Collins | Station Valuations During A Challenging Year

One of my favorite characters from the early days of Saturday Night Live is Gilda Radner’s Emily Litella. In what I now know was a not-so-subtle jab at the FCC’s fairness doctrine, Radner’s character would provide an opposing view on an issue only to learn, about midway through her diatribe, that she’d misunderstood the subject. Two viewpoints that come to mind are “Violins on Television” (violence on television) and “Busting Schoolchildren” (busing schoolchildren).

I was reminded of these classic examples of misunderstanding when I read the latest installment of the Media Valuations Special Report for MFM’s member magazine The Financial Manager. Called “Optical Illusions,” the description accompanying the piece, explains, “TV station values are impacted by a series of sobering conditions this year. Yet there’s reason for optimism.”

The Sobering Conditions

The authors, Bond & Pecaro’s Matthew Lochte and Jake Lourium, begin their article with a look at what they describe as U.S. stock market prices that seem “to defy basic financial and valuation theories and continue to levitate upwards in the face of a pandemic; global economic recession; high unemployment; downward revisions to earnings; political standoffs; and social upheaval.”

Unfortunately, TV station group stocks have not kept pace with the market as a whole. For the most part, “ ‘pure-play’ television stocks have had a less buoyant return.”

These stock prices should come as no surprise when viewed through the lens of the pandemic. Despite increases in viewership for entertainment and news along with record spending on political advertising, overall television advertising is suffering. Businesses hit hardest by the pandemic are also, according to Lochte and Lourium, among the largest television advertising categories. These categories include, “restaurants/dining, automobile sales and travel and leisure.”

The authors theorize that depressed television stock prices may also be related to investors who consider “the past as prologue to the future.” They use an index of four “publically traded pure-play TV station owners” to demonstrate that in September 2008, such stocks had fallen disproportionately to the overall market. The index stocks dropped 65.4%, while the Nasdaq fell 22.6% and the S&P 500 was down 23.6%.

Television merger and acquisition (M&A) activity reinforces this theory. All M&A activity paused for four months at the beginning of the pandemic. Current activity, which resumed in the summer, shows depressed valuations. Deals in the top 25 markets are at decreased cash flow multiple lows not seen since 2015. Multiples in other markets are slightly higher, but still at their lowest since “at least 2009.”

Reasons For Optimism

However, despite a litany of troubling trends, TV station groups have good reasons to predict a better future. The first of these is the industry adoption of ATSC 3.0 technology. In the last two weeks alone, as outlined in articles by TVNewsCheck’s Mark K. Miller, four Norfolk, Va., stations and five Raleigh, N.C., stations have begun “broadcasting with NextGen TV or ATSC 3.0.” This technology, which Miller compares to internet technology, will allow broadcasters to provide a variety of new features and applications.

Next is what Lochte and Lourium call an advertising category “immune to COVID-19 and the recession this year.” That is, political advertising. In a recent TVN Focus on Business, TVNewsCheck contributor Jack Messmer called it “A Political Haul for the Record Books.”

In a related TVN Focus on Advertising, writer Janet Stilson (who also edits MFM’s TFM magazine) predicts another $180 million to $210 million in political advertising revenue to support the Georgia Senate runoff elections. In fact, Stilson reports that there may be so much money spent that it will crowd out traditional holiday advertising.

Another growing revenue category, although growing more slowly than in years past, is retransmission fees. What Lochte and Lourium like about this category is that it’s “a stable and predictable revenue stream protected from the cyclicality of special sports events.” They report that Kagan estimates, as of June 30, 2020, such dollars made up “55.9% of broadcast revenues for pure-play television companies.”

On the valuation side, Sinclair Broadcast Group president and CEO, Chris Ripley suggested that the potential for the FCC to relax station ownership rules could improve investor valuations. Ripley spoke as part of a TV station group leadership panel for TVNewsCheck’s “TV2020: Monetizing the Future,” part of NAB Show New York in October.

Finally, groups are expanding what it means to be a television station business. Sinclair purchased Fox’s regional sports networks before the pandemic hit. While this has certainly hurt the company’s recent stock performance, Sinclair has positioned itself for a post-pandemic future in which live events offer the only true appointment television. It’s also a future that includes legalized sports betting, leading to increased interest in live games and the potential for related gaming ad revenues.

As Emily Litella would say: “That’s very different.”

If you would like to read Matthew Lochte and Jake Lourium’s “Optical Illusions,” in its entirety a digital copy of the November/December 2020 issue of TFM is currently available on the MFM website. In addition to their complete in-depth analysis of TV station valuations, the piece includes a sidebar that looks at the “disconnect between Wall Street and Main Street this year.”

Gamification And Video Games

The objective of media companies continues to be reaching consumers and driving content consumption. Sinclair recently showed its commitment to that vision when it hired J.R. McCabe in the newly-created role of chief business officer of D2C/ gamification.

MFM is committed to same vision, which is why we are hosting our first Video Games Outlook on Dec. 8 at 2 p.m. ET. This 90-minute virtual event will offer an economic overview and forecast along with an in-depth analysis of both the current results and the 2021 forecast for the video games industry. Featured speakers are Kevin Depew, deputy chief economist with RSM US LLP; Joost van Dreunen, author of One Up: Creativity, Competition, and the Global Business of Video Games; and Victor Kao, consulting partner and national leader in video gaming and esports for RSM US. Register here.

Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary, the media industry’s credit association. She can be reached at [email protected] and via the association’s LinkedIn, Twitter, Facebook or Instagram accounts.