The CEO of BIA Fiancial Network knows the business of TV stations inside and out. And while some broadcasters are struggling in this troubled economic climate, he sees hope for stations willing to not just sell time on their air, but offer clients multiple local platforms on which to reach new customers.
By carefully monitoring the TV and radio businesses for the past 25 years, including every station sale, the BIA Financial Network has compiled a financial history of the businesses and deep insight into their workings.
It has transformed these basic assets into an array of businesses of its own, ranging from comprehensive station directories to station appraisal to investment banking.
Then last fall, it gained a wider new perspective on local media with its purchase of another research firm, The Kelsey Group, which specializes in yellow pages, local search and small-business marketing.
With Kelsey, BIAfn now has a handle on the entire local advertising marketplace, which it estimates topped $155 billion in 2008.
In this interview with TVNewsCheck Editor Harry A. Jessell, BIAfn CEO Tom Buono tempers his grim assessment of the today’s TV broadcasting business with a bright outlook for those TV broadcasters who have the same broad view of the local media marketplace that he does.
An edited transcript:
What are you seeing in the station trading marketplace these days and how is it affecting station values?
Last year, as everybody realizes, was a real slow year for the transaction marketplace. We documented 54 station sales in 2008 compared to 232 the year before with a total dollar amount of only $700 million compared to $4.6 billion the year before. So, the economy, the credit tightness, the advertising trends — all of those factors — created an environment where there just were not going to be a lot of deals.
And what did that do to station values?
Multiples have gone down substantially for both privately held companies and publicly traded broadcast companies. People that could have done a deal in the double-digit range five years ago were looking at transactions that were going to be seven, eight times in 2008. There is clearly a huge gap between buyers’ and sellers’ expectations. And even if you want to buy, where are you getting the money to do it and on what terms?
I imagine it’s hard to appraise a station when so few deals are getting done, isn’t it?
Well, there’s not a lot of transaction information. If you look at the publicly traded marketplace, those companies are trading for an average of about seven times EBITDA for the prior 12 months. You don’t have a lot of other transactions that you can point to, but based on the valuation work that we’re doing, we’re typically seeing things in the six to eight range for established full-power stations.
Is that historically low?
Yes. It really is. In the 25 years we’ve been tracking this, it’s the lowest that we’ve ever seen and then there are lesser values for stations that have some kind of disadvantage from either a programming or technical perspective. There’s really no stick value out there right now.
What do you mean by stick value?
Basically, if you were to purchase, let’s say, a religious broadcaster to do conventional programming, there’s just not a marketplace for that.
We do a lot of work also for companies for financial reporting purposes and we’re seeing declines in those values of 40 to 50 percent for a lot of these companies this year. It’s really is a function of what the growth potential is for the business.
We’ve just done an extensive study of the ad marketplace for local companies, what the marketplace is for local advertising and we’re seeing negative trends for 2009 with a slight recovery in 2010. That has a dramatic impact on a discounted cash flow analysis, which determines the value of a business. EBITDA margins have been contracting because the stations haven’t been growing at a rate faster than their expense structure. Seventy-five percent of their expenses are fixed. We’ve seen their margins for EBITDA decline from 35 to 40 percent down to 30 percent, maybe 35 percent on the high side.
What are you projections on TV station revenue?
We estimate 2008 revenues were $19.9 billion dollars. That was compared to over almost $23.2 billion in 2006. We’re projecting it to be $16.9 in 2009. That’s a 15 percent decline. So, if you have less revenues, your expense margins are going to continue to contract and the EBITDA is going to be less than what it was in 2008. That’s gotten a lot of the companies in trouble and a lot of the bankers worried.
We did a story last week indentifying some of the station groups that may be in danger of defaulting on loan covenants and loan payments, which can lead to bankruptcy.
We’ve already seen a number in bankruptcy and you’ve been documenting them — Tribune, Pappas, Equity, Multicultural. We’ve got a number of companies that are obviously in upside down capital structures right now from a bank perspective. We’ve got other companies that are soon to be in trouble. There’s concern about covenant defaults for LIN, for Entravision, for Barrington, for New Vision.
I went out and surveyed lenders a few months ago and just asked them what’s going on. Their time is being spent almost entirely on renegotiating existing covenants and amendments with existing borrowers. There’s not a marketplace out there for selling properties. So from a bank’s perspective, what can you do? Well, you have to try to work through it with the existing company.
It’s a real troubled situation because multiples of value are getting closer and closer to the debt leverage on the companies, meaning the equity’s basically been sucked out.
What is the upside here for the station business?
First off, when you take a look at who’s really in trouble, it’s the print businesses — newspapers, yellow pages, magazines.
