up in markets where they can double up." (Today, the FCC allows ownership of two stations in a market—duopoly—in only the largest market. It is considering permitting them in smaller markets.)

Among groups considered likely to be looking for deals in the months ahead are those with both broadcast and newspaper holdings like Gannett, Tribune and Media General.

"The groups that have been in the industry for a long time will make strategic acquisitions," says Fratrik. "The networks will expand their owned-and-operated stations. If you look at the top 25 groups you have now, I suspect that next year—and two, three and four years from now—20 to 22 of them will still be on the list, but they will be stronger, bigger players because they will have acquired a lot of the smaller groups."

'Pent-up strategy'

The companies probably won't take too long to put deals together once the FCC acts, Miller believes. "There's a certain amount of pent-up strategy out there. I think they've been waiting a number of years for some relief. I'm sure that every company has a certain number of transactions or swaps or duopolies or whatever that they'd like to form. You're not going to see people completely surprised by a rule change and going, 'Oh my God, we can do things, let's explore it.'"

Groups likely to be in a buying mood include Cox and LIN, which indicated interest in owning 100 stations, says Miller. "And Sinclair has already told people that they've got five or more TV stations that they want to do strategic reviews on. I think they'll be able to do something smarter with dereg; it gives them a lot more options. Almost anybody who went out of their way to file comments with the FCC [in this rulemaking], I think, would find this an interesting climate."

FCC Coverage, 2002
Rank Group % of U.S. TV Homes
*Formerly Shop At Home
Sources: Broadcasting & Cable, BIA Financial Network, Nielsen Media Research
14Clear Channel8.7
20Media General6.9
21Summit American*6.8

Station trading may pick up even before the FCC acts, says Fratrik. "If there is a consensus sometime prior to the FCC issuing a rule, there may be some pre-activity. This happened with the 1996 act; there were a lot of radio stations that were acquired in late 1995 before the bill was actually signed, so, if there's an understanding on where these rules are going to go, there may be some acquisitions."

Fratrik is optimistic about television's economic prospects for this year and the next. "The networks are doing very well, and that optimism weaves its way into local-station operations and station sales. I think that 2004 is going to be a really great year for television. The economy will be stronger for the full year, and there will be a lot of political advertising coming down, both on Senate races and the presidential campaign where the incumbent president will have an awful lot of money.

"And the way the electoral maps look now," he continues, "the best way to get to the swing states is to buy local television, not network television. That's going to be a strong, positive force for television advertising revenue in 2004. And that's to say nothing about the synergies of duopolies in mid-size markets, that could have a profound effect on the television industry at the end of 2003, going into 2004, if there's enough regulatory relief."