Bullish Big Time On Buying TV Stations

Buy low, sell high.

George Lilly has been applying that basic business principle in the buying and selling stations since 1983.

In 2005, he partnered with the private equity firm The Blackstone Group to form Montecito Broadcast Group and purchased four stations from Emmis Communications for $259 million. Less than two years later, he flipped the stations to New Vision for a figure somewhere north of $330 million.

Now he thinks he can work that buy-low, sell-high formula at least one more time. Backed by Sankaty Advisors, a unit of Bain Capital, Lilly last month agreed to buy two small-market ABC O&Os — WJRT-TV Flint, Mich., and WTVG Toledo, Ohio — for $30 million.

With the worst of the recession apparently past and new sources of revenue beginning to materialize, Lilly believes the stations’ price tag is low and that he will be able to sell at a considerable markup several years from now.

How low? According to BIA/Kelsey, the same George Lilly and yet another investment group sold the stations to ABC for $120 million.

With the Sankaty money, Lilly hopes to purchase four to six more stations over the next year or year and a half in mid-size markets and operate them under the flag of the SJL Broadcast Group.

It will be kept separate from Lilly’s three family-owned stations: WICU (NBC) and WSEE (CBS with CW on a subchannel) in Erie, Pa., and WENY (ABC with CBS and CW on subchannels) in Elmira, N.Y.

In this interview with TVNewsCheck Editor Harry A. Jessell, Lilly talks about his latest deal, why his faith in the broadcasting business in undiminished and why it’s a good time to buy.

Why are you buying stations when it seems so many other are selling or at least trying to?

Well, a lot of the selling that you’re seeing are persons who got trapped two years ago and are overleveraged. They had a bad time in our industry, and the net result is a lot of people lost a lot of value. Some of them went under water and lost a lot of their equity value and don’t see merit in staying in the television business.

Do you expect a lot of action in station trading next year?

It’s just starting. The Freedom stations just came up for sale. Those people that got into difficulty and went through bankruptcy will start to put stations on the market to minimize their losses and exit the business.

What’s the upside on stations in small, no-growth markets like Flint and Toledo?

The upside is that there is growth. On the advertising side it’s modest, but there is growth. We are still better than any other medium at moving products, goods and services for advertisers. As long as there are people in those markets selling cars or bank services or refrigerators or washing machines, there will be a great need for television. If we do the job right, we can serve a lot of advertisers, increase their business and profit margins and make the marketplace a lot healthier.

So you think you can significantly grow revenue?

Over the past few years we have seen other revenue streams open up to television that I think gives us a very positive look at the future. That would be retransmission revenues. That would be the use of the digital channel for multicasting purposes. That would be the use of the Internet. All of these are revenue streams weren’t available to us five, 10 years ago and all are beyond the exploratory stage. I am not suggesting they will blow the lid off, but I think it’s going to give us high single-digit — possibly low double-digit — revenue growth for the next five years.

And you’re looking for more stations in these types of markets, right?

We’ve had good success over the years at mid-size television markets. We don’t have any interest in being in the top 10 or the top 20. That’s not our skill. We have done very well in the 50 to 100 range. We think we know how to run those stations extremely well. We think we know how to be very competitive in those markets and so that’s what we would be looking for. Specifically, we would be looking for stations with a strong history of audience revenue and service to the communities. We’re looking at being the No. 1 or No. 2 station in each market. We’re not looking to buy a CW or the No. 3 or No. 4 station. We’re looking for the dominant stations in the markets.

Are there duopoly opportunities in either Flint or Toledo?

I don’t think the FCC would approve of duopolies in those markets at this point, but we certainly are open to looking at what they call local marketing agreements, where you partner with somebody in the market. You keep your programming and your news and sales separate, but you combine your backroom activities, which could be fairly significant in your cost savings and benefit both parties.       

What was the cash flow multiple on the two stations?

It was just north of 10 times cash flow yeah.

For what year?

The cash flow was based on two years, 2009 and 2010. ’09, of course, was quite depressed, but there are also other considerations that are of significant value other than cash or affiliation agreements or retransmission agreements.

Could you elaborate on those “other considerations” a little bit?

No. I would rather keep that to ourselves.

What about affiliation agreements? Do you come away with a nice, long-term affiliation agreement with ABC?

