Station Values Signify A New Era In OTA TV

Media General closed on its merger with Young Broadcasting on Tuesday of this week. That deal joins acquisitions announced by Gannett, Nexstar, Sinclair, Tribune and others.

Lately TV critics and others have been talking about TV’s “Second Golden Age.”  While I think they are probably talking about the quality of original series playing on broadcast and cable networks, I’d argue that these recent sales activities also demonstrates the resurgence of broadcast television.

In addition to the near-weekly “Station Trading Roundup” reports appearing here in TVNewsCheck, consider this statistic by Kimberly M. Randolph, ASA which appears in the September-October issue of MFM’s member magazine, The Financial Manager (TFM):

The flurry of TV station sales activity has escalated substantially in 2013, with more than $8 billion in proposed transactions announced in the first seven months of the year. In comparison, 2011 and 2012 deals totaled $1.2 billion and $2.8 billion, respectively.

Randolph, a director of valuation and financial opinions at the financial advisory firm Stout Risius Ross, goes on to note that “prior to 2012, the TV industry’s equity performance was relatively correlated with the S&P 500 Index. However, for the majority of the last year, the industry outperformed the S&P with significant growth in market capitalization.”

So, what’s behind the resurgence? Randolph says the drivers include the combination of a robust debt market, retransmission fee revenue from multichannel video programming distributors (MVPDs) and a healthier advertising market.

In her article entitled “Video’s Vibrant Rise,” she notes:

When acquiring companies, buyers generally look to potential cost savings, financing benefits and potential revenue synergies that can be realized by the combined entity. In nearly all of the top nine transactions for the first seven months of ’13 the potential synergies to be realized by a buyer in the TV industry are substantial; in fact the average spread between buyer and seller multiples is nearly three turns of EBITDA (earnings before interest, taxes, depreciation and amortization).

Randolph’s analysis is based upon an average EBITDA for fiscal years 2011 and 2012, which helps to smooth the fluctuations in ad sales revenues that occur during years with political advertising and thereby represent a normalized level of cash flow.

“Generally, the parties to these nine largest transactions focused public discussions on potential synergies that would be realized fairly quickly, i.e., within 12 months following the close,” she reports. “On investor calls, the management cited advantages such as increased retransmission revenue; elimination of public company costs, as well as reduced operating expenses and programming fees.”

As you would expect, retransmission revenues are becoming increasingly important to cash flow estimates. Randolph’s analysis shows retrans fee estimates can also result in divergent expectations between buyers and sellers. “The buyer is not always willing to pay the seller for synergies it brings to the table, and the seller may expect to be paid for higher retransmission dollars in the future based on current industry trends.”

Broadcast station groups with relatively new retransmission agreements can achieve almost immediate synergies related to increased retransmission revenues, as a result of including an “after-acquired” clause in their retransmission agreements that allows buyers to roll the newly acquired stations into their existing contract. And, Randolph points out, “In situations where the buyer does not have new or favorable retransmission agreements, increased size and scale can be leveraged in future negotiations.”

The article goes on to outline the effect of asset allocations on TV valuations. In sum, they address the favorable impact on station valuations of intangible assets such as broadcast licenses, network affiliation agreements, a station’s advertiser base and retransmission consent agreements. Of course as she notes, “the assets have different useful lives for accounting purposes.”

Randolph further observes: “Despite these variables in the valuation process, there’s been one constant in the past few years for those valuing TV transactions: the multiples have held fairly steady, with no material appreciation or return to pre-recession levels.”

However, as she concludes in her piece, that constant may be ready for a change. “As the deal market intensifies, the multiples paid for companies are likely to be driven up. With increased competition for less inventory, it’s likely that buyers will be forced to pay for a portion of the synergies.”

Whether you are a buyer, a seller or are holding pat, Randolph’s analysis is good news. It’s a very obvious example of how efforts to increase revenues by expanding brands across media platforms and to contain costs through activities like shared services agreements are going to result in a healthier outlook.

I expect that I will have much more to say about that outlook in the months ahead as MFM members and others share results of specific strategies designed to improve station EBITDA.

Near term, we are offering a Distance Learning Webinar next Tuesday, during which Borrell Associates’ Gordon Borrell will address “Budgeting for Digital in 2014: Thinking Big Pays Off.”  More information about this educational program is available on our website; it’s not too late to join us for this timely discussion on how to grow your station’s digital media revenues.

After all, a successful multiplatform strategy for broadcast television can be the ticket to experience what Wired magazine has described as the “Platinum Age for Television.”  Taking my cue from the music business, I think of going platinum as a step beyond gold — and a very good thing indeed.

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.