While the market for TV stations has appeared lackluster, like a sun obscured by clouds, a deeper examination of the TV station business reveals currents of growth and potential opportunity. Here’s why the outlook that may appear dreary now may end up sunnier by year’s end.
When I say, “Groundhog Day,” is your first thought “Punxsutawney Phil” or “Bill Murray”? Of course, Punxsutawney Phil is the famous weather predicting groundhog, while the 1993 movie Groundhog Day stars Bill Murray as a frustrated meteorologist caught in a Feb. 2 storm he didn’t predict; he is doomed to relive the day until he finally gets things right.
It goes without saying that predicting TV station values, like forecasting the weather, involves more science than a quick peek at a groundhog’s shadow. And like the weather, station values are a topic that is on a lot of people’s minds. Getting it right, as Bill Murray’s character ultimately learned, means learning from the past and factoring in clues about the future.
John Sanders, a principal at Bond & Pecaro, a consulting firm specializing in valuations and related services to media and telecommunications companies, wrote an article about TV station market values for the January-February issue of MFM’s member magazine, The Financial Manager. Entitled “TV’s Optical Illusion,” the article observes that while the market for TV stations has appeared lackluster, like a sun obscured by clouds, a deeper examination of the TV station business reveals currents of growth and potential opportunity.
What’s Behind the Dreary Appearance?
Sanders attributes the sluggish quality of TV station values in 2017 to several factors. Chief among them was last year’s “anemic” M&A market.
Excluding 2017’s two megadeals, Nexstar’s $4.6 billion acquisition of Media General, which dominated 2016 and closed in early 2017, and Sinclair’s proposed $3.9 billion acquisition of Tribune Media, station acquisitions totaled less than $1 billion for both years. He characterizes that as “a mere shadow of the $5-billion-ballpark averages” seen in the 10 years prior.
Additionally, cash flow multiples for the few station transactions that did occur marked a decline “into the high single digits.” (Cash flow is defined as revenues minus expenses not including interest, income taxes, amortization, depreciation and corporate allocations.) Publicly traded television stocks reflect similar valuations.
Sanders attributes the downward trend to two developments that may be creating an illusion about what to expect going forward. The first is that “the two large consolidators, Nexstar and Sinclair, were preoccupied with the Media General and Tribune acquisitions.” In addition, the FCC “quiet period” around the 2017 spectrum auction meant that station owners were unable to share information about their assets.
Underlying Factors That Favor Higher Values
Low transaction volumes may be masking favorable demographic, economic, and financial conditions for TV stations. In Sanders’ view, “The underlying economic fundamentals for television broadcasters are strong, and any decline in valuation multiples is more a result of healthy and expanding cash flows than a less robust outlook.”
While he warns that total broadcast television transactions in the $5 billion per-year range are unlikely going forward, he does expect to see activity increase in 2018.
One of the fundamentals he points to is the growth in OTA (over-the-air) viewership resulting from cord cutting. That has lifted the number of OTA households to more than 15 million. It’s “back to the future” for the industry.
“TV broadcasters’ share of the U.S. has increased from 10.7% of all television households to almost 13%. Even this small increment permits broadcasters to serve a larger proportion of the overall TV audience.”
Thus far, the surge in OTA households is not affecting retransmission consent fees, which have been growing at more than 30% per year industry-wide. Market forecasts predict them to continue to grow at close to 3% annually. However, as Sanders points out, “the results for individual companies can be wildly different.”
The New Revenue Mix
Retransmission dollars have also helped stations diversify their revenue. Where local and national advertising sales once accounted for virtually all of a station’s revenue, those now come in at between 50% and 60% of the total.
Bond and Pecaro’s analysis indicates retransmission fees currently account for approximately 39% and digital revenues represent between 5% and 10%. It’s this diversification combined with technological advances that Sanders credits with allowing “the television industry to maintain enviable profitability relative to most industries.”
Technology has also helped stations cut costs through practices such as shared services for accounting, credit, collections and other operational functions. These changes are contributing to broadcast cash flow margins of between 35% and 40%.
Average profit margins (before non-cash and non-operating expenses) have grown from 26% in 2012 to 35% in 2016, the subsequent election/Olympics year.
The most significant technological innovation will be the new ATSC 3.0 TV transmission standard. As Sanders points out in his article, “Even though approximately 84 MHz of television spectrum was sold for other purposes in the broadcast incentive auction, the innovative technology will offer more over-the-air channels; the ability to transmit directly to mobile devices; video-on-demand capabilities; targeted advertising; and additional data services.”
Areas Requiring Scrutiny
Although 3.0 is projected to provide a major lift to revenue diversification and growth, Sanders cautions that offering these advanced services requires new competencies. He sees “significant execution risk” in developing new revenue streams “as they will likely require staff expansion and a change in corporate culture.”
Sanders also sees storm clouds gathering on the horizon. He warns that revenues such as those for retransmission consent and political advertising are subject to “how the regulatory winds blow in Washington.” Additionally, “the financial, competitive and operating challenges faced by cable and satellite companies could impact retrans fees.”
Another area to watch is digital revenue, which continue “to be a challenge” for broadcasters. “This is a crowded and competitive marketplace that will require increased focus and effort to be successful.”
There are also risks inherent in the anticipated relaxation of ownership limits. Sanders uses an example from the radio industry, where “reverse economies of scale” negatively affected at least one company. His takeaway is “television broadcasters who expand too rapidly may face a similar response from the iron fist of the marketplace.”
Much more analysis of the outlook for TV station values is available in Sander’s article, which appears in the current issue of TFM. Members have already received hard copies of the magazine and it can be accessed from the MFM website until the end of February.
Senior industry finance executives who want more information are also invited to join their colleagues at this year’s MFM CFO Summit, being held in Fort Lauderdale, Fla., on March 8-9.
The summit will open with a market overview from Davis Hebert, director and senior high yield analyst for Wells Fargo Securities. BIA Kelsey economist Mark Fratrik, who has been watching ATSC 3.0 and other developments affecting local TV station revenues, will also be among the expert presenters. Other speakers include those whose expertise covers new market opportunities for media including connected cars, IoT — the Internet of Things — and big data. A complete list of speakers and their topics is available on the event’s web page.
MFM’s mission is about providing education for the media industry. We will continue to explore and share the information that can help your station and company uncover what lies beyond the uncertainties of a clouded future.
While it probably won’t involve groundhogs, MFM will help identify measures that can ensure you get things right when faced with the only opportunity you’re likely to have.
Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary, the media industry’s credit association. She can be reached at [email protected] and via the association’s LinkedIn, Twitter or Facebook sites.