While there a a number of reasons for the almost nonexistent station trading marketplace these days, a big factor is the upcoming spectrum auction. Potential sellers don’t want to commit now before finding out what the market will be for their airwaves once the bidding starts. To get around this, however, station sale contracts are being written with “chump insurance,” which provides some protection for a seller if the buyer sells the station in the incentive auction and makes a killing.
The station trading market is moribund.
Deals are few and far between and the prices don’t make for good TVNewsCheck headlines.
The most active buyer these days seems to be spectrum speculator LocusPoint Networks, which is going around picking up Class A stations for a few million dollars in the hopes of selling them for a big profit when (and if) the incentive auction rolls around next year.
Some of the big station groups say they are in the hunt, but they are not bringing anything home. The only thing the acquisitive Perry Sook at Nexstar has been able to bag lately is a digital services company.
A month ago, we ran a story by Price Colman that attributed the inactivity to a handful of factors.
First, there is the FCC crackdown on sidecar deals — JSAs and SSAs — that have complicated the merger of groups with stations in the same markets. Clever lawyers can no longer circumvent the FCC’s local ownership limits.
Another factor is the uncertainty around retransmission consent and reverse comp. With cable and satellite determined to rewrite the rules of retrans, broadcasters can’t be sure that their retrans revenue will continue to grow at the same brisk pace it has been.
At the same time, it seems that the networks’ demands for reverse comp keep building. Will the network ease up on reverse comp if retrans revenue flattens? Who knows?
But my guess is the third factor identified by Colman is the big one: the incentive auction.
The FCC wants to buy stations so it can resell the spectrum to wireless carriers and deliver a big fat check to the federal treasury.
And the numbers being thrown around are huge: Hundreds of millions of dollars for stations in large markets and tens of millions for stations close to large markets.
Some stations will clearly be worth far more in the incentive auction than they are as broadcasting businesses.
The trouble for potential sellers if that the value of their stations as broadcasting business is fairly certain, while their value at auction is as fuzzy as the old CRT TV set you still have in the garage.
At this point, we don’t know how much spectrum the FCC will go for or where. We don’t know what the opening bids will be. We don’t know how many other broadcasters will be selling and driving down prices. We don’t know the rules of the auction.
Heck, we don’t even know for sure there will be an auction.
With all the uncertainty, what’s a poor station owner to do if a buyer comes knocking with an offer based on traditional broadcasting valuation?
“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,” says Damian Riordan of Peloton Media Advisors, a boutique financial advisory firm.
Well, here’s one suggestion: chump insurance.
That’s a term I learned this week from a station broker who was wondering where his next deal would come from.
Chump insurance provides some protection for a seller if the buyer sells the station in the incentive auction and makes a killing.
I’m told that chump insurance of some kind is on the table in all negotiations these days, but I’ve only been able to find a couple of examples. They come in the form of a provision in the sale contract.
Both involve Brian and Patricia Lane, lawyers who have decided to indulge youthful interest in TV and radio by operating small-market TV stations.
In 2013, they made their first play, buying ABC affiliate WMDT Salisbury, Md., for $9 million from Berl Brechner. Buried deep in that sale contract is a provision that says that if the Lanes take the station to auction, they are obliged to pay Brechner 14% of any proceeds in excess of $10 million.
That paragraph could mean a lot for Brechner down the road. Salisbury is not much of a market (DMA 142), but it abuts Washington, Baltimore and Philadelphia. So, to clear all the spectrum in one of those big markets, the FCC may also have to clear some in Salisbury.
The Greenhill study, an FCC-commissioned first guess as to what stations might be worth in the auction, pegged the median price of Salisbury stations at $50 million. Fourteen percent of $40 million ($50 million minus the first $10 million the Lanes get to keep) is $5.6 million.
The Lanes made their second buy this week. They agreed to pay the University of Georgia $2.5 million for WUGA, a full-power noncommercial licensed to Toccoa, deep in the piney woods of Northeast Georgia.
At the university’s request, Nielsen shifted the station from the Greenville-Spartanburg, S.C., DMA to Atlanta, even though the tower is 90 miles away from the Georgia capital.
The Lanes plan to operate it as an Atlanta independent with new calls (WGTA) and are working to get carriage on the Atlanta cable systems.
How much value the station might have in the auction in really unknown, of course. The Greenhill study says that stations in Atlanta will bring a median price of $65 million, but WUGA’s distance Atlanta and other population centers might make it worthless. In any event, the university has some protection.
Under terms of the sale contract, it keeps half of all auction proceeds in excess of $8 million.
I spoke to Patricia Lane this week and she seems committed to operating the stations. But if millions in excess of what she paid for the stations become available in the auction, she might be compelled to take it
So, if fear of missing out on an incentive auction windfall is what’s keeping you from selling, a little insurance may be all you need.
Nobody wants to be a chump.