Brokers: Wait Till Next Year

Station traders expect market to rebound in 2003 as economy improves, FCC deregulates

The final tally isn't in, but, unless some really big deals go down in the next few weeks, 2002 will go down as the slowest for TV-station trading in a decade.

According to the BIA Financial Network, as of Nov. 30, just 86 stations changed hands in 2002, down from 111 last year and a far cry from the more than 200 that traded each year from 1995 to 1997. The total dollar volume of the deals—$2.2 billion—is the lowest since 1992, when the country was pulling out of its previous recession.

(In radio, the number of stations sold dropped from 986 in 2001 to 721 this year, but the value of the transactions shot up from $3.8 billion to $5.1 billion.)

The sluggish station-trading market is just another symptom of sluggish economy, says BIA Vice President Mark Fratrik. Plus, he says, sellers and buyers are uncertain about how far the FCC will go in loosening its ownership rules and how the new rules will affect station values. "People have been holding off."

But Fratrik and brokers who live off the commission from the trades are optimistic about 2003, based on the promise of deregulation and the increase in trading activity over the past few months. "There is no explosion, but there is a steady stream starting to pick up," says Larry Patrick, a broker based outside Baltimore.

"There is a ton of equity out there," says Patrick, who says he has met with many investors seeking to put money into TV broadcasting. "In the past three months, I had 10 lunches with money people saying 'We have an operator and are looking for stations' or 'We are looking for an operator and some stations.'

"Television is still a pretty good business," he adds. "Even a badly run station will have 20% or 30% margins. A well-run station can still do 50% or 55%."

Banks remain "skittish," however, Patrick says. Instead of allowing buyers to borrow seven times trailing cash flow as they did a few years ago, the banks are limiting loans to 5 or 51/4 times, he says. "That has slowed the market, and it continues to be a drag."

Fratrik also predicts a strong market in 2003. "TV sales are doing pretty damn well," he says. "Once we get over this hump of worrying about a double-dip recession, I think there will have more optimism about advertising and more interest in purchasing TV stations."

The story is the same at Blackburn & Co., a longtime station brokerage. "It's picking up," says broker Bruce Houston. "We are very encouraged about 2003."

At Kalil & Co., broker Frank Higney believes the market will improve with the strengthening economy. "You have buyers who see upside," he says. That means they may be willing to pay more than they have been, he says: The ask-bid narrows, and deals get done.

All feel that the market is waiting on the FCC this spring to decide who may own what where. The agency may allow common ownership of daily newspapers and TV stations in the same market (some markets already have such crossownership, thanks to grandfathering and waivers). It may also lift the TV-station ownership cap, allowing one station to reach more than 35% of TV homes. And it is likely to relax its duopoly rules, which restrict ownership of two stations to the large markets. While the FCC is expected to permit duopolies in smaller markets, it is not certain how small.

"Duopolies would open the floodgates on dealmaking in small to medium markets," Patrick says.

The ability to own two stations dramatically changes the economics and finances of broadcasting. "Some of these small-market stations that have been languishing suddenly become very attractive," says Higney.

Some broadcasters are not waiting for the FCC to act. They are already enjoying the economies of duopolies by acquiring effective control of second stations through "joint sales and administrative services agreements," Patrick says.

In some cases, these broadcasters are finding third parties to buy the second stations and enter into management agreements, Patrick says. The third-party buyers account for some of the recent upsurge in station trading.

Most broadcasters are not under any pressure to sell and will continue to demand high multiples, as much as 15 times, says Houston. For others, though, now might be the time to bow out. "The ones I'm feeling sorry for are those in the small markets, where three or four stations are divvying up $6 million to $8 million in revenue and have spend money to make the conversion to DTV. Some of these operators are not making as much money as you think they are."