Station marketplace in the first half of 2006 is marked by cash-flow multiples in the low- to mid-teens as duopolists and other strategic buyers show willingness to pay for right stations in right markets.
From a Wall Street perspective, the TV station business is about as compelling as summer reruns on UPN. Investors have beaten down the stock prices of station-laden companies and kept them down. But judging by the sale prices of TV stations over the past several months, the business appears to be thriving.
Despite the loss of a network, declining national-spot and network-compensation revenue and a more competitive mediascape than ever before, the sale prices for TV stations over the past several months have been unexpectedly strong, coming in at 12 to16 times cash flow.
Emmis Communications’ TV stations, sold separately to LIN TV, Gray Television, Journal Communications and the Montecito Broadcast Group, fetched multiples of 14 to 16 times cash flow. Raycom paid at least 13 for Liberty Corp.’s 15 stations. And Media General’s purchase of four stations from NBC represents a multiple of 14.
Broker Larry Patrick suggests that the Wall Street and private-market views of the business may not be as far apart as they appear.
Some broadcasters are paying more for a station because they already have a station in the market, Patrick says. The economies that flow from operating a second station in a market—a duopoly—are significant, allowing the buyer to pay a much higher multiple than if the station were a standalone.
“The buyer says, ‘Yeah, I’m paying a big number, but the reality is I’m going to be under 10 times by the time I close, combine operations and cut payroll,’ ” Patrick says, adding: “The seller is saying, ‘Hey, if the market’s telling me my station is worth 11 1/2 or 12, but I can get 13 or 14, I’m out of here.’ That is what is driving some of these deals.”
Patrick goes on to say, “We are working on eight or nine deals right now, six of them are duopolies.”
Some of the most recent sales have been duopoly driven. Gannett Co. agreed to buy WATL from Tribune for $180 million in Atlanta, where Gannett also owns the NBC affiliate (WXIA). And Freedom Communications, which owns WRGB Albany, N.Y., a CBS affiliate, just bought the soon-to-be CW affiliate in town, WCWN, from Tribune.
Other broadcasters simply want to grow through acquisition, improving their market or network profiles in the process, Patrick says. “Media General is a good example. They haven’t bought anything for a long time, so when the NBC package came along, they moved pretty aggressively.”
Also holding up prices are hedge funds and venture capital firms, Patrick says. They continue to be attracted to the business by the still high operating margins and the prospects of new revenue streams, namely retransmission consent, digital multicast channels and Web sites. “Broadcasters are slowly learning that that the Web is not simply an add-on,” he says. “They’re learning that that is a whole new revenue stream.”
On the negative side, Patrick says, rising interest rates are starting to suppress multiples and prices.
Bottom line, Patrick says, if the premiums that strategic buyers are willing to pay are taken out of the equation, station prices today are about the same as they have been for the past few years. Small-market stations go for 10 times cash flow; mid-market stations, which account for most of the buying, are getting at 11 or 12; and the major-market stations still command 13-14.
Like Patrick, other brokers expect prices to remain steady.
“There are still some believers out there. The people who were scared of technology bailed and are pretty much out of it. The people who have remained believe in the product and are in the marketplace to stay,ÃƒÆ’Ã‚Â¢ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬Ãƒâ€šÃ‚Â says Kelly Callan, a broker for Kalil & Co.
Callan points to several positive trends that are helping turn the tide for local station valuations. Audiences are just beginning to discover the joys of receiving uncompressed HD signals over the air, and broadcasters have not really begun to exploit the other potential of their digital channels, he says.
What’s more, Callan adds, broadcasting still has the best programming. Most of the networks now have three or four hits, helping broadcast TV to recapture primetime share lost to cable over the past season.
Broadcasters and brokers are anticipating a number of upcoming sales that will cast further light on station values. Raycom’s KASA is up for sale in Albuquerque, N.M. Two TV stations remain in the Emmis portfolio. LIN TV is putting its two stations in Puerto Rico on the block to concentrate on its U.S.-based operations.
Media General has to sell its CBS affiliate in Birmingham, Ala., after adding NBC affiliate WVTM and also plans to unload its CBS affiliates in Wichita, Kan.; Mason City, Iowa, and Chattanooga, Tenn.
The brokers say the station marketplace and prices would be helped if the FCC were to relax rules so that broadcasters could own two stations in small and medium-size markets and take advantage of the cost-cutting synergies and increase their leverage in retransmission consent negotiations with cable operators. (Broadcasters can manage second stations—so-called virtual duopolies—in smaller markets, but cannot own them.)
FCC Chairman Kevin Martin has launched a proceeding to relax the rules and, with the addition of a third Republican, Robert McDowell, to the commission, Martin apparently now has the third vote he needs to act. But media consolidation is controversial and most believe the proceeding will run deep into 2007.
“I’m not optimistic anything will happen this year, particularly with midterms elections coming up,” says broker Brian Cobb, president of media brokerage Cobb Corp. “Congress will be watching this issue very closely.”