Station Trading Continues Comeback In 1Q

The catch phrase for the current station trading market: Let’s make a deal.

Quite a change from just a year ago when private equity investors in broadcast television were lining up to cash out while many buyers were sticking to the sidelines.

What’s driving the deal making? An improving economy coupled with a looser credit market, station groups looking to scale up and private equity investors still looking to cash out.

“The rationale is that scale matters,” says Barry Lucas, SVP-analyst with Gabelli & Co. “In order to have a balance of power between station groups, network owners and MPVDs, group owners have to bulk up.”

The station trading market started heating up a year and a half ago and has stayed hot in 2013. Since the beginning of the year, 17 deals involving 38 stations valued at $656 million have been recorded, according to BIA/Kelsey.

The key transactions in the first quarter so far: Sinclair Broadcast Group’s purchase of 24 Barrington stations for $370 million and five Cox stations for $99 million.

The Barrington deal translates into a 5.2x multiple for Sinclair, 7.8x for Barrington. Sinclair’s $99 million acquisition of four Cox stations, again in smaller markets, came at a 4.6x multiple for Sinclair, 6.2x for Cox.

The sellers’ multiples are startlingly low for an industry where 12-14 times were routine prior to the Great Recession. But the experts explain that the stations involved in recent deals are in smaller markets where margins are smaller, growth is slower and buyers are fewer.

Stations in middle and larger market still command multiples in the 9-10 range. The best evidence of that are Sinclair’s purchase of Freedom Broadcasting and Scripps’ buy of McGraw-Hill Broadcasting in late 2011.

Recognizing the differences between large- and small-market scale prompted Sinclair CEO David Smith to create a small-market group and put veteran small-market broadcaster Steve Pruett, formerly of Communications Corp. of America, in charge.

“We believe there are many more opportunities to acquire quality assets and to unlock hidden value in both the middle and small markets,” said Sinclair CEO David Smith during a call with security analysts. (Transcriptions of Smith’s comments to analysts in this article were provided by Seeking Alpha.)

So far, Sinclair has demonstrated the biggest appetite and the greatest financial capacity for acquisitions. But it’s hardly alone in adding to its stable. Nexstar, whose key private equity backer ABRY Partners has reduced its stake from a peak of roughly 54% to 4%, is also in the chase. CEO Perry Sook says the group will continue to seek acquisitions that are accretive — that increase cash flow from day one.

After floating a for-sale trial balloon in 2007, Nexstar Broadcasting shifted gears and is now well along in building scale. With the recent acquisitions, including 10 Newport stations, Nexstar now owns, operates or provides sales or other services to 72 stations. Those include 26 duopolies out of the total of 41 markets.

Nexstar anticipates the acquisitions will boost free cash flow, potentially enabling additional acquisitions and speedier debt repayment, by 50%.

Other groups possibly looking to selectively scale up include Gannett, Scripps, Hearst and Meredith.

Meanwhile, with many private equity investments in television getting long in the tooth, there are plenty of willing sellers. Local TV LLC, owned by Oak Hill Capital, is among those rumored to be for sale though no book is yet making the rounds.

Pruett’s old group CCA and Granite, both backed by Silver Point Capital, do have books out, according to sources. Titan Television Broadcast Group’s 11 stations also are reportedly on the block.

Then there’s Fisher Communications, which, after several years of playing coy, put up the for-sale sign early this year.

From a 30,000-foot view, it’s all part of a television industry consolidation that’s been building momentum for several years.

“The industry has long been ripe for consolidation,” says Damian Riordan of Peloton Media Advisors. “Why? It’s a modular business and technology has helped drive that. Operations can be made more efficient through technology and continue to become more efficient through deployment of new technology.

 “We’re at the beginning of what could be a decade of this.”

Sinclair, with more than 100 stations reaching roughly 30% of U.S. television households, clearly leads in the bigger-is-better battle. And it is precisely that size and scale that explains the gap between buyer and seller cash-flow multiples in Sinclair’s recent acquisition of Cox and Barrington stations.

Scale delivers many efficiencies, says broker and station investor Larry Patrick of Patrick Communications, and “retransmission consent is the biggest cog in the wheel.

“The bigger you are, the better you can negotiate and gain most-favored nation status,” says Patrick. If the typical group is getting 40-50 cents a month in retrans, “the big ones have deals in place that get them double that number.”

Operating two or more stations in a market also translates to higher margins and Sinclair’s David Smith is a master of that strategy. He has used proxy companies — including Cunningham Broadcasting, Deerfield Media and a newly formed Howard Stirk Holdings headed by Armstrong Williams — to own stations that he operates in markets where FCC rules say Sinclair cannot own them itself.

“The obvious objective in all of this, as it has been in our smaller markets, is to accumulate as much mass as we can in every market to be as competitive as we can,” Smith said during the analyst conference call.

“So whether we have one station or start with one station and end up with two or various operating structures to get scale on efficiency is to be determined.”

Smith is also a big believer in the value of spectrum.

“The longer-term strategy — and I don’t know what the definition of longer here is, it could be two years, could be three years, could be four years — is about spectrum space,” Smith elaborated during the call. “And we think that the notion of having spectrum space and being a really large-scale multichannel broadcaster for the long-term is well worth the play.”

With sufficient spectrum, station groups gain the capacity to deliver more digital channels and other services, effectively reducing the advantage cable and satellite providers have in bundling hundreds of channels.

For television viewers growing disaffected by the steady escalation of cable and satellite bills, receiving a broadcast bundle for free could represent an inflection point for the industry.

“If you’re sitting there with 14 million homes and trying to get up to 70 million, how do you do it?” Riordan asks. “Bargain with telcos or go through side door? As long as the distribution is there, now your gatekeeper is a guy like David Smith.”