Outbid for the Emmis TV stations that he managed, Bongarten treamed up with the Diamond Castle fund to build a new TV station group. With the purchase of the Bluestone group, they’re off to a fast start.
When Emmis Communications decided to exit the TV business in May 2005, Randy Bongarten was first in line to buy at least some of the 16 middle-market TV stations. As president of the Emmis TV division, Bongarten knew the stations better than anyone and had the inside track. But he was outbid at every turn.
So, backed by a New York City-based private equity firm, Diamond Castle, Bongarten began looking for stations outside of Emmis, and finally scored. On Nov. 14, he and Diamond Castle announced that they had agreed to purchase Bluestone Television from another private equity firm, Providence Equity Partners, for $230 million. And, organized as Bonten Media Group, they made clear that Bluestone was just the start, that they were in the market for more stations.
Bluestone is a collection of eight full-power and two low-power TV stations with multiple network affiliations in eight markets, ranging from the Tri-Cities of Tennessee and Virginia (DMA 92) to Eureka, Calif. (DMA 193). It has a virtual duopoly in Tri-Cities, where it owns the NBC affiliate (WCYB) and operates the Fox affiliate (WEMT) under a joint sales agreement.
The station lineup on Bluestone’s Web site is up to date, except that it no longer includes the WB cable outlet in Chico-Redding (DMA 130) or the digital UPN affiliate in Greenville-New Bern-Washington, N.C. (DMA 107).
In this interview with TVNewsCheck Editor Harry A. Jessell, Bongarten explains why private equity firms are being drawn to broadcasting and how he is seizing the opportunity that they present.
We are hearing a lot about these private equity firms in broadcasting lately. How come?
There’s a variety of reasons, not the least of which is that the public markets in many cases are not fully valuing what assets are worth and I think that’s particularly true in the case of television and radio.
They see that there are opportunities to acquire properties and get them to the point where they can realize the full value. The other thing about private equity is the financial structure of the business. It enables them to achieve larger returns than you might achieve in a public company.
What I mean by that is these companies specialize in buyouts where you put in a certain amount of equity, but you essentially fund a large portion of the purchase through debt. Now, broadcasting is a business that has very attractive characteristics because it’s a business that has a lot of cash flow. That cash flow can be used to pay the interest and allow private investors to achieve large returns on their equity. So that’s essentially why I think private equity’s interested in doing these deals. Plus, you have the fact that, for a variety of reasons, and not all of which I am totally familiar with, there is a lot of money in private equity these days.
Looking for all sorts of businesses.
There’s just a lot of money out there looking to invest and doing better than it can in other forms of investment. My fund is not a super fund. I can’t really disclose what the size of the fund. It’s similar to the large ones that you hear about like Blackstone and Bain.
Where does the money come from?
It comes from a variety of places. It comes primarily from pension funds and large insurance companies, where there are large pools of funds that are trying to achieve returns. Then, you have some private investors as well, wealthier individuals who have money that they want to invest in these kinds of opportunities.
And the play is to find a manager, find someone who knows what they’re doing, like you. Do you get points in the deal?
I’m not going to discuss my private deal, but it’s typical. I’m making an investment myself and there is some sweat equity involved.
Did you find them or did they find you? How did you guys get together?
I’d been working with an investment bank, Lehman Brothers, for the last 18 or 19 months. I’ve met a lot of equity people and they introduced me to Diamond Castle.
And the Bluestone buy is Diamond Castle’s first broadcasting play?
It is the first for this fund—this is a new fund—but all these people I’m working with have prior broadcasting experience. They’ve been elsewhere before. They were at DLJ and CSFB Private Equity bought them. They left CSFB and formed this company.
You bought Bluestone for $230 million. The CFO of Bluestone told me the cash flow of the group is $22.4 million. Is that right?
Well, we haven’t announced it. I did see that he said that and I would assume he knows what he’s talking about.
You know the numbers. That sounds like a pretty good multiple. Can you talk about that getting a 10-times multiple in a 12-times market? How did you manage that?
I will just say it’s a fair price for both buyer and seller and, obviously, multiple is just a number and we looked at a lot of factors about the business. At the end of the day, it’s really not about the multiple you pay. It’s about the money that you’re going to make and what the return is going to be. So, all the factors considered, we felt that this was a fair price and so did they.
OK, let’s talk about how you are going to make money. You’re coming in with the idea of growing revenue and the margin, right?
The idea is growing cash flow really. I tend to focus on growing cash flows as opposed to growing margins per se.
So what’s the plan? How do you intend to do that, going into a year when revenue is supposed to be 10% off the big political year?
Well, fortunately, we’re not making the investment for a single year. We’re making the investment over a period of time and I think one of the advantages of working with the people at Diamond Castle is that they understand the biennial nature of the business. Obviously, we’ve planned for what we think the reality is for next year. We expect the ups and downs, but we also expect the trend line to be up so that in the odd years one is better than the last and in the even years one is better than the last as you go forward. You don’t expect the odd year to be as good as the even year.
