The ‘M&A Thunder’ Just Keeps Rolling

We posted our annual TVNewsCheck-BIA/Kelsey Top 30 Station Groups ranking on May 23 and already it is badly out of date. Two weeks ago, there was the merger of Media General and Young and then just yesterday came the news of that Gannett was acquiring Belo for a whopping $1.5 billion and assumption of debt. We haven’t seen that kind of money tossed around in the station trading market in a long while.

With Belo on board, Gannett shoots from No. 6 to No. 3 on the chart with combined 2012 spot TV revenue (the ranking measure) of $1.5 billion. Only Fox and CBS are bigger. The Young-enhanced Media General goes from No. 17 to No. 12 with a combined $611 million in revenue.

The two deals create two vacancies on the Top 30. They are being filled by Granite Broadcasting with $98.8 million in revenue and Weigel Broadcasting with $97.2 million.

As I told you here a month ago, expect more comings and goings on the Top 30 over the next year to 18 months. With the exception of the network O&O groups and a few determined buyers like Sinclair, everything appears to be in play. While Sinclair will continue to scoop up smaller groups, I expect to see more mergers of near equals among groups in the top 20.

The acquisitive Perry Sook of Nexstar told a group of finance executives in New York two weeks ago that the industry is less than halfway through a round of consolidation — “rolling M&A thunder,” he calls it — that will total $8 billion before it exhausts itself. That’s starting to sound a little low.

What’s driving the consolidation is the recognition of the value of scale, nationally and locally. After closing, Gannett will have 43 stations and reach a third of U.S. TV homes. By bending FCC restrictions on local newspaper and stations ownership (all very legal, mind you), Gannett made clear its intention to hang on to every last Belo station so that it can reap every possible economy.

Another key factor is retransmission consent. According to SNL Kagan, broadcasters are now getting only 10% of the $31.7 billion cable and satellite operators are paying to programmers this year. Since broadcasters deliver 30%-35% of the audience, they should be able to get a much larger share of the programming dollars if they have sufficient size and muscle.

I’m sorry to see Belo go. It is one of the great legacy groups that grew out of the newspaper business, although the shareholders led by Chairman Robert Decherd spun off the newspapers into a separate company five years ago. Belo is known for its first-class news operations. And with stations in Dallas, Houston, Austin and San Antonio, it has had a powerful voice in its home state of Texas.

Belo should be a good fit with Gannett, which also has a strong journalism legacy, although not as distinguished as Belo’s.

Gannett-Belo came as a surprise to us and to others who track the broadcasting industry closely. That was a result, I’m told, of the fact that there was no auction. Gannett and Belo just got talking and worked out a deal satisfactory to all — including the Gannett shareholders.

On the news, Gannett shares climbed 34% to $26.60, but had given up some of the gains today, trading at around $25 this afternoon.

Typically, it’s only the acquired company that benefits from merger news. But in the recent station group M&A action, both buyers and sellers are seeing share prices rise. That suggests that investors understand the benefits of scale in the business.

Another sign of that approval, and maybe early cheerleading for the next deal, is that other publicly traded station groups saw stock prices climb. Gray was up 17.5% to $5.44; Meredith was up nearly 9% to $44.84; Media General was up nearly 9% to $9.53; Nexstar climbed a little more than 10% to $10.22; Sinclair was up 12.7% to $27.15; and LIN jumped 20% to $11.55.

Respected Wells Fargo securities analyst Marci Ryvicker notes there is still plenty of room for the broadcast stocks to grow given the seller’s cash flow multiple in the Gannett-Belo deal: 9.4x.

All such deals bring a degree of fear and loathing for employees whose livelihoods are reduced to a number and rolled up in the “synergies” — the cost savings and other merger benefits that prove to investors the deal really does make financial sense. In the case of Gannett, the synergies are expected to be $175 million. There are a lot of salaries in that number.

Nice knowing you. Thanks for your years of service. See HR.

The deal tacitly underscores what a lousy business newspapers are. In announcing the deal, Gannett made a point that by picking up the 20 Belo stations and the attendant revenue and cash flow, it is shrinking the importance of newspapers to the company. Upon closing, only a third of the EBITDA will come from newspapers, Gannett said. Ink-stained Al Neuharth who built the company into a behemoth and who passed away in April would not have been pleased.

Like Belo, Media General made itself merger-worthy by spinning off its newspapers. Tribune is taking the same tack. It will be interesting to see what some of other big newspaper/broadcasting companies like Scripps do. Will they simply spin off the newspapers? (Is Warren Buffett still buying?) Or, will they buy more TV stations as Gannett did to dilute the negative impact of the newspapers?

When we posted the Top 30 chart last month, the headline blared that Sinclair had jumped from No. 6 to No. 3 with a string of acquisitions that boosted its revenue to $1.2 billion.

Sinclair just got bumped from that third spot by Gannett. I don’t think its demotion will last long, however. My hunch is that before too much longer it will strike another deal or two and recapture the spot or perhaps even surpass CBS to become No. 2.

Then again, any of a dozen other combinations could occur to shuffle the Top 30. But don’t worry. When they do, we’ll just post an updated chart. With help from our fiends at BIA/Kelsey, here’s the latest:

TVNewsCheck-BIA/Kelsey Top 30 Station Groups