TV’s Next M&A Wave Won’t Be Like Last One

As Mark Twain might put it, news of the death of broadcast television M&A has been greatly exaggerated. In fact, as the end of summer looms, we could be on the cusp of an especially dynamic market for mergers and acquisitions in the television space.

Of course, throughout the recent downturn there have been regular declarations that a return of broadcast M&A is just around the corner and the predicted uptick seems as elusive as the ever-receding horizon. But this time there are a number of cross-currents forming that will create a particularly strong climate for deal-making. Those deals and the climate itself will be different from what we saw before the economic downturn. This won’t be your father’s M&A market.

The last several months have seen growth in M&A activity. Although the debt-ceiling crisis has introduced uncertainty and variability into the credit markets, good deals are still getting done. And for broadcast television, there are particular features that will spur new mergers and acquisitions. First, the 2012 election cycle promises to be a blockbuster for political advertising. The 2008 and 2010 election cycles showed historic growth in political ad spending and 2012 is poised to break all records. The Supreme Court’s decision in Citizen’s United will unlock unprecedented spending in a presidential election cycle with many contested seats up for grabs. While debate has appropriately centered on whether the Citizen’s United case is good public policy or sound jurisprudence, one thing is certain:  it’s good business for broadcast television.

Projections for political advertising will make station financials particularly healthy, creating an opportune time for station groups and bankers to put together a book. Naturally, smart buyers will not extrapolate political ad spending into the long-term, but robust projections act like home-made cookies at an open house: it’s not the reason to buy, but it does make the property that much more inviting.

Moreover, the possibilities for political ad spending underscore an especially salient feature of the broadcast TV business. Broadcast advertising generates cash. For buyers looking to the credit markets for acquisition financing, the prospect of increased cash flow in the coming political season creates confidence in paying down that indebtedness.

And for private equity looking at an array of investment opportunities, the cash flow of broadcast television is a steadying element in a portfolio. Betting on new technologies or the next social networking craze may yield a homerun, but it’s a long-life cycle. By contrast, while it may not be sexy, those ad spots in local news generate cash, day in and day out. The reliability of cash flow will continue to make TV a logical component of private equity portfolios.

To be sure, there are also private equity funds that have gone down this road before — and are ready to exit. While they may have reaped the television cash flow, they may have also stayed longer in the investment than planned. Having waited out this downturn, some will see the recovering credit and M&A markets as a prime time to exit — fueling still further M&A activity in the space.

Changes in the television industry since the last wave of M&A activity will both spur new deal-making and change its very nature. Retrans fees — which had not yet matured as a meaningful second income stream in broadcast TV as of the last M&A cycle — will now be a new catalyst for growth and achieving scale. The opportunity to expand valuable existing retrans relationships into new markets through station acquisitions will be a new driver for deal making. But the role of retrans in station valuations could be complex. Buyers will need to look hard at both the terms of the target stations’ retrans arrangements as well as the after-acquired station clauses of their own deals to determine which deal will control.

At the same time that retrans has developed as an important component of station valuations, the role of the networks is changing the complexion of that revenue stream. Network affiliation agreements are re-slicing the retrans pie, adding still another variable into the valuation mix. Calibrating retrans revenue based on the cable agreement that will govern and then recalibrating those revenues based on the target’s network affiliation agreements will become an essential calculus of deal valuation modeling.

Lurking as an X factor in valuations is the role of spectrum. The specter of spectrum auctions — whether voluntary or otherwise — and an emerging media and technology ecosystem giving broadcasters new uses for their licensed spectrum, including for mobile digital television, make the role of spectrum both more significant and less certain. Whether buyers simply continue to see spectrum as part of old fashioned “stick value” or look to the future to see new uses and values will be one of the interesting developments of the coming television M&A market.

Valuation comparables may be the essential missing man in this formation that either opens or continues to hold back M&A. With little meaningful deal data since the downturn, some will be reluctant to jump in without knowing the water temperature of this M&A market. Concerns about over-paying or under-selling could continue to chill the market. Now, with at least two groups announcing plans to test the M&A waters, the industry soon may have that missing reference point on valuations.

The foundational elements for renewed M&A activity are falling into place. Add to that the differentiating value of broadcast television — its ability to generate cash, the near-term value of huge spending in political advertising, and the emerging (and, yes, changing) shape of station economics — and you have newly ripening incentives for buyers and sellers. No, TV M&A is far from dead,  but to say that this time it will be very different is no exaggeration.

Eric Dodson Greenberg is a partner at Paul Hastings LLP in its New York and Washington offices. He specializes in media transactions. You can reach him at [email protected].