News Articles

High Rollers Placing Their Bets

From retransmission cash to big-ticket acquisitions, the industry’s top groups are enjoying a period of affluence and action 4/08/2013 12:01:00 AM Eastern

Spectrum Speculation

The FCC’s pending spectrum auctions have caused some motion in the station market, with speculators such as NRJ Holdings, OTA Broadcasting and Locus Point buying up fullpower, low-power and Class A stations in order to sell them back to the government.

The National Association of Broadcasters is looking askance at those deals; they believe the auctions and the resulting spectrum repacking could threaten spectrum integrity. But analysts say it’s purely an economic solution, meant to move the scarce resource of spectrum to companies that can use it more effectively.

“I can understand fighting on the repacking and making sure that their members don’t lose coverage,” says Larry Patrick, managing partner of Patrick Communications, which has an ownership interest in NRJ, which placed No. 11 on B&C’s Top 25 station groups list. “But this is about clearing out these guys who are marginal operators so that the broadband people can get more spectrum for tablets, smartphones and other mobile applications.”

“The auctions will have no effect on stations that will continue to be traditional ad- and retrans-supported broadcast stations in the marketplace,” says John Tupper, who heads up investment firm Kepper, Tupper and Co. “Groups are buying stations that generally don’t have network affiliations, or tertiary stations that are doing a variety of programming, some successful, some not. This is a way for the owners of those stations to get more value for them. If you are running a successful station, the math doesn’t work.” —PA

The story of today's hot TV station trading market starts with
two words: retransmission consent. It’s a phrase that sets teeth
gnashing among everyone involved, from the stations and broadcasters
who must forge tough deals to the viewers who must sometimes deal
with the tough reality of missing important shows and sports events when
those retrans negotiations don’t go smoothly.

These days, obtaining the highest possible retransmission fees is the sign of a
well-run broadcaster. And the injection of that money back into the station market
is the biggest reason that stations are again being sold.

“Cash-flow growth has come back to the industry, and the principal reason
that’s happened is because of the evolution of the retrans revenue stream,” says
John Tupper, head of Hilton Head, S.C.-based investment firm Kepper, Tupper
and Co. “After the network’s share is deducted, 100% of that revenue falls to the
station’s bottom line.”

Retrans deals may be a prime mover in the uptick of station trading, but other
factors have evolved to make this something of a renaissance period for acquisitions.
Everything from the brightening economy to deeper post-election pockets to hungry
private equity firms has been a contributing factor.

And retrans numbers have only increased stations’
value, whether they are on the trading block or not.

“In 2009, the average retransmission consent fee was
somewhere between 8 and 15 cents per subscriber.
Now, it’s somewhere between 50 and 70 cents,” says
Erik Brannon, an analyst at research firm IHS Inc. “Fifty
or 70 cents across 2 million subs may not sound like
a lot of money. But when you consider the total reach
across all station groups, we’re talking $135 million to
$150 million in retrans fees paid to broadcasters every month.”

Battle Scars

It’s an end result—after often tough fights—that might not have ever been anticipated
back on Jan. 1, 2005, when Nexstar CEO Perry Sook pulled his station
group’s signals off the air in Abilene, San Angelo and Texarkana, Texas and in
Joplin, Mo., rather than allow them to stay on the air without being paid a persubscriber
fee by the local cable operators.

The battle was long and hard, and ultimately cable operators in those four
markets lost up to one-third of their subscribers to direct broadcast satellite (DBS)
competitors. In the end, Nexstar cut retransmission-consent deals with about 150 distributors of its stations’ signals.

0408 Cover Story Auctions chart

In 2009, Chase Carey returned to News Corp. after a stint running DirecTV. By
December of that year, Carey had made it his mission to extract the value for the
Fox-owned TV stations that he thought they warranted. Fox also faced protracted,
bloody battles, but today the Fox stations are
paid well for their signals.

“There’s been explosive growth in retransmission
consent fees,” says IHS’ Brannon. “It’s
fair to say that total annual revenue from [retrans]
fees [is] somewhere in the neighborhood
of $1.5 billion and $2 billion and growing.”

Politics also led to the very strong years
enjoyed by many stations in 2010 and 2012,
mostly due to election advertising. In 2010,
politicians were !ghting tough midterm elections
battles, while 2012 saw a drawn-out
presidential campaign.

“That’s courtesy of the Citizens United decision,”
says Tupper, referring to the Supreme
Court decision that found corporations possess
free-speech rights which allow them to spend money for or against candidates
and issues. “That [decision] opened up the political coffers.”

And while the economic recovery has been slow, it also has been steady enough
to help buyers’ prospects, although not as much as other factors.

“Money’s been cheap for quite a while,” says Tupper. “But the availability of
money for the acquisition of TV stations is still not where it was.”

That has limited a lot of station trading to groups that can pull off the bigger
deals, such as LIN’s purchase last October of New Vision Broadcasting’s eight fullpower
and two low-power stations for $342 million, or
Sinclair’s deal last month to acquire Barrington’s 18 TV
stations and six service agreements for $370 million.

Size Matters

Groups doing deals in the hundreds of millions can
access the bond markets, which need the deals to be
very big in order to be attractive.

“Bond markets will only deal with you if you are dealing
with a transaction size that is big enough to create a fee
that’s worth the !nanciers’ while,” says Tupper. “If you do
a $10 million bond offering, no one makes any money.”

That dynamic also is leading to the big getting bigger,
as B&C’s Michael Malone pointed out in his Jan. 31 cover
story, “The Rise of the Station Super-Groups.” Groups
such as Sinclair or Nexstar gain substantial efficiencies
when acquiring syndicated programming, Nielsen data
or even healthcare for employees if they are very big.

“[Those efficiencies] can amount to a 10%-15% revenue
jump and a 10% expense cut,” says Larry Patrick,
founder and managing partner of Patrick Communications.
“There are cases where the seller will say that they
sold a station for eight times cash flow, and the buyer
will say after we take over and make adjustments the
deal becomes 5½ times cash flow. That’s why some of
the more aggressive people want to get so big.”

Playing the Waiting Game

Another factor coming into play is that private-equity firms have been sitting on the sidelines, waiting to sell
stations that they acquired several years ago. That’s why Silver Point Capital is selling
Communications Corp. of America, why Oak Hill Capital Partners last month
put Local TV LLC on the block, and why Providence Equity Partners unloaded
Newport Television last summer.

“Local TV has done well, they’ve increased the
stations’ operational revenues, they’ve added a
station here and there and they will get a very
nice return,” says Patrick. “Private equity is usually
a five-to-seven-year horizon, and when they
hit their numbers they want out. Three years ago,
they couldn’t sell because the economy was so
bad and there were no buyers.”

Even with all of the deals getting done and the
FCC’s spectrum auction on the horizon (see “Spectrum
Speculation
,”), many broadcasters still
just want to run strong local businesses that serve
their communities.

“What I think is important is that while TV
stations face a lot more competition for viewers
and for advertisers, they are still an important
part of the local media mix,” says Mark Fratrik, VP and chief economist at BIA/
Kelsey. “When the car dealer in Wausau, Wis., wants to advertise that they have
a 72-hour sale, they’ll still use local TV stations as part of their local media mix.
Local advertisers who want to reach their local audiences generally need to use
local television.”

E-mail comments to palbiniak@gmail.com
and follow her on Twitter: @PaigeA

Spectrum Speculation

The FCC’s pending spectrum auctions have caused some motion in the station market, with speculators such as NRJ Holdings, OTA Broadcasting and Locus Point buying up fullpower, low-power and Class A stations in order to sell them back to the government.

The National Association of Broadcasters is looking askance at those deals; they believe the auctions and the resulting spectrum repacking could threaten spectrum integrity. But analysts say it’s purely an economic solution, meant to move the scarce resource of spectrum to companies that can use it more effectively.

“I can understand fighting on the repacking and making sure that their members don’t lose coverage,” says Larry Patrick, managing partner of Patrick Communications, which has an ownership interest in NRJ, which placed No. 11 on B&C’s Top 25 station groups list. “But this is about clearing out these guys who are marginal operators so that the broadband people can get more spectrum for tablets, smartphones and other mobile applications.”

“The auctions will have no effect on stations that will continue to be traditional ad- and retrans-supported broadcast stations in the marketplace,” says John Tupper, who heads up investment firm Kepper, Tupper and Co. “Groups are buying stations that generally don’t have network affiliations, or tertiary stations that are doing a variety of programming, some successful, some not. This is a way for the owners of those stations to get more value for them. If you are running a successful station, the math doesn’t work.” —PA

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