As many as eight of the TVNewsCheck Top 30 station groups already have private equity backing, as do several smaller station groups, and there are hints that private equity investors could be preparing for another push into the sector. “Private equity used to buy because of growth,” says an industry source involved with M&A activity. “Now they’re buying because groups are throwing off cash.”
Private Equity Is Bullish On Broadcasting
Ah, the good old days. Remember when private equity’s broadcast buying spree boosted multiples, stock prices and overall sector fortunes?
Those days are gone. Now it’s stormy skies clouded by reverse compensation, tight credit (when credit’s available at all) and sagging ad revenues. And oh, yeah, don’t forget the struggling economy.
But guess what? Private equity still likes broadcast.
As many as eight of the TVNewsCheck Top 30 station groups already have private equity backing, as do several smaller station groups, and there are hints that private equity investors could be preparing for another push into the sector (see chart below).
“We have seen some interest in our research from private equity firms,” says Mark Fratrik, VP of BIA/Kelsey. “Demand for our research products and services is often a bellwether.”
Although broadcast has suffered over the past several years, its ability to generate and increase free cash flow remains an attraction.
“Private equity used to buy because of growth,” says an industry source involved with M&A activity. “Now they’re buying because groups are throwing off cash.”
That points to an upsurge in M&A when the financial planets line up.
“There are still a number of station groups that are well-positioned to be acquired by talented management teams backed by private equity sponsors,” says Michael Alcamo, head of M.C. Alcamo & Co., an investment banking firm. “The consumer value proposition in broadcasting remains high. We don’t yet see enthusiasm among lenders, but that will return in due course.”
Private equity investments typically carry certain conditions, a key one being the investment window, usually five to seven years. That’s why, at any given time, one private equity fund may be looking to exit a given investment while another, perhaps even from the same firm, is looking to get in.
“Private equity investors in Nexstar and LIN have been in a long time, well beyond their investment windows,” says the head of a private-equity backed station group. “I am sure a lot of those companies would like to get out. But that doesn’t mean there isn’t other private equity looking to get in. You’re always going to have this coming and going because that’s the nature of private equity.”
ABRY has been majority owner and controlling stakeholder in Nexstar Broadcasting for about 15 years, more than twice as long as the optimum investment window.
Nexstar was close to arranging a buyout of ABRY’s stake — roughly 54% economic control and 88% voting control — when news leaked, forcing Nexstar to publicly disclose it was exploring “strategic options,” including a possible sale of the company.
That was never the plan, says a source familiar with the situation. “They’re not getting any bids from anybody; they never thought they would,” the source says. “They were well on the way to financing a recapitalization of the company and take ABRY out. That approach still will work. They’re not talking about breaking up the company. They want this deal to go through.”
Prospective buyers include TPG, Oak Hill and Providence Equity, according to various sources.
HM Capital, which bought a controlling stake in LIN Media in 1998, is also said to be looking for an exit.
Nexstar, ABRY, HM Capital and LIN either did not respond to queries seeking comment or declined interview requests.
When Oak Hill, Providence, and others paid cash flow multiples of 12-14 times in the mid-2000s, it was because the math worked. Consistent cash flow paid down debt, covered the private-equity fund’s annual management fee (typically around 2%), potentially funded some reinvestment in the business and maybe even some payouts to investors along the way.
Under that model, the big payback came when investors cashed out, ideally at a higher multiple. The window’s still open on those private equity investments, so it remains to be seen how well they’ll perform.
But when credit markets shut down in 2007-09 and the model private equity liked — finance 80%, put 20% down — was no longer viable, the landscape changed and investors had to tinker with the equation.
Today, senior lenders, usually banks, typically will lend for broadcast at a multiple of no more than 3-4 times cash flow, sources say. That means if a deal is going at an 8 multiple, the buyer must be prepared to put down up to 50%.
Private equity investors with plenty of cash — and many have it — are well positioned. Others, perhaps wishing to spread the risk, might try to pull in other interested parties, forego a controlling interest for a smaller stake, or look for smaller deals.
One example of the shared risk approach: Broadcasting Media Partners Inc., an investor group including Madison Dearborn Partners, Providence Equity Partners, TPG, Thomas H. Lee Partners and Saban Capital Group. It owns Univision.
