Station Buys: Are They Worth It?

Emmis stations sell for a fat price, even as TV-station business seems slack

Execs from Journal Communications gushed enthusiastically, as anyone spending $235 million should. CEO Steve Smith had just agreed to buy three TV stations from Emmis Communications and organized a call with analysts and investors last month to accept their congratulations and explain the deal.

The purchase surprised many in the TV-station business, in part because Emmis had received unpredictably high bids for nine of the 16 stations it put up for sale. (A deal for New Orleans station WVUE, however, was not finalized before Katrina knocked it off the air).

But one player just had to spoil the party: Veteran media-money manager John Kornreich questioned Journal Communications' Smith on the fat price of the three Emmis stations, a rich 14 times Emmis' annual cash flow—a valuation multiple that highly presumes the stations will deliver strong growth.

“Why are you bullish on the TV-station business in the next five years?” he asked Smith. “What makes you optimistic about a business that recently has been very disappointing?”

This is a good question, and it's one actually directed at the entire industry. TV stations are stuck in a financial rut. The economy is slack. Stations' most important advertisers—car manufacturers—are struggling.

Even by 2008, an election year, not every market will benefit. The big lifts will go to stations located in presidential swing states or with several local or state races, and political money typically only goes to stations with strong newscasts.

The bottom line: Stations are profitable but are not expected to see significant increases over the next few years. TV stations are mired in a cycle of 2%-3% annual revenue growth—not very exciting and certainly not enough to justify prices like the ones Emmis is securing for its TV stations. It's the reason stations' stocks have dropped 7% so far this year, on top of the 16.5% decline during 2004.

Clear Channel Television President Bill Moll acknowledges that the growth question is “a hot iron, a huge challenge,” but he adds that “we've been blessed in many, many rediscoveries of our business.”

So what are Journal Communications CEO Smith and his fellow station chiefs counting on?

  • Broadband: Hurricane Katrina proved the power of local broadcasters' Web sites. When stations' transmitters went dark, they were able to stream vital news coverage online. Broadcast stations are second only to newspapers in mustering resources and bringing an audience to powerful hometown portals.
    TV executives say selling ads on their Web sites is the fastest-growing part of their business, giving them a chance to crack smaller advertisers that can't afford to buy commercials. One Grand Rapids, Mich., station expects to generate $1 million in online classified ads this year.
    “I really do think that's a great opportunity,” says Fred Reynolds, CBS stations' prodigal son, who recently resigned as president and then returned to the company.
  • Digital signals: This is one that Journal Communications cites as a reason for its high sale price, but the logic seems questionable. Converting broadcast signals to digital will create four or five new slots per station. NBC wants affiliates to fill those slots with its new weather channel; ABC has a startup news network under way. More channels should mean more viewers to watch more commercials.
    But one current problem is that the local ad pie isn't growing much, so trying to sell more ad time to the same car dealers and supermarkets doesn't look like a big winner.
    One additional—and questionable—option is wireless cable. USDTV, most notably, gathers spare digital channels from several broadcasters to create a mini-package of cable services sold for $20 or so monthly. But after 18 months on the air in Salt Lake City and two other markets, USDTV is struggling and starving for cash.
    The venture says it is close to raising more money, but its track record indicates that wireless cable is hardly financial salvation for stations.
  • Centralcasting: If they can't move the top line, stations can exploit technology to cut costs and at least improve the bottom line. One big driver is centralcasting—consolidating “master control” of stations in regional hubs. News production and ad sales are handled locally, but much of the station operations are handled centrally—at least part of the day.
    LIN Television CEO Gary Chapman—who also is buying some Emmis stations—talks about using fiber optics to wire 11 Midwest stations into a hub in Indianapolis. First, it allowed him to shrink operations by 200 employees, 10% of the stations' workforce.
    More important, the hub can buy equipment more efficiently, purchasing several giant video servers or digital gear for Indianapolis rather than having each station buy smaller pieces of equipment one by one.
    “You have to find ways to cut the expenses,” Chapman says.
  • Consolidation: Stations love the operating efficiencies of duopolies, but FCC rules limit ownership of two stations in a market to only the largest markets. There are a few ways around the limits, but station owners want greater freedom. Broadcasters in small markets have found all sorts of loopholes in those restrictions. For example, they cut joint sales agreements with other stations, some owned by little more than straw men. Still, station owners want greater freedom.
    It's an economic rule of any mature industry: If a business isn't growing through the top line, it has to consolidate. Similar slow-growth sectors such as department stores, groceries or oil, however, need only clear conventional antitrust barriers to maximize the advantages of consolidation. Broadcasting is a uniquely heavily regulated business.
    Yet station chiefs hope to grow cash flow 7%-8% annually, which might be enough to perk up station stocks. But as Kornreich told Journal Communications executives, “the burden of proof is on you.”
    True enough. Of all the companies involved in the purchase of Emmis stations, there is only one whose stock is doing well: Emmis.

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