Since broadcasters won’t know how much cash other stations in their market are willing to accept, it is even more important to be knowledgeable about the factors that will affect a station’s ultimate net gain before deciding to participate. Here are some tips about understanding the auction’s financial implications.
Do Your Pre-Auction Financial Homework
The 64,000 Question was a 1950s CBS game show in which contestants could win up to $64,000 by answering questions about a specific subject. Today it could just as easily be used to describe the challenge broadcasters face when deciding if and how they will participate in the upcoming FCC television spectrum auction. That’s particularly true when you consider that estimates for the auction’s top bids would exceed the present value of $64,000 — more than $500,000 — by as much as 18 fold.
Of course, as Congress discovered when looking into Question and other quiz shows of the era, there is always the risk of cheating when that much money is at stake. To minimize the chances for any party to gain inside knowledge, the FCC is setting down a number of rules designed to ensure a level playing field, beginning with making it a blind reverse auction.
Since broadcasters won’t know how much cash other stations in their market are willing to accept, it is even more important to be knowledgeable about the factors that will affect a station’s ultimate net gain before deciding to participate.
No one is more concerned about understanding the auction’s financial implications than the media finance executives served by our organization. To assist our members — and the broadcast television community in general — in acquiring critical knowledge about the auction’s financial considerations, MFM prepared a special report entitled “The Spectrum Spectacular” in the current issue of The Financial Manager (TFM), our member magazine.
The report, which appears in the November/December 2015 issue of TFM and is currently available on our website, includes two feature articles prepared by industry experts in media property valuations and corporate tax law. Before I give you the top-line summary, let me warn you about what not to expect: a simple formula that allows you to plug in a few data points and determine exactly what you can expect to gain or lose from your participation.
That said, the experts provide some highly valuable insights on the factors that will influence just how large or small the net income could become for your station. As John S. Sanders points out: “Determining how much revenue is likely to be garnered by those stations participating — and pinpointing the many variables that buyers and sellers may encounter along the way — have taken on a sense of urgency. It’s crucial for those participating to understand the nuances of how the auction could play out.”
Sanders, whose article addresses the factors that will determine the revenue to expect from auction payments and spectrum relocation reimbursements, is a principal with Bond & Pecaro, a consulting firm specializing in the appraisal of media and communications properties. His piece is drawn from a white paper the firm prepared, Current Valuation Issues: Opportunities and Pitfalls on the Road to the Television Spectrum Auction, which is available on that company’s website.
It’s Good To Be Bad
When it comes to figuring out just how much they should expect to profit from participating in the auction, Sanders encourages readers to recall one of Mae West’s memorable quotes: “When I’m good, I’m good; but when I’m bad, I’m better.” In this metaphor, a good station is one with “lots of interference-free population coverage” while bad stations — those that potentially cause interference with other stations inside and outside of their (highly populated) market have even greater value.
“The most valuable licenses will be attached to UHF stations with expansive interference-free population coverage, but which also potentially cause interference in surrounding areas,” Sanders says. His comments are also reflected in last week’s FCC decision to revise opening bid estimates for a number of stations based upon revisions to its baseline data for interference considerations.
Understand The Uncertainties
One of the few certainties a station can have about the outcome of participating in the auction is its ability to reject any bid that’s below its bottom price. Aspects of the auction that will be almost completely out of your hands include:
- If the FCC needs your spectrum.
- The best price you can expect.
- How long the entire repackaging process is going to take.
As TVNewsCheck reported earlier this week, the NAB and FCC are at odds over the timeline, with a report prepared for NAB concluding a nationwide repack of broadcast spectrum could take a decade while a region-by-region approach could come in closer to the FCC’s three-year estimate.
In his response to questions from Congress about the auction’s costs and timing, FCC Chairman Tom Wheeler said: “This is not a drop-off-the-edge-of-the-table situation” and the FCC will “work it out” with the broadcasters.
As Sanders concludes in his article: “The economics are not only driven by market size, the results of prior spectrum auctions and wireless telecom subscriber and usage growth. The number of stations that participate and the appetite of the wireless carriers will also heavily influence the proceeds that participating stations ultimately receive.”
Playing Out The Chess Game: Tax Considerations
Of course, one thing we can be certain about is that any net revenue will be taxed. In the TFM special report’s second article, Adam Handler, a principal in PwC’s national tax service practice; Dan Hays, principal at Strategy&, part of the PwC network; and Louis Lazar, a director at PwC, outline some of the key strategic and tax planning consideration stations should take into account. The authors note that, “[Broadcasters] need to take into account important implications — such as channel change costs and brand concerns; revisions to their fundamental operating model; or the termination of a TV station signal altogether.”
Exploring Your Options
Here is a quick look at the tax implications for each of the four scenarios available to participating broadcasters:
- Go off the air — If a broadcaster relinquishes its spectrum and goes off the air, the full amount of gain (or loss) generally would be included in the broadcaster’s gross income.
- Move to a different channel — Broadcasters relinquishing UHF (or upper VHF) spectrum in exchange for payment plus VHF spectrum may be eligible for “like-kind exchange” tax deferrals for the relocation but would also be required to pay taxes on any gain from the cash “boot” they received.
- Channel sharing — Channel sharing will require well-defined governance and cost-sharing approaches. In addition, tax treatment of channel-sharing arrangements will depend on such considerations as whether or not the arrangement results in a partnership.
- Repacking — Involuntary conversion rules may apply to broadcasters that must be relocated to a new channel as part of the FCC repacking process. In this instance, they will only pay tax on the portion of reimbursement that exceeds relocation expense.
The PwC article provides additional details on specific IRS rules governing each of these scenarios. The authors also elaborate on the considerations that could allow stations to take advantage of the “significant opportunities for deferring taxes.”
As the tax experts note in their piece, “Tax considerations will play an important role in evaluating which option may be best for a broadcaster. A clear picture of a particular broadcaster’s tax characteristics will help determine its potential after-tax benefit from each option.”
Both of these articles deserve a full read; I hope providing a few of their highlights entices you to take advantage of the opportunity to gain even more knowledge from the insights shared by these financial experts. How each station should best address the challenges posed by the reverse auction and repacking of broadcast spectrum is most definitely the $64,000 question of our time.
Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary. She can be reached at [email protected]. Her column appears in TVNewsCheck every other week. You can read her earlier columns here.
Comments (0)