But how do you grow the business when revenue really isn’t growing?
Who says the revenue isn’t growing? You see, that’s the issue. That’s why the stock market is undervaluing this business. It’s because we have not been able to show that we can grow the top line, but the top line can be grown. You saw those multiples that the Emmis stations got. Those are the stations that I was running before.
They did well.
Know why that was? Because we were on the top line. You just have to focus on growing the top line instead of trying to figure out how you’re going to cut another cost.
And that’s your philosophy going in to this deal?
And where exactly is that revenue?
It’s in the local markets. We have a focus on local business and there is a tremendously underdeveloped marketplace in local business for television.
And this is aside from any digital revenue you might pick up on the Web?
I’m sure we’re going do that too, but our expertise is in growing the core business in the local marketplace. That’s what we did at Emmis and that’s what we’re going do here.
Any particular trick to that?
Yes. You have to focus on it. You have to say this is what we’re going to do and you have to have systems involved that are going to help you get that done. We do that.
So that is sort of the crux of what you promised to Diamond Castle and the investors—that you can grow local revenue?
The guy who is now managing Bluestone, Sandy DiPasquale, has a good reputation and he was backed by another equity firm.
He’s done a fine job.
So, it’s not like you’re going to go in there and find a lot of fat to cut, right?
That’s not my modus operandi. I mean you have to manage cost carefully, obviously. We’re not in an era where you can afford to waste money and so we will be very careful on costs, but we will invest the money we need to invest to improve ratings and improve revenues.
Let’s talk about ratings. Are you going to be able to improve the newscasts, their viewership? It’s a hard thing to do.
I know, but we did it before.
And so you think you can do that again?
I’m quite sure of it.
So increase the ratings and increase the local revenue. What about national? Is there any hope for national spot?
You know, it’s not like national has been a disaster. It’s been kind of flattish. The truth of the matter is, I’m not sure there is any truly national business anymore and I don’t think that there has been for a while. National business is really regional or local business that’s bought outside the market.
A surprising amount of national business is actually—or should be—sold at the local level because all these national accounts have people at the local level who are decision makers or who can influence the decision makers. So the answer to the question is, if we can do our job at the local level, which I think we can, I think what’s on the national revenue line will be just fine.
In the press release announcing the Bluestone deal, Diamond Castle said that you would be looking to acquire more stations. How much capacity do you have?
We have the capacity to grow. I’m not going give you a specific amount, but we have the capacity to grow and, the truth of the matter is, if you want to grow, it’s always possible to obtain the capacity to grow.
Fortunately, I have partners who believe not only in the television business, but in the growth possibilities of the television business. And to the extent that others do not, we think that this is a good time to be looking. There are a lot of available properties and we’re going to be looking at them. I don’t think we have a fixed number or size in mind, but we’re certainly going to be active.
What’s the ideal station? What’s the profile of the ideal station for you to buy?
The ideal station for us to buy is any station where we think we can have a material impact on growing the cash flow. In today’s world, I don’t think it’s a good idea to be a one-trick pony. Some people like to buy market leaders, some people like to buy turnarounds, some people like to buy fat stations and cut all the cost. We can participate in any and all of those.
What about market size?
I think we’d rather not be in the largest markets. I would say 40 and above is probably our size.
There’s a lot out there right now.
Yes, there is. There’s a lot on the market right now.
What do you think about the New York Times stations?
They’re definitely on the market.
So you’ve got your eye on those.
I didn’t say that. I said they’re on the market.
Clear Channel? Tribune? Tribune may be too big a bite for you, but Clear Channel has great stations in smaller markets.
I think you have to keep your eye on everything and you have to look at the opportunities as they evolve.
I know that you said you are going to focus on local spot. But what do you see as the potential for the Web, for multicasting and for other digital opportunities?
I think it’s there, but I am not sure that it can be a material part of revenue and cash flow over the next three to five years. I just think that it’s going to be awhile in coming. That’s why I’m a believer in staying focused on the core business and driving that because that’s where we’re going to get the profitability from.
There’s a very high potential with digital [broadcasting]. We’ve got a lot of spectrum and there really isn’t a great game plan for that yet, but there will be. So I do hold out a lot of hope for the use of digital spectrum whether it’s through additional channels, some kind of datacasting or creating a local alternative to cable and satellite.
There are a lot of possibilities and we don’t know all the elements of that model yet. But the one thing I do believe is that spectrum is scarce and that drives the value up.
What about retrans? Is that in the picture?
The answer is yes, but, again, it’s not core to the performance of our business. I think television is going to get paid for retrans. I don’t know when, I don’t know how much, but I think it’s going happen.
What is Diamond Castle’s exit strategy? What’s the time frame?
We don’t have a specific time frame.