Broadcast M&A Prospects Chilly In ’24
Paramount may be entertaining offers these days, and The Walt Disney Co. might soon strike a deal that would give the National Football League a stake in ESPN. But there’s no clear sign that broadcast TV station groups will see a lot of shopping-and-buying momentum as 2024 gets further underway.
A number of factors are impacting potential M&A or private equity deals. Among them:
- The current election cycle
- The FCC’s recent Top Four duopoly rule decision
- A possible decline in interest rates
- A potential change in FCC rules concerning the UHF discount
Concerns about the FCC’s passive-aggressive behavior toward the proposed Standard General deal to acquire Tegna, along with a possible selloff of Paramount’s CBS assets, may also come into play.
To understand just how unpredictable the situation can be, consider last year’s results. “If you look at ’23, it was all about the termination of the Tegna and Standard General deal,” says Justin Nielson, principal analyst at S&P Global Market Intelligence. “If that deal had gone through, we would have seen the largest deal market since 2018.”
“The total deal volume of $428 million for sales of TV stations in 2023 is the lowest volume since 2010,” adds Volker Moerbitz, S&P’s senior research analyst. The volume of station sales in 2010 was just $175 million, largely due to the financial crisis going on at that time, he said.
Last year’s $428 million figure compares with $643 million in 2022 and $4.517 billion in 2021, according to Moerbitz’s calculations, as of Jan. 9. The mega year of 2021 was shaped by two agreements: the $2.8 billion merger of Gray Television and Meredith, and Gray’s $924 million acquisition of Quincy Media.
The top deal in 2023 involved just two stations in Fort Myers, Fla., sold by Waterman Broadcasting to Hearst for $220.54 million. “That deal alone stands for 60% of the year’s full-power deal volume, indicating how one deal can alter the entire landscape,” Moerbitz says.
Will Private Equity Back Off?
It’s possible that the demise of the Standard General deal to acquire Tegna could have a chilling effect on big deals involving private equity. The FCC dragged its feet and failed to make a timely decision. One of the key objections to the proposed deal related to the involvement of the private equity firm Apollo Global Management.
“They were concerned because Apollo was going to have a piece of Cox and a piece of Tegna,” says Tim Pecaro, a principal of Bond & Pecaro, which provides financial analysis and valuation services. “If it was someone other than Apollo that didn’t have broadcast holdings, I don’t think it would be an issue. In general, [the FCC doesn’t] like leveraged buyout private equity deals, but there’s no good reason to stop them, unless it’s a concentration of ownership issue.”
Is that enough to sour private equity firms on broadcast TV investments in the future? The answer depends on whom you talk to. “If I’m a private equity guy, I like to go into a market that has a great deal of growth in front of me and have some very controllable avenues for achieving success,” says Larry Patrick, managing partner of Patrick Media Brokerage. It’s less attractive “when you don’t know where the next attack is going to come from — you know, who else is going to come into streaming and suddenly upset things? And how are you going to counter it?”
S&P’s Nielson feels differently. Yes, higher interest rates and the inability to get the Standard General deal through the FCC did have a chilling effect on private equity. That said, he believes TV stations are undervalued right now. And private equity has “a very short memory when it comes to those things. If they see value, and they see opportunity, they’re going to go after it.”
Another positive view comes from Justin Krieger, director, technology, media and entertainment, and telecom senior analyst at RSM Canada. “We’ve seen inflation decrease, and interest rates have been holding steady,” he says. “We’re expecting rates to start slowly falling in the second half of the year. We could slowly see more private capital and deal flow being put to use in the sector.”
Who Might Sell, Or Not?
Among the station groups that might possibly consider selling off their properties are the small ones. “It’s tougher and tougher and tougher to be small,” says Stephan Sloan, an adviser to the brokerage CEA Group. “I work with a lot of independent TV broadcasters who do not enjoy retransmission monies and are not network affiliates. That’s a very difficult business.”
A scenario for the sale of a larger group might come if Paramount is acquired by a company like Comcast or Disney, which would need to sell Paramount’s CBS broadcast properties because of their own networks and stations.
For many station groups, there’s a big reason not to sell right now: all the extra revenue flowing into their coffers from political advertisers. Patrick says that in his conversations with broadcasters, “one or two of the big groups have said, ‘Look, we’ve got 80 or 100 stations, and to be honest, we would be just as well getting rid of the five or 10 smaller stations, or the ones that don’t necessarily generate as much. But in the short term, we might as well take the profits. We could see anywhere from $50 million to $200 million of extra revenue coming in [to a station] because of elections that we normally wouldn’t get.’”
Patrick explains that political revenue doesn’t get calculated into the trading multiple, so from that standpoint, it isn’t more attractive to sell stations this year. And the extra political cash could be used to buy a new station or build another facility.
What’s more, some of the larger groups might use the opportunity to pay down debt, Pecaro says.
FCC Decisions, Past & Future
The FCC’s killjoy Top Four duopoly decision around Christmas is also a downer for the market. “Right now, you cannot combine two of the top four TV stations in any market without making a special showing to the FCC that the combination is in the public interest,” explains David Oxenford, partner in the law firm Wilkinson, Barker, Knauer. “[But] there are no specific standards that have been put out there by the FCC.”
In other words, if a company wanted to own both the No. 3 and 4 stations in a market, and the outlets’ combined market share is less than that of the No. 1 or No. 2 stations, there’s no FCC policy indicating that it would look favorably on the proposed deal. “There’s no specific way that’s guaranteed to get you an exception to allow the combination,” Oxenford adds.
The commission’s decision “really put a damper” on some of the optimism for major M&A activity, Nielson adds. He notes that some of the larger station groups have grandfather clauses for duopolies in certain markets. But if they were sold, the stations previously grandfathered would be subject to the newly revised FCC duopoly regulations.
In a recent blog post, Oxenford raised the potential of another FCC rule change: elimination of the UHF discount. “[It] counts UHF stations as reaching only half the households in their markets.”
If the FCC eliminates the discount, “that would immediately place a number of companies over the [market share] limit, and ones that weren’t over the limit would be an awful lot closer to it,” Sloan says. That might force some selloffs, if it were to happen.
Some believe that the FCC wouldn’t rule on that in an election year, but Pecaro thinks otherwise. “They’re in power now; they may not be in January. It’s something that the Democrats would want much more than the Republicans.”