That’s the assessment of a basically positive report on the TV broadcasting business from Bear Stearns. Industry will generate new revenue streams, but needs help from Washington, it says.
Victor Miller and his team of security analysts as Bear Stearns today offered investors an appraisal of the local television business and found reasons to be optimistic.
Their report, released this morning, has some fundamental concerns, however, mainly the sluggishness of national advertising, an over-reliance on political advertising, the loss of network compensation and the size of—and lack of return on—digital TV investments.
And local TV’s buggest hurdle, the report says, is too much debt. “We believe that local TV companies’ leverage at year end 2005 was excessive: Young Broadcasting ended 2005 with 30x 2005 trailing debt to EBITDA; Nexstar came in at 10.4x; Gray at 8.3x; LIN at 7.5x and Sinclair at 7.2x.”
High leverage has helped drive down stock prices, it says. “The average local pure-play TV stock has declined 65% from year-end 1999,” he says. “Many of the stocks that have suffered worst—Granite, Young, Paxson and ACME—all had or have significant leverage issues. And not surprisingly, the stock that has declined the least, Hearst-Argyle, carries the least amount of leverage. And Hearst-Argyle also benefits from Hearst Corp.’s continued share repurchases.”
So what does Bear Stearns see as hopeful signs? “We think retransmission consent and the Web will create meaningful new revenue streams and the private market still sees local TV assets as particularly valuable.”
The report sees other opportunities for broadcasters: 1) expanding local news to new time periods (5-6 a.m. news programs, for example); 2) creating local cable channels; 3) operating second TV stations in the same markets through through duopolies or local marketing agreements/shared service agreements; 4) exploiting digital channels; and 5) operating radio and cable systems in the same market if laws and rules can be relaxed to allow it.
The report was particularly bullish on retransmission consent. “We believe the combination of more overall subscribers and the reality of satellite and terrestrial competition may finally bring cable companies to the table to negotiate meaningful retransmission consent payments for local TV stations,” he says.
The retrans potential is significant, he says, offering estimates for how much the 15 largest TV station groups might earn at three different per-sub fee levels. For Fox., the figures ranged from a low of $94.2 million to a high of $314 million. For No. 15 E.W. Scripps, the range is $16.9 million to $56.3 million.
TV Web sites “will likely be a substantial future revenue stream,” Miller says. “Even if the business reaches $500 million to $700 million by 2007, that would spell 2% to 3% incremental growth for local TV based on the industry’s $24.5 billion revenue base in 2005.”
Another positive trend for stations is industry consolidation. “While activity has quieted relative to the storm of 1999’s record $45.6 billion in recent years, multiples paid for local TV stations remain at decent levels, averaging 12.0x to 14.0x for recent deals. This compares with current public multiples of 9.0x to 9.5x on average based on 2006 EBITDA, which is among the widest multiple disparities we have seen in some time. So asset values seem to be holding up well.”
Miller also handicapped action of broadcast-related issues in Washington:
Media ownership—”Do not expect any movement on media ownership until we see a fifth FCC commissioner, which does not seem imminent.” Even then, he doesn’t expect to see any activity until next year or 2008.
Indecency—Likely legislation increasing fines is a “decent outcome for local broadcasters,” he says, considering earlier proposals that would have subjected broadcasters to license revocation for violations.
What the TV station industry needs from Washington, Miller says, is relaxation of ownership restrictions. And he offers a couple of examples of how times have changed and undercut justification for the existing rules.
- In 2003, Google was not even a public company and yet its enterprise value ($114.1 billion) is now worth more the eight radio companies (Clear Channel, Cox Radio, Citadel, Entercom, Radio One, Westwood One, Cumulus Media, Emmis and Salem), seven TV companies (Sinclair, LIN TV, Gray, Nexstar, ACME, Young and Granite) and six newspaper/TV companies (Gannett, Tribune, Scripps, Knight Ridder, New York Times and Journal Register) combined.
- In December 2005, “we calculated the average sign-on/sign-off audience for the top 50 local TV broadcast groups. We summarized the sign-on/sign-off audiences for the top 15 broadcasters in the exhibit and ÃƒÆ’Ã‚Â¢ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬Ãƒâ€šÃ‚Â¦ the largest broadcaster, CBS Corp., only captures 1.9% of the U.S.’ 110.2 million TVHH on average from 7 a.m. to 1 a.m. during May 2005. The 15th largest broadcaster (in terms of average sign-on sign-off audience) is Meredith and Meredith only reaches 0.4% of total U.S. TVHH. This is not exactly a monopoly of viewing.”
“For the government to permit cable-broadcast cross-ownership and not permit newspaper-broadcast cross-ownership is intellectually inconsistent,” the report says. “How can the FCC and the courts object to market power implications of the combination of a newspaper and a local TV station relative to the market power of a cable system and a local TV station?”
“We would still like to see some deregulatory relief for the fourth ranked TV stations in a given market, especially in smaller markets,” the report adds. “We believe that fourth-ranked TV stations trail third-ranked TV stations by an average of 27% in audience share and 22% in revenue in the top 50 markets. And given the high operating leverage of TV stations, differences in cash flow can be even greater.”