Yes, we do. We have an eight-year affiliation agreement.

And what about retransmission consent revenue? You talked about retrans being this great new revenue stream, but it seems as though ABC and the other networks want to take it away.

I don’t see “take it away.” I see sharing of a revenue stream that both parties can contribute significantly to, which I think is appropriate. Without ABC, our negotiations [with cable] would be tougher and we would get far less. Without us, there are no local negotiations. So, it’s a real partnership.

You may not want to buy a Fox affiliate.

Why not? Oh, because of how fierce they are in negotiations.

They are a bit tougher I think than ABC and CBS have been so far.

Well, we will see where it falls out. I am of the opinion that generally fair is fair and fair is what it all comes down to. What you’re talking about is negotiations and certainly Fox is starting high.

I understand that you are going to stick with the general managers at the two stations — David Zamichow in Toledo and Tom Bryson in Flint?

They’re both quality managers and they were the managers in place when we sold the stations to Disney. They have managed the stations extremely well through the Disney experience. We have asked both of them to stay on. But Tom has indicated that he is ready for retirement so I don’t think he will stay on.

OK, so you’re going to need a new GM in Flint.

Yes, we are.

Should the employees at the stations be bracing themselves for cutbacks in resources and personnel?

I don’t know that I would use the term “bracing.” Undoubtedly, there will be some changes once we get there and start to look and see how we might do things better. We know that there will be some opportunities for automation, which will undoubtedly require some cutbacks, but we have been very upfront with the employees at our meetings to let them know. We’re not making the claim that there won’t be changes.

What we’re telling them is that we have a high regard for all the employees, we would love to keep them all on, but that may not be possible as a result of technology changes or better ways of operating. We’re also promising that as soon as we know anything, we will share it with the employees fully. We won’t take the back door of claiming we weren’t going to do anything and then all of a sudden just lowering the boom three months down the road.

Let me get this straight. Going forward, the three family-owned stations and the station you buy with Sankaty will be managed separately?

Right. Erie and Elmira will be separate, standalone stations. They will have their own management team separate from the Sankaty transactions. [My son] Brian, who has been the chief executive officer of the Erie and Elmira properties, will move over and become the CEO of the new company.

The FCC wants to take TV broadcast spectrum and is, in essence, willing to compensate broadcasters who agree to give it up. Does that interest you?

Not at this point. You know, we have great designs on using that spectrum to serve the local marketplace. If you look at all that we’re doing in Erie, serving local marketplaces, I think that’s great use of the spectrum. So, I don’t know that we would want to give up or give back any of our spectrum. There are places where it clearly might be appropriate or realistic to sell off some of your spectrum or give some of your spectrum away for other purposes, but I would be very careful about giant companies coming in and swooping up spectrum for national purposes in place of local companies who serve local needs.

You mentioned online and retrans as new revenue sources. What about mobile?

Here’s another great avenue for opening up the potential to the local television stations. In other words, when you look at mobile, what’s really of interest to people is local news, weather, sports. So again, I see a great niche and another opportunity for us to have another great revenue stream.

Are you involved with the Mobile500 coalition?

I believe that Kevin is. I believe he serves on that committee. [Editor’s note: Kevin is George’s other son, who owns WSEE Erie and part of WENY Elmira].

Once you have built this new group, how long do you expect to hold onto it before selling? What’s the exit point?

When you are dealing with financial partners in the equity world, we’re probably talking eight to 12 years. I would say five to 10, but it’s going to take you three to four to build a group and then you would be five years after that.

OK. What’s your forecast for 2011 and 2012?

I think 2011 will be, certainly, a step back, particularly in these markets, which get the high degree of political revenue. You will see a step back from the big political year and there will be some people that will be nervous and say, oh, my gosh, maybe we’re going into a double-dip recession. That won’t be the case. 2009 will be the anomaly. That will be the year that it was just different and unique. It wasn’t normal. It’s come back to a good degree in 2010. I expect in 2011 we will start to look at figures that are close to your typical off-political year and then of course 2012 should be a blockbuster.

And that’s why you’re buying?

Two years ago we sold our last group right at the top of the market and that was inflated. That never should have happened. We got out just in time and now we see the market prices hit bottom because of 2009 and we see it coming back. So we just see upside potential.