McGraw-Hill Sale Could Fetch $200 Million

McGraw-Hill Broadcasting’s sale of its TV station group is in the current and picking up steam.

“This is an actionable item,” said one industry executive who’s kicking the tires. “It may not be Mr. Right, but it may be Mr. Right Now. I think it will likely be the catalyst that would kick off a wave of M&A over the next 18 months.”

McGraw-Hill broker MorganStanley sent out the “book” — a financial profile — on the group in late June and letters of intent with preliminary bids are due next Monday (July 25).

McGraw-Hill’s four full-power stations are all ABC affiliates: KMGH Denver (DMA 17); KGTV San Diego (DMA 27); WRTV Indianapolis (DMA 28); and KERO Bakersfield, Calif. (DMA 125).

The group signed a five-year affiliation agreement with ABC in early 2010, meaning one less variable to ponder for potential buyers. The group also includes low-power Azteca America affiliates in Denver, Fort Collins, Colorado Springs, San Diego and Bakersfield.

“This deal is so clean,” said an industry source. “McGraw-Hill has owned the group for 39 years and these are just really attractive markets. That’s why it will attract a lot of interest. If they can’t get a decent multiple out of a group like this, then where is broadcast M&A?”

According to sources who have seen it, the book does not include an asking price, but does contain financial information that suggests a price of under $200 million.

Because there have been no comparable transactions for at least three years, it’s difficult to estimate what the group will fetch, those familiar with broadcast M&A say.

The group’s estimated average annual net revenue for 2010 and 2011 is around $93 million, according to broadcasters who have seen the book.

Denver’s KMGH was the top performer for 2010-11, averaging $41.9 million a year. KGTV in San Diego was next with $25.8 million; WRTV in Indianapolis was third at $20.7 million and Bakersfield was last at $4.6 million.

The book provides another key piece of the puzzle: a 20% average broadcast cash flow margin for the two blended years. That works out to an average annual cash flow of $18.6 million. (The low-power stations, as developmental operations, were minimal contributors to revenues with slightly negative cash flows, the sources say.)

Based on that cash flow and a assuming a multiple range of 8X-10X, the stations could fetch roughly $150 million to just under $200 million.

But wait! What about 2012? Projections say it will be a banner year, perhaps record setting, for political revenue. McGraw-Hill undoubtedly hopes those expectations, and the potential for boosting cash-flow margins, will push the price much higher.

After letters of intent and preliminary bids are sifted through for the players who are serious and can actually come up with financing, McGraw-Hill executives will go on the road — probably next month — to share more definitive numbers and make the case for a price higher than the current arithmetic indicates.

That means the announcement of a deal could come early this fall.

Nexstar Broadcasting, Meredith, and Belo are said to be the most interested potential buyers. Other candidates include Gannett, LIN Media, Hearst Television and E.W. Scripps.

Gannett and LIN may be lower on the likely bidder list because they have FCC-prohibited station overlap — Gannett with a station in Denver, LIN with one in Indianapolis.

One potential dark horse: George Lilly’s SJL Broadcast Management. Backed by Sankaty Advisors, a unit of Bain Capital, Lilly earlier this year bought the ABC O&Os in Toledo, Ohio, and Flint, Mich., for $30 million.

Lilly already had one other ABC affiliate, WENY Elmira, N.Y. (DMA 174), and a duopoly in Erie, Pa. (DMA 144), with WICU (NBC) and WSEE (CBS). At the time of the Toledo and Flint purchases, he said he would like to add four to six more stations to his holdings.

McGraw-Hill and MorganStanley declined to comment on how many operators requested the book, or anything else.

Executives at the station groups either declined to comment or as of press time had not responded to queries requesting comment.

When McGraw-Hill announced its intention to get out of the broadcasting business in June, some industry insiders had anticipated an asking price of $300 million or higher, but had not seen financial information in the book.

The lower numbers suggest a deal that would be easily digestible by strategic buyers, lenders and, possibly, private equity interests.

“We’re not talking about a large deal; we’re talking about a deal that is largely financeable on the balance sheets of a number of companies that have reduced their own leverage,” said Barry Lucas, analyst with Gabelli & Co.

“We’ve seen private equity around for other industries. We could see private equity coming back to broadcasting,” he added.

The newscasts of the McGraw-Hill stations generally rank third in their markets. But that fact cuts both ways on the trading block.

“There are two schools of thought,” said an industry consultant. “There’s the romantic theory that I can always do better than the other guy. The other is it’s difficult to bridge the gap between No. 3 or No. 4 and No. 1.

Larger station groups such as Nexstar, Belo, Hearst, LIN and Meredith, all of which have stations in similarly sized markets, are attracted by the opportunity to cut costs, improve ratings and enhance already solid economies of scale.

Such scale economics provide significant leverage in negotiating retransmission contracts fees, programming contracts and advertising deals.

“I think the corporation has probably treated these stations like step-children and it shows,” said another industry consultant who asked not to be named. “I think Belo would be an incredibly good operator for them and so would Meredith. I would think Meredith would be the one that would really benefit from this.”

In sizing up potential buyers, the key issue becomes which companies possess not only the acquisitive drive, but also the financial capacity to handle a deal.

“Belo just got its leverage down to moderate levels,” said a source in the financial sector. “Nexstar is still leveraged. Hearst is least leveraged, and Meredith is probably somewhere between Hearst and Belo. But, there are no indications commercial banks are willing to step up for TV M&A the way they used to.

“So unless there is a stock swap component on the deal at a lofty level of value per share, the dilution would not be welcome by equity holders. Only privately held Hearst might be able to shoulder the buy and the subsequent leverage.” 

What’s private equity’s appetite for growing station groups in which they already have a stake? Deals that could help them make up what was lost in value during the downturn would be worth a look.

But as one financial sector insider put it, “The rodeo days are over. There’s a limited talent pool of guys out there from a management standpoint. Couple that with a disciplined, highly discreet group of guys thinking of investing in this.”

Two other variables play into the calculus.

On the downside, there are the economic gyrations in Europe and the U.S., and the impact on financial markets and the likely requirement that a buyer pay at least 50% of the final price in cash. That’s a far cry from those “rodeo days” when private equity was eager to do highly leveraged deals that looked a lot like home mortgages: 20% cash down, 80% in debt, double your money in five to seven years.

On the plus side, there’s 2012 and all that political money. That imposes some urgency on a deal.

“At this point, station groups are looking forward to a very profitable 2012,” says Michael Alcamo, of M.C. Alcamo & Co., an investment banking firm. “I think they will encounter ready access to capital or credit should they decide to make the winning bid.

“What we’ve noticed in recent filings is many broadcasters maintain significant borrowing capacity under existing covenants. Bank groups would be evaluating the operating performance of the potential acquisition and, if they feel a multiple of 5X-6X is suitable on the lending side, the acquiring company makes up the difference out of cash on hand.”