Run On Nation’s Station’s

It’s been a booming market for TV stations in the past year, with both station prices and the number of deals at cyclical highs. And despite some concern about how much further the market can run, experienced players have raised about $2 billion in recent months to continue buying up stations.

Wall Street firm Donaldson Lufkin & Jenrette is putting the finishing touches on an investment fund for ABRY Broadcasting that will eventually have more than $1 billion of buying power, says ABRY principal Andrew Banks.

A similar-sized fund is also being raised by Argyle Television with the help of Chase Manhattan Bank’s securities division. Argyle has already made one purchase with the money, buying three stations owned by North Star for $110 million last September, while ABRY is close to finalizing a few deals.

Several other investment partnerships are said to be scouring the land for potential station purchases, while operators like Clear Channel, Ellis Communications and Renaissance are also looking to expand.

All this comes after the best year for TV station deals in almost a decade, according to Paul Kagan Associates analyst Bishop Cheen, who tracks the market. A combination of affiliate switches prompted by Fox’s $500 million deal with New World Communications last year, a rebounding economy, launch of two new networks and the prospects of an easing of ownership limits have brought all sorts of buyers into the market.

Cheen told the independent TV stations annual conference (INTV) last month that $5.6 billion worth of stations changed hands in 1994, making it the best year for purchases since 1985. As a result, prices are also at a 10-year high, having doubled in the past three years, Cheen said.

Some bankers question whether this is the right time for anyone to be buying. “It’s awfully well picked over,” says one banker. “It’s a fair point. There are an awful lot of people buying TV stations,” says a Wall Streeter who dips in and out of the TV station market.

But some analysts argue that as strong as the market is right now, it can go higher. And for experienced players, the timing is not so important.

“For skilled operators I would say that there are still some opportunities in TV stations,” says Rick Michaels, chairman of Communications Equity Associates.

Kagan analyst Cheen says that despite the price rises over the past three years, “we think there is more growth ahead because of the ownership issue being reviewed by the FCC.”

Cheen also notes that the strength of the market is tied to the ease of borrowing money. “We have learned in the past 10 years that access to capital matters more than the cost of capital,” he says, and adds, “credit is coming back.”

But other factors unrelated to capital could impact the market’s strength. As a result of all the affiliation switches that the Fox-New World deal wrought, most stations are now locked into 10-year affil deals, which could limit the number of potential buyers.

“The longterm affiliation deals have increased compensation, and that goes straight to the bottom line,” says Renaissance Communications topper Michael Finkelstein, who adds that while that means the value of the station increases for the seller, the buyer will pay for that with nothing to pass on.

David Schutz, VP of Hoffman Schutz Media Capital Inc., a station consultation firm, says prices have plateaued.

“The renewed interest in the marketplace for TV stations was due to such things as the one-time run-up in affiliate compensation and increases in national spot advertising,” says Schutz. “We don’t think the recent growth will continue.”

Many are looking to the very real possibility of relaxed regulations as a factor in further driving up station values. While it may be several months before any new regulations are passed, a worst case scenario would still likely result in the 25% national reach cap being upped to 30% or 35%.

ABC, CBS, NBC and Fox are expected to be the biggest beneficiaries and they’re watching the market closely.

“The 10-year affiliation agreements will limit the number of buyers,” says one network exec. “If we want to buy more stations we would be restricted to our own affiliates.” The network exec is also concerned that ad growth won’t be as strong in the next year; 1997, he says, would be the year to start shopping because values will be down.

ABRY and Argyle’s ability to raise close to $2 billion in equity and debt notwithstanding, one banker close to ABRY agreed that “lots of people” think it’s the wrong time to be raising money for TV station purchases.

“It’s a simplistic view. It’s a question of what they’re going to do with the funds. It’s more than buying cheap and selling high. These guys are owner-operators. They buy their stations and do terrific things in terms of making them run better,” he said.

Even ABRY principal Andrew Banks agrees that for pure investors, “it would be imprudent to buy when prices were at a cyclical high.”

Banks says ABRY is “somewhat different.” The partnership buys stations where there are opportunities to increase cash flow through operating changes, he says.

ABRY has a track record. The partnership bought five stations in the late ’80s and sold three of them within five years for enormous returns. Banks also pointed out that ABRY bought the stations at cash flow multiples close to historical peaks – and sold at the same multiples. What changed in the meantime was their cash flow.

“We increased the audience at the properties on average by over 50%, increased revenue on average by more than 250% and increased cash flow seventeen-fold,” he says.

A similar approach is taken by Argyle Television, although its track record benefits as much from windfall gain as from operating improvements. Argyle and DLJ doubled their money on a $320 million purchase of four stations bought from Times-Mirror in 1993. Only months after closing the deal, Argyle and DLJ agreed to resell them to New World for $717 million.

DLJ is not involved with Argyle in its current effort. Argyle’s principals, including Bob Marbut, Blake Byrne and Ibrahim Morales, wanted to keep control of their new investment vehicle known as Argyle II, Byrne says.

Byrne dismisses questions about the state of the market. “I don’t look at the market, I look at the individual station, and if the individual station is such that it appears that we could buy that station and provide our investors with a good return, then I am interested.”

CEA chairman Rick Michaels says the sellers of stations will include “big newspaper chains” which didn’t run the stations all that well or “family-owned companies that have accumulated a lot of people on the payroll over the last 25 years and there could be significant cost-savings” after a sale.

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