Private investors go rural

Equity players reel in big fish in small ponds

It owns one of the nation’s largest home mortgage lenders and financial service providers, GMAC LLC.

It owns or co-owns a school bus manufacturