Over the last several months, TV station dealmaking has slowed considerably. Blame uncertainty over the new FCC local ownership regs, the incentive auction, retrans, reverse comp and a possible rewrite of the Communications Act, say the market experts.
Buyer’s market in broadcast M&A? Hardly. Not exactly what you’d call a seller’s market, either.
So what kind of a deal market is it?
“Tuck under, bolt on,” as Nexstar CEO Perry Sook colorfully put it, characterizing his own company’s approach during its 2014 fourth-quarter earnings conference call with analysts last week.
Bishop Cheen, independent analyst and SNL/Kagan consultant, attributes the 60-to-zero slowdown to a single factor: “Two words — Thomas Wheeler. That’s what happened to M&A.”
On March 30, 2014, the FCC chairman and the two other Democratic commissioners voted 3-2 to impose tough restrictions on joint sales and shared services agreements and require many of those already in place to be unwound over the next couple years. Such agreements enabled broadcasters to operate two stations — duopolies — in markets where the rules say they may own only one.
After several years of heady action, station trading action dropped off sharply starting just about a year ago.
In 2013, the biggest deal year in at least a decade, volume totaled nearly $10 billion. Last year, it barely scratched its way to $5 billion, and much of that was thanks to deals that had been in the pipeline for a while.
This year, who knows.
To be fair, Wheeler’s FCC reign may be responsible for much of the slowdown, but not all of it.
The incentive auction, retrans/reverse compensation and what could be a landmark rewrite of the Communications Act of 1934 have also coalesced into a big, dark cloud of uncertainty that has potential sellers sitting out the weather until it clears.
Buyers, meanwhile, still have an appetite.
During Sinclair’s 2014 fourth-quarter earnings conference call with analysts and investors, CEO David Smith acknowledged that he anticipates a much slower deal pace for the company this year, in part because it’s nudging up against the national ownership cap that limits the reach of any group to 39% of U.S. TV homes.
Nonetheless, Smith said: “I would expect some activity there and it will be significant relative to our free cash flow but not nearly as much as it was in years past.”
Smith’s observation is congruent with those from his peers at Gannett, Media General and Nexstar. All have indicated a desire to grow and, with the exceptions of Sinclair and Tribune, all have ample headroom under the 39% cap.
“I would say we wouldn’t do a transaction just for scale’s sake,” said Nexstar CEO Perry Sook during the company’s recent fourth-quarter earnings conference call. “But … at 18% of the U.S. we could double the company — in fact more than double the company — in reach without bumping up against the cap.”
Let’s see: willing (even eager) buyers; a deal climate that, typically, would be attractive — an off political year followed by what’s likely to be a record political advertising year — relatively cheap, plentiful debt.
But instead of getting in the game, sellers are sitting on the sidelines.
Once again, the FCC gets credit (or blame): The spectrum incentive auction now set for early next year has a lot of broadcasters seeing a pot of gold at the end of a different rainbow.
“I think the spectrum auction numbers have slowed down the deal market even more,” says Larry Patrick of Patrick Communications.
The recent AWS-3 wireless spectrum auction, which generated nearly $45 billion in proceeds, coupled with recent even headier projections from Greenhill & Co. for broadcast spectrum, is prompting virtually every broadcaster to hit pause and rerun the numbers.
CBS and Fox, for instance, signaled a while back they weren’t interested in selling. Now they say they’re paying close attention to those spectrum valuations. Even David Smith, who’s openly opposed the auction, is saying Sinclair’s keeping a close eye on the numbers and not rejecting participating in the auction out of hand.
Station owners with duopolies or better, particularly in larger markets, see a way to stick with the core business and simultaneously enhance shareholder value by selling excess spectrum.
Where it gets a little funky is in smaller markets. There, station owners that might have been prompted to sell to consolidators are seeing staggering spectrum valuation estimates.
“We get people in those small markets saying wow, my station is worth $100 million,” says Patrick. “The FCC is not playing fair. They should have said those stations are worth zero.”
Why? Likely spectrum buyers including Verizon, AT&T and others are far more interested in big markets because that’s where the pools of wireless subscribers are deepest.
“Some of the slowdown may be related to people thinking not about if they’re going to get out, but how they’re going to get out,” says Damian Riordan of Peloton Media Advisors, a boutique financial advisory firm. “You don’t want to sell your business for a nine or 10 multiple [of cash flow] when you discover you could sell spectrum for who knows how much.”
Uncertainty about retrans and reverse comp has also been a drag on the market, experts say.
After several years of station group owners asking how high is up regarding retrans, “The blush came off the rose a bit in 2014,” Cheen says.
“Everyone saw it coming but reality has a sobering effect,” he adds. “We knew that networks were telling affiliates, we’re your new retrans partner whether you like it or not. Networks and affiliates have always had a predatory relationship.”
Now, networks are taking a bigger chunk of affiliate revenue in the form of reverse compensation. Moreover, they’re untethering it from retrans and simply demanding a flat fee per subscriber.
During the SNL/Kagan annual TV and Radio Finance Summit last year, analyst Robin Flynn presented retrans revenue research showing that reverse comp now amounts to about 45% of retrans revenue and will top out at 55% in a few years.
Wells Fargo’s Marci Ryvicker goes bigger: She estimates the networks could eventually take 65% of the affiliates retrans money.
The good news is that retrans money is still growing. According to the SNL/Kagan research, retrans revenue, currently about $4.3 billion, will hit $7.6 billion by 2019.
But that growth could be stunted if the cable and satellite operators have any success in winning reforms of the retrans law to gain more leverage in their retrans negotiations with broadcasters.
The tougher local ownership rules surrounding JSAs and SSAs clearly have put a damper on deals, but an even more sweeping regulatory change may be brewing.
Just to make things really interesting, Congress is starting work on a rewrite of the Communications Act of 1934. While broadcasters likely are saying it’s about time, the prospect of changes invokes a hunker down mentality.
“It’s certainly possible that rewrites of the Communication Act would try to restore some of the things the FCC has taken away,” says Barry Lucas, Gabelli & Co. senior vice president and analyst.
Lucas notes that affiliates of Gabelli & Co., including GAMCO, and he personally own shares of many of the broadcasters.
“If David Smith and others can make a good case for [deregulation], then maybe we’ll see those changes in shared ownership or shared service agreements get reversed.”
He’s not exactly betting the farm on it.
“I don’t think it’s a given that just because the argument is sound and has merit and Congress has nodded approvingly that anything will get done,” he says. “Color me very cynical about anything going on inside the Beltway.”
The year is still young, though, and Lucas and others see M&A ramping up some in the coming months.
Group owners, meanwhile, are likely to look at buying assets other than stations — specifically, digital and/or programming assets — as a way to grow revenues and profits.
Nexstar’s Perry Sook noted during the company’s conference call that, “I probably dedicate 25% of my time to acquisitions in the digital space, looking to continue to grow that footprint because obviously that revenue line is growing at rates much faster than the core television revenue line.”
“As bigger footprint guys get bigger, there’s going to be a natural tendency to diversify,” says Riordan of Peloton Media Advisors.
“Diversifying portfolios may be the theme in 2015.”