On Hold

Rankings change little as regulatory uncertainty keeps station trading in neutral

Want to see a business stymied by the uncertainty of regulation? Look at the broadcasting industry. For the third year in a row, the companies in BROADCASTING & CABLE's Top 25 TV Station Groups shifted positions, though the list itself remained unchanged. But there's no lack of desire to increase or improve their portfolios; the companies have been put in limbo by the FCC, Congress, and the courts.

Throughout 2001 and after the 9/11 terrorist strike, broadcast movement slowed to a crawl, as did much of the economy. Then business perked up, but station groups were waiting to pounce until the FCC released its new ownership regulations in June 2003. Analysts predicted that's when buying and selling would be brisk. In fact, B&C's Top 25 story last year was headlined "Calm Before the Storm."

It hasn't work out that way, although, for a while, things seemed to be going as scripted. Last spring, the FCC's Republican majority approved the most sweeping relaxation of broadcast-ownership rules in history.

Under them, new TV duopolies would be permitted in more than 70 markets, including many midsize and smaller markets, where no owners have been allowed to control two stations. Three-station "triopolies" also would be permitted in six of the country's largest markets. In addition, restrictions on owning a TV station and local newspaper in the same market would be greatly relaxed, as well, with the number of markets open for crossownership increasing from 46 to 160.

But the changes prompted a firestorm of criticism from both sides of the deregulation debate. Activists from Prometheus Radio Project and other groups went to court, charging that the FCC would be giving media conglomerates the ability to choke out independent voices. Many industry outfits—among them, the National Association of Broadcasters and Clear Channel—argued that the FCC's action fell far short of the deregulation required by law.

A three-judge panel of the Federal Court of Appeals for the Third Circuit in Philadelphia heard their arguments in February and is now reviewing the ownership rules. It's anybody's guess what they'll decide.

"We had the anticipation of the June 2 rules," says Mark Fratrick, vice president of market-research firm BIA Financial Network. "There was some idea about what they might suggest, but it wasn't completely clear until [the FCC announced the rules]. They were supposed to [take effect] on Sept. 6, [but], on Sept. 5, the court got involved."

Specifically, the court is reviewing rules affecting local markets, including relaxing limits on TV duopolies, permitting triopolies, and allowing more same-market TV/newspaper combinations. The national-audience limit of 39% is not part of the review.

But, for the most part, TV station buyers and sellers have been waiting yet again to learn what the new rules will be.

"In the big markets," says broker Larry Patrick, president, Patrick Communications, "there's been almost no movement. I think everybody throughout the whole industry is waiting to see what the ownership rules ultimately will be. It's less to do with price for once and more to do with the ownership rules."

One big issue is settled. After a fractious debate, the ownership cap has been set at 39%. The FCC had raised it to 45% before Congress and an upset public nosed in. In hearings in several cities, the public often railed against big media.

"We learned during the media-ownership proceeding that the public is concerned about something that can't be captured in ownership rules: perhaps that broadcasting is losing its character," said FCC Chairman Michael Powell in an interview with B&C in January.

This reticence to deal is reflected in the Top 25 list. The players are the same as last year, with a few companies moving one or two slots (mainly because of changes in market size). B&C ranks the Top 25 by audience reach: the percentage of the nation's 108.4 million homes with TV sets. We use the FCC method for calculating reach—that is, we assume that VHF stations (chs. 2-13) get to every home in their markets but UHF stations (chs. 14-83) reach only half. And, like the FCC, we don't count groups' second stations in a market. Also not included are low-power stations and translators or satellites.

The top groups were unchanged from last year. Retaining the No. 1 slot is Viacom, with 38.92% coverage by its CBS and UPN groups. Fox is second with 37.92%; GE's NBC is third at 33.56%; Paxson's 32.36% puts it in fourth; and Tribune is fifth at 30.02%.

There will be a change on next year's list, however. This year's No. 22 group, Summit America (formerly Shop At Home Inc.), in one of the past year's few deals, agreed to sell its five stations to current No. 16, E.W. Scripps. When the approximately $235 million sale closes (expected later this month), Scripps will add another 6.07% to its FCC coverage and 12.14% to its total coverage, boosting it to what would have been 11th place this year.

Looking forward, Fratrick says that, once the issue of ownership rules is settled (it's estimated the court may have a decision by May or June), station trading will pick up—especially if the court allows duopolies in small and medium markets. "Because there are so many tremendous efficiencies with a local duopoly," he says, "especially in midsize and small markets, I definitely think there will be a lot of activity once that gets relaxed."

Brian Cobb, president of brokerage Cobb Corp., agrees. Once the rules are set, he says, "I think we'll see deals instantly."

He stresses the need for a more liberal duopoly policy: "I would like to see duopoly because the television revenue quotient has been very small for three years in a row. The growth has been [minimal]. Unless stations are able to get some kind of economies of scale in smaller markets, they are just going to continue to languish. As they languish, less news and product like that is provided to the local community."

Patrick offers an example of the plight of small stations: "You look at the history of the sales of a really tiny, tiny station in Casper, Wyo., KTWO-TV. [It sold for] $8 million seven or eight years ago. We sold it [a few years later] for $3.5 million, and it just sold for $1.75 million. That's less than what radio stations are selling for in that market, and the reason is, it's lost all its network compensation and it's got the huge cost of building out digital. And not just for the station: It's got almost 100 translators around the state, and every one has to be converted. That's the hidden cost for some of these small-market, mountain or rural stations that need translators or boosters."

And, he adds, without a more liberal duopoly policy, "what you really see, more than anything else, are literally hundreds of side deals where there are two owners controlled by one person. Legally, it's OK. I buy one station, you buy another, and I lease my station or sign a joint sales agreement with you, and you wind up with two in the market."

Of course, other things factor into station values besides the uncertainty over regulation. And most of those metrics are looking pretty good now. Says Patrick, "There still is a difference between the bid and the ask. Buyers would like to pay 10 times [cash flow], and most sellers would like to get 12 or 14 times, but I think that can be overcome fairly quickly. We have low interest rates, and the economy is slowly, steadily getting better.

"But the big problem," he continues, "is that people aren't sure what the rules are. Can they have more [stations]? Where can they have them? And they're waiting for the payday. If you're a seller, what you would like is the rules to change so that, in some of the markets, perhaps, you can sell into a duopoly, which would get you a much higher price. Or maybe your friendly newspaper guy down the street would buy you. The rule change would simply bring more buyers into the market, and that always pushes prices up."

Cobb points out that "the capital-gains rate is perfect for a seller right now. Once there's clarity one way or the other, people that have been wanting to buy or sell will at least know what the operating rules are, and I think they'll move very quickly. A lot of people have been waiting a long time."

How the Philadelphia court rules will have a lot to do with the 2005 Top 25 list looks like.