Among those willing to take smaller stakes is Amalgamated Gadget, which has, or had, pieces of LIN, Belo, Nexstar, Gray and Emmis.
Then there’s Sankaty Advisors, a division of Bain, that’s backing George Lilly’s plan to build a group of up to eight stations at SJL Holdings.
“In putting the deal together for the ABC stations, I was fortunate Sankaty was willing to do both equity and senior debt,” Lilly says. “I spoke to a number of private equity companies who were interested in a television investment but the question was how do you put the senior debt together.”
Despite economic uncertainty, “I think there are positive vibes from equity players regarding broadcast,” Lilly adds. “The greatest impediment is bank financing. There’s enough cash out there for someone to finance the entire transaction, but it’s rare to find someone with that level of commitment.”
Cash flow remains key.
“I think the private-equity mindset for those who want to get in now is they see broadcast as a stable, cash-flow business,” says the head of a smaller station group that’s private equity owned.
If that cash flow can be enhanced through acquisitions, particularly properties with potential for growing retransmission consent fees and limited reverse compensation downside, “they think they can capitalize on that,” the source says.
Even absent that, effective management that can grow cash flow over the course of the investment can translate into doubling of profits — or better — at exit.
Here’s the working hypothesis: XYZ Private Equity buys Big Deal Broadcasting at eight times the average two-year cash flow of $100 million — that is, $800 million. Over seven years, Big Deal management doubles cash flow through JSAs, retrans and Internet revenue boosts, and greater operating efficiencies. When XYZ exits, the multiple’s still 8X, but the deal’s now worth $1.6 billion vs. $800 million at the buy-in.
Significant headwinds remain for broadcast M&A. One is constraint surrounding senior debt.
Another, perhaps more important factor, is the uncertainty over reverse compensation.
“To the extent that there are a lot of question marks around the future of our business — in addition to secular issues, spectrum, retrans and network compensation — all those things make private equity more conservative about what they think they’re going to get at the end,” Lilly says. “That leads to a fair amount of caution regarding private equity making investments right now.
“The question of what the landscape will look like in five to seven years is a major driver of why we’re not seeing a lot of deals.”
It was a near universal view, colored strongly by hope, that the M&A market would rev up in the second half of this year into the first half of next year. That’s looking less likely. “Everybody thought exiting in 2012 was the thing,” says one station group boss. “I think it will be 2014.”
Freedom and Young have effectively put the brakes on proposed deals, though Young’s for-sale sign was unofficial.
Broadcasters and investors alike are pinning hopes on a McGraw-Hill deal that will help set the valuation bar and that, in turn, will spur other deals. McGraw-Hill put its four attractive network affiliates on the block in June.
“I think that if private equity is interested at all in broadcast, that would get their attention,” says Barry Lucas, senior vice president-research at Gabelli & Co.
Lucas noted that he has a hold on McGraw-Hill stock (MHP) and owns no stock personally, although it’s possible an affiliate, GAMCO Investors, may hold shares.
“It should be very straightforward, relatively bite sized for anyone, so you could get a smaller private equity player to bring in a management team to run the stations,” he says. “There’s an opportunity to enhance what are thought to be very anemic margins and make some money.
“It’s exactly what I would want if I were private equity.”
Top 30 Station Groups And Private Equity/Hedge Fund Involvement
Station groups in TVNewsCheck’s Top 30 (and their rank) that currently have private equity backing
1. Ion Media: Avenue Capital, Black Diamond Capital and Trilogy Capital.
2. Univision: Broadcasting Media Partners Inc., an investor group including Madison Dearborn Partners, Providence Equity Partners, TPG, Thomas H. Lee Partners and Saban Capital Group.
17. Local TV LLC: Oak Hill Capital Partners
22. Newport: Providence Equity Partners
23. Nexstar: Nexstar Broadcasting Group, ABRY
24. LIN: HM Capital Partners
29. Granite: Silver Point Capital
30. Young: Standard General, Highland Capital.
Other groups with private equity backing
Barrington: Pilot Group
Bonten: Diamond Castle Holdings
Freedom: Providence Equity
CCA: Silver Point
SJL Holdings: Sankaty Advisors
Private Equity Firms with Broadcast Investments
Diamond Castle Holdings
HM Capital Partners