Nice PriceDespite recent deal snags, the station market is still relatively strong 2/17/2006 07:00:00 PM Eastern
Last Wednesday, the buyer for Granite Broadcasting's two WB affiliates
for $190 million backed out. Five days earlier, Belo Corp. disclosed that it is
being sued for reneging on a deal to buy a UPN station in New Orleans from CBS
Corp. Still, the recent collapse of two station sales probably isn't enough
to halt the resurging market for TV stations.
|RECENT STATION DEALS|
|Buyer||Seller||Price (million)||Cash flow multiple|
|Source: Wall Street
|Blackstone and SJL||Emmis||$259||15.7x|
Those snags are exceptions to the strong pace of the overall market.
Despite weak station-group stocks, broadcast properties themselves are fetching
surprisingly high prices. Deals for many of Emmis Broadcasting's stations
closed recently at startling values. The planned sale of broadcaster Liberty
Corp. to Raycom is only slightly less impressive.
That's prompting other broadcasters to try to exploit the wave. NBC is
seizing the moment to sell six of its smaller stations. What I find puzzling is
that prices are relatively high at a time when the business is stuck in
The whole TV-station sector is running in financial slow motion, with
revenue and cash flow growing an average 3%-4% annually in election years, down
in odd-numbered years. Typically, buyers don't value such low growth rates
very highly. While many forces affect a buyer's willingness to pay, one
station owner gave me a crude rule of thumb: A company generating 10% growth in
operating cash flow often sells for 10 times annual cash flow. The higher the
growth rate, the higher the valuation multiple.
Some industry observers think recent buyers are overly optimistic. One
media investment banker pegs the $987 million Liberty Corp. sale at 13 times
cash flow. Emmis has cut four deals totaling $859 million for stations at 13-16
times annual cash flow. Recently, when asked by an analyst whether ABC needs to
beef up its relatively small station group, Disney CEO Bob Iger said, “Every
time we've looked at potential acquisitions in that space, we felt that the
prices being paid were just a little bit too high.”
And the high-priced deals were generally not troubled situations where
the buyer was betting on a significant turnaround. So how do the buyers justify
their high prices? The first attraction is that stations generate lots of cash
flow, with margins often hitting 40%-50%. (By comparison, strong newspapers
generate 20% margins.) Those earnings are relatively predictable, so lenders
allow high leverage. That helps enhance returns on investment.
Where does earnings growth come from? “You need four revenue
streams,” says Bear, Stearns & Co. analyst Victor Miller. In addition to
advertising, there's retransmission consent, digital channels and the
That's the game plan of one Emmis buyer, Montecito Broadcast Group CEO
George Lilly. Known until recently as SJL Broadcast Management, Lilly's group
used private-equity giant Blackstone Group to buy four Emmis stations for $259
million, or 14 times estimated cash flow.
The most obvious subsequent move —one that has created a firestorm at
one new Montecito station—is cost-cutting. At KHON Honolulu, the company
plans to invest more in automated sets and editing systems and lay off a number
of production workers.
Top station executives resigned over the planned cuts, and station
staffers told a local newspaper that 35% of the station's 112 workers might
be cut. Lilly says the cuts will be less draconian than that and phased in over
a long period. “We did not do a good job of explaining,” he says. “That
doesn't mean it's easy to bring automation in and let 10 people go.”
Lilly is also counting on new revenues. He expects that strong stations
will collect cash payments from cable systems looking to retransmit their
signals. When millions more consumers buy digital TVs, he believes, new
channels may generate modest revenues but carry high profit margins. And he
thinks broadcasters will get Internet ad revenues by integrating their stations
with their Web sites.
But investor Ken Brotman isn't so confident. He is a partner in
private-equity fund Acon Investment, which is backing off a $190 million deal
for Granite Broadcasting's two WB affiliates.
Acon wasn't attracted to the TV sector's overall prospects, merely
to Granite's special circumstances. The broadcaster has been a troubled
company. Acon sought the struggling Granite stations as turnaround situations
where the profits would come from stronger management.
He is balking over the Granite deal because of the stations' loss of a
network affiliation. The Granite stations have zero chance of getting an
affiliation deal with The CW, the network that The WB parent Time Warner and
UPN parent CBS are creating out of the two networks' ashes. Granite's
stations are in markets where CBS owns UPN stations, San Francisco and Detroit.
Acon's AM Media hasn't completely scrapped the Granite deal, but the
broadcaster is looking for other buyers.
How much damage does Brotman see with an orphaned station? “If I had
that exact answer, we'd know exactly where we were,” he says. “The fact
is, there's a lot of uncertainty out there.”
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