We view this as a media ecosystem. What happens is that when you introduce some kind of disruptive force, the whole ecosystem changes. We’ve seen this happen over the history of media– when radio came in, when television came in and then cable television came in. Now we’ve got the Internet entering and the Internet just dramatically changes the media ecosystem in terms of relationships, in terms of accountability, in terms of transparency, how quickly you can see ROI information, the cost-per-point differential and actually shifting from cost per point to cost for leads or actual performance in terms of purchases.
So the business model is shifting dramatically and TV is caught up in the middle of this as is all of media. Unfortunately for print media — newspaper, yellow pages, magazines — they’re very vulnerable to what’s going on. We are starting to see the death of newspapers. Longtime heritage newspapers are going out of business because their business model can’t adapt to this new environment. Television is much better situated for survival and actually can thrive, but it needs to be redefined in terms of what the business it is in.
First off, TV stations must redefine themselves as being community portals or content providers of local content.
Do you mean go online? Most have already done that.
They have Internet sites, but they really haven’t monetized those to any extent and there are a lot of other business models that are being developed that they need to be a part of.
Broadcasters need to think of their business differently, to think of themselves as being in the business of creating content that can be distributed in a number of different ways. We’re not just in the business of sending an RF signal over a transmitter.
TV broadcasters have to start looking at their business differently and saying. I’ve got these assets. I’ve got the ability to generate content locally. I’ve got a sales force that can go out and reach advertisers. I’ve got a local identity already established in this marketplace. I have a brand that has value. I have got an audience that already follows what we’re doing. How do I capitalize on that?
The sales force needs to be trained differently. They have to be selling multiplatform. They can’t just be selling spots on a TV station. They need to be selling a whole range of services for local advertisers. It’s how can I help the local advertisers be successful, not how can I sell spots on my TV station. So that means that there’s an education process that has to happen. They have to know how to sell search engine marketing. They have to understand what’s going on in the local marketplace for yellow pages and other businesses. They’ve got to look at other businesses than they’ve traditionally looked at. They can’t be so dependent on the national advertisers.
But they have to develop these other platforms before they sell them, right?
They can develop it on their own or through partnerships. I don’t know why they wouldn’t have some kind of partnership with yellow pages companies in their markets. They should be looking at all the other players in a local media marketplace and saying, how can I partner with a newspaper company, how can I partner with a radio company. What can we do to share? The bottom line is that our cost structure isn’t working as revenues continue to contract. How can we expand revenues and share our expenses?
The yellow pages are one example. The bigger example is mobile. We think it’s going to be a very large opportunity for TV.
We think that local mobile advertising will be over $3 billion by 2012 and that television is really well suited to get a significant piece of that. That’s a completely new business model that television can capitalize on.
Do you think broadcasters have something to learn from other local media players?
AT&T Yellow Pages is one of the largest companies in the country and its sales people go in and meet with advertisers and make five different offers. They go in and say, you can buy print yellow pages; you can buy interactive yellow pages; you can buy search engine marketing, which basically gives them a cut on whatever Google is generating from search. They’ve got some type of mobile device and, in some markets, they actually have television. They go in there and say, how can I help you allocate your ad budget.
TV stations should absolutely be going in there as a consultant working with advertisers, not just selling television. They’re already in the business of helping local advertisers. How can they do it in this more complicated media ecosystem?
Do you have any ideas about how TV stations can squeeze more money out of their Web sites? To date, they have not been generating much revenue.
You’re right. We’re talking about 2 to 4 percent of the revenue at most television stations. It’s not that significant. The problem with Web sites in general is that people spend just two or three minutes at a Web site. So, it’s hard to monetize those assets. That’s why broadcasters really have to broaden their offering to be multiplatform.
It has to be more than just, we have a Web site and we have a TV station. That’s not going to be a solution that’s very successful. There are companies out there like Emmis Interactive that are helping develop strategies for a much broader offering to the marketplace. Television needs to start moving that way. Newspapers have been more successful than television in getting revenues online. Yellow pages have actually done a pretty good job with their interactive yellow pages.
I’ll tell you where things may change for the better online — in going from display ads to video. Video is an area that Kelsey has growing at 160 percent annually over the next five years. There are a lot of things happening on local video and you can see it at the yellow pages conferences. You can see the dentist, you can see the chiropractor, you can see the plumber doing a video on his business. That’s a hell of a lot more compelling than having a display ad in a print yellow pages book.
So video might be the key to triggering some serious online revenue.
Absolutely. There’s a lot of opportunity in online video and there’s a lot of opportunity in mobile. Those are two areas that will really help. At the same time, broadcasters also have multicasting digital channels and there are probably additional business models that can be developed there. We’re kind of in the early stages of that. The good news is television, unlike newspaper, has a lot more options of how it can move forward.