Wells Fargo securities analyst Marci Ryvicker says FCC Chairman Ajit Pai’s much anticipated relaxation of the local ownership rules may happen at the FCC’s next open meeting and it might go so far as to allow Big Four duopolies in every market. The result: “a stronger industry overall.”
The FCC at its Nov. 16 meeting is likely to significantly roll back its local ownership rules, triggering station swaps and sales as broadcasters try to take advantage of the relaxed rules, according to Marci Ryvicker and her team of broadcast TV securities analysts at Wells Fargo.
“All of this will be a welcome change for a sector that has suffered undue regulatory handcuffs, in our opinion, given the changing competitive environment,” the Ryvicker team says in a note to subscribers today.
The note cautions that the new rules will likely be challenged in court. “Will there be a stay of the FCC’s proposed changes? We don’t think so, but the probability is higher than what we saw for the UHF discount.”
In particular, the notes says, the FCC will likely eliminate the so-called 8-voice test, allowing ownership of two stations in every market.
Also, it says, the FCC “might” drop the prohibition against owning two top-four rated stations in a single market so that a broadcaster could own two (but only two) Big Four network affiliates.
Finally, the note says, it believes the FCC will once again allow broadcasters to operate stations under joint sales agreements without them counting against the ownership limits.
“Recall that JSAs were initially created so as to allow small-market broadcasters to operate multiple stations so as to save costs, especially in news programming,” the notes says. “However, should the 8-voices test be eliminated, small market consolidation would no longer be as restricted, resulting in the JSA attribution rule losing a lot of its relevance.”
The notes says not to expect “transformative M&A” as a result of the FCC action.
“What we are talking about is in-market transactions, which would involve swaps and other small-scale deals.
“That is not to say that this precludes something larger — we just aren’t anticipating another [Sinclair-Tribune] any time soon.
“That said, we remind you that in-market transactions create duopolies, which exhibit much higher margins (700-1,500 bps depending on the company and market); hence we anticipate a stronger industry overall.”
The note calculates and ranks which of the public companies would benefit most from the deregulation.
The big winners from elimination of the Top Four rule would be Scripps, which could potentially benefit in 83% of its markets, followed by Sinclair-Tribune (66%), Nexstar (59%), Meredith (58%), Tegna (58%) and Gray (37%).
Those benefitting the most from elimination of the 8-voice test would be Nexstar (30% of its markets), Gray (30%), Tegna (24%), Sinclair-Tribune (21%), Scripps (21%) and Meredith (8%).
More should be known tomorrow when the FCC, in keeping with its recent practice, releases a draft of proposed rules changes.