Ownership Rules Distort TV’s M&A Market

I was listening to former Labor Secretary Robert Reich on the radio the other day (he’s pitching a new book) and he made the point that there is really no such thing as the free market that libertarians are always yapping about. All markets are governed by laws and regulations that are set up and enforced by the powers that be.

He is right, of course. Think about it: To do business, you need laws and regulations to protect property rights, grease commerce and arbitrate disputes. But it is also true that some markets are regulated not just to promote business, which I suppose is what the libertarians really mean when they say “free market,” but also to protect consumers from potential harms, real or imagined, and achieve other social goals.

The TV station market is one such market. With power derived from Congress, the FCC prohibits ownership of two Big Four affiliates in all markets and ownership of two stations of any kind in small markets. What’s more, it in effect outlaws station groups from reaching more than 39% of U.S. TV homes.

Such rules don’t foster business. They interfere with it. They are ostensibly designed to preserve concepts like localism and diversity of viewpoints. I say ostensibly because behind such concepts is simple fear of some broadcasters getting too big and somehow acquiring undue control over public discourse.

Whatever the reasons, the FCC ownership regulations have shaped (warped?) today’s broadcasting business in many ways, and determined what kind of station deals can and cannot be done.

Take the 39% cap. It more or less bars six station groups — Fox, CBS, Sinclair, Comcast/NBCU, Univision and Ion Media — from merging with other groups because they are at or above the cap. I’m not saying any of them want to; I’m just saying they can’t.

Somewhat paradoxically, it also complicates their ability to exit the business. They are so big now, they can’t merge with any other group. To get out, they would have find outsiders or sell themselves off in pieces to other broadcasters. Not impossible, but far more difficult.

On the other hand, the 39% cap can act as a safe harbor. If a publicly traded group is at or near the cap, it doesn’t have to worry about a hostile takeover by another broadcaster.

The national cap is playing a big role in the M&A drama now taking place with Nexstar, Media General and Meredith.

Media General is now at 23%. Its proposed $2.4 billion merger with Meredith would take it to 30%, which would be close enough to 39% to ward off unwanted suitors like Nexstar.

At 17%, Nexstar can scoop up Media General without Meredith, but not Media General with Meredith. That’s why it had to act fast in getting its bid out for Media General and why part of its strategy has been to disparage the Meredith deal.

If Media General really wants to stay in the broadcasting business, it needs to move ahead with the Meredith merger. That won’t be easy. A succession of large Media General shareholders have publicly blasted the deal. To save it, Media General is going to have to persuade Meredith to accept less.

Media General has to be sure it wants to stay in the business. Remember, because of the 39% cap, once it reaches 30%, its exit options start to narrow.

Now, if Media General wants to get out of the business, it simply needs to sit tight and wait for Nexstar to up its $14.50-per-share bid, which everybody expects it will. Nexstar acknowledges that it had earlier approached Media General with a $17 bid, and Wells Fargo analysts say that Nexstar can still manage that.

And who knows? Another bidder may appear to drive the price up, although it is not readily apparent to me who that might be.

The local ownership rules limiting how many station one group may own in a single market also affects station trading. It doesn’t help that the current FCC administration is strictly enforcing the limits after years of loosey-goosey oversight.

Nearly every merger between station groups involves some spin-off of stations in overlapping markets to keep the resulting group on the right side of the FCC.

Both the Media General-Meredith deal and the Nexstar-Media General bid involve spin-offs, as does Gray’s proposed acquisition of Schurz Communications.

If two groups have too many overlapping stations, a merger between them is simply a non-starter. It’s just like hitting the 39% ceiling.

The urge to merge is common to all industries, and most businesses as old as broadcasting are far more consolidated. Scale or bigness is intrinsically more efficient, spreading out fixed costs and giving companies more clout in dealing with vendors.

And in the particular case of broadcasting, scale also empowers station groups maximize their retransmission consent revenue and minimize their reverse comp payments. Those are important capabilities to have as broadcasting gets pressed by new media and audiences continue to fragment.

Two years ago here, I argued that the government should take another modest step in the incremental deregulation of broadcast ownership that began during the Reagan administration and raise the 39% cap to 45%.

Even that is not going to happen. There seems to be little interest among lawmakers and regulators in relaxing the ownership restrictions and, frankly, among broadcasters in having them relaxed. So those desiring to buy or sell stations will have to work around (and perhaps exploit) the rules in a market less free than others.

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