While many expected the station trading market to heat up in the wake of the FCC’s spectrum auction and subsequent deregulation, that hasn’t happened. What’s up? There are a number of factors including the eventual result of the Sinclair-Tribune merger, uncertainty about the FCC’s ownership rules and the new tax law.
A year ago, after the FCC’s auction of TV spectrum closed, the ownership class of broadcasting began buzzing about M&A again. The auction, and its prospect of quick riches, had discouraged owners from putting stations on the block, I was told. Now, they were ready to deal.
But with the big exception of Sinclair’s takeover of Tribune, not much happened.
Just wait, I was then told. The new FCC chairman, Ajit Pai, is a bona fide deregulator with a record of opposing structural regulation. He would set broadcasting free.
And sure enough, Pai came through, loosening the local and national ownership limits last November. Surely, this would trigger the “wave of consolidation” that everybody had been assuring me would happen.
But what we have gotten is far less than a wave. More like a ripple.
In December, Tegna paid $325 million for CBS affiliate KFMB San Diego. But otherwise, it’s been mostly small transactions, involving stations of little consequence. Speculators are continuing to unload sticks that they couldn’t sell in the auction.
So, what’s going on?
After consulting with the usual suspects, I can offer some insight.
First of all, Sinclair, broadcasting’s most reliable and rapacious buyer, is sitting on the sideline and it may remain there for a good long while.
The Sinclair-Tribune merger has been hung up too long at Justice and the FCC by Sinclair’s never-ending determination to hang on to every station it can.
When all is said and done — and let’s hope that is soon — Sinclair will emerge at or near the national ownership cap. And it is not clear if the FCC will allow Sinclair to circumvent that cap by operating stations through closely related companies over which it has substantial de facto control.
I should note that the merger is generating some secondary deal-making. To get the deal past the regulators, Sinclair is spinning off stations in several markets where it would have owned two Top-4 stations. And to appease Fox, it may sell it some of its Fox affiliates.
Another factor depressing station trading is continued uncertainty about what kind of local station combos are allowed.
Last November, the FCC said it was OK to own two stations in a market, but not necessarily two Top-4 stations. It would, it ruled, consider the Top-4 duopolies on a case-by-case basis.
May a broadcaster own a No. 1 and No. 2 station in the same market? How about a No. 1 and a No. 3 or a No. 4? A No. 2 and a No. 3?
We won’t know the answers to those questions until the FCC rules in several cases. Fortunately, Sinclair is proposing Top-4 duopolies in two markets so some answers may come from that effort.
Adding to the uncertainty are the antitrust regulators at Justice. That Sinclair is having to spin off stations in several markets after a Justice review suggests that Justice is taking a hard line on Top-4 duopolies. And a deal needs the greenlight from Justice just as it does from the FCC.
The Republican’s new tax law is also not helping.
Last year, there was a lot of talk about swaps to take advantage of the relaxed local ownership rules. Swaps have always been tough because no two stations or markets are equal. One party often has to put some cash in the deal to balance things out.
But at least they didn’t result in a big tax hit because the tax code allowed so-called like-kind swaps — that is, exchanges of similar businesses — without triggering any tax obligations.
Not true anymore. The Tax Cuts and Jobs Act of 2017, which took effect at the beginning of this year, took away the like-kind tax exemption for all businesses except real estate. (Do you think the White House had a hand in writing this provision?)
That change has taken all the fun out of imaging what kinds of swaps station groups could do to strengthen their portfolios.
But the biggest reasons for the dearth of M&A may have nothing to do with regulation or tax policy.
As I look down our list of the top 30 station groups, I don’t see any that are eager to sell and, with a few exceptions, I don’t see are any that are hell bent on buying.
The other big consolidators, Nexstar and Gray, have been quiet lately. Nexstar is still digesting Media General, which it closed just 14 months ago.
Gray raised a quarter of a billion dollars in a stock offering last December. Among the things it said it might use the cash for was “future business expansion and acquisitions.” But so far none of the loot has bubbled up into the station trading marketplace.
Fox’s appetite for more stations may be sated by whatever it is picking up from Sinclair. CBS keeps saying it would like to own more stations, but it let KFMB San Diego — a good station in a good market — pass into the hands of Tegna.
Of the mid-range groups, only Tegna is seen as a serious buyer. It bought San Diego and appears to be in the scramble for some of the Sinclair-Tribune spinoffs.
Groups like Scripps, Cox, Hearst, Meredith and Raycom may buy or sell a few stations, but seem content with what they have.
Some of the smaller groups would like to get out, but it’s a question of timing and, with Sinclair and Nexstar out of play, now may not be the time. If you are going to hold an auction, you want to make sure all the buyers are in the room.
And, according to one broadcaster, the sellers are wising up. They have seen buyers like Sinclair and Nexstar crow about how they are paying a buyer’s multiple of just 6X or 7X after they kick in their higher retrans fees and other synergies. So, now sellers are increasing their multiple to capture some of those synergy earnings for themselves.
Yet another overhang is the networks, I was told by one market watcher. At this point, CBS, NBC and Fox cannot be trusted not to move into any top 30 market and take back their affiliation.
So, a buyer must make damn sure that the networks are not coveting the same station it is or another station in the market. The affiliates of all the networks, in a joint FCC filing a couple of weeks ago, recounted the networks’ recent history in undermining their affiliates.
And everybody remembers what happened to Vincent Young in San Francisco. NBC’s entry into the market not only wrecked KRON, but Young’s entire station group.
I could be wrong. Once Sinclair is done with its machinations and we all know what is permissible and what isn’t in the context of the Tribune deal, the broadcast station trading market might finally break open.
But I’m still betting that wave is too big a metaphor.
Harry A. Jessell is editor of TVNewsCheck. He can be contacted at 973-701-1067 or here. You can read earlier columns here.