ABC Cat’s Out Of The Bag, But Is It For Real?

Well, the New York Post went ahead and did it this morning. It posted (and/or) printed a story that Disney is looking to sell its O&Os. A rumor to that effect has been circulating for the last couple of weeks. Price Colman, our business reporter, and I have been asking around about it, but have been unable to confirm it. Apparently, the Post reporter Claire Atkinson found a reliable source.

Now that it’s out there, let me give you the other half of the rumor: An investment group possibly backed by Citicorp would buy the O&Os, and it would hire Sinclair to run it. One variation has the investors buying the network and the stations in a package.

I ran all this by Sinclair CEO David Smith two weeks ago in an email. “Sorry, Harry,” he wrote back. “I don’t engage in speculation.” Not a confirmation, certainly, but not a denial, either.

Despite the non-denial denial, I came to dismiss the Sinclair talk, mostly because of the FCC ownership rules, which limit groups’ reach to no more than 39% of all TV homes.

Sinclair is already right up against the cap. Even as a manager only, I’m told by the lawyers, Sinclair would still have to count the ABC reach as part of its total reach, putting it way over the 39% limit.

To manage the ABC stations, the Sinclair lawyers could probably come up with a legal work-around for circumventing the national cap as they have local caps, but I can’t believe the FCC would go along with it at the same time it is trying to tighten up the rules.

What’s more, Sinclair is a lightning rod for liberals and anti-media-consolidation forces. Its involvement in any kind of ABC station deal would produce enough political blowback in Congress and at the FCC to kill it. ABC knows this.

But let’s go back to that Post story that Disney is trying to dump the stations and keep the network. Does it make any sense?

The conventional broadcasting wisdom says that the network is a marginal business and the stations are the business of high margin. In other words, if you had to sell something, you would sell the network.

But the conventional wisdom may be out of date. Disney also owns a studio, so the network gives it a guaranteed outlet for its programming. Of ABC’s 24 primetime shows, ABC Studios produces 13, plus two more standing by as midseason replacements.

Plus, all the networks have something they didn’t have before — an additional revenue stream in the form of reverse comp, the networks’ share of affiliates’ retransmission consent dollars. That stream will be getting deeper and wider.

The ABC stations have long been considered the best-run, most profitable group in the business. BIA/Kelsey estimates that it had spot revenue of $1 billion in 2012. I’m guessing that 40% of that goes to the bottom line.

But that success may be a problem for Disney. With competition from other broadcasters and other media intensifying all the time, the group has nowhere to go but down. For years, the group had Oprah to lead viewers into the evening news. She went away and it has been unable to find a replacement.

If it’s smart to sell high, now may be the time.

As long as we are speculating, let’s ponder whom the buyer might be. Several second-tier station groups could buy it without tripping over FCC rules. They include Cox, Scripps, Post-Newsweek, LIN, Meredith and Nexstar. Hearst would have to spin off a few stations to stay under the cap.

But I don’t know if any of these groups have the financial muscle to pull off such a deal. The ABC O&Os won’t come cheap. Given $1 billion in spot revenue, a 40% margin and a 9X seller’s multiple, the group is worth at least $3.6 billion. That’s not factoring in cash flow from retrans, which would inflate the number.

A well-heeled private equity firm could certainly do it with credit still easy. And it could hire a lot of managers other than Sinclair to run the group. Rebecca Campbell, the current manager, comes to mind. She might appreciate having a little equity stake in the stations.

Separating the network from the stations sounds radical, but only because it’s never been done. I can’t see any real reason not to do it. Whoever ends up with the ABC stations would have the same incentive to promote ABC programming — daytime, news and entertainment — and otherwise contribute to the well-being of the network as the ABC stations now do.

Life may be more difficult for the Disney-ABC syndication arm. It would no longer have a string of major market stations in the family to jump start its clearance efforts. But, then again, Sony and Warner Bros. have managed all these years without an in-house launch group.

Since we first heard these rumors three weeks ago, Price and I have talked to perhaps a dozen broadcasters, analysts, lawyers and researchers. A few had heard the rumors, too. Most had not. And there was no consensus on whether it made any sense for ABC to sell the stations or the network.

This column reflects much of what we heard. Take it for what it’s worth.

ABC had no comment.

Harry A. Jessell is editor of TVNewsCheck. He can be contacted at 973-701-1067 or [email protected]. You can read earlier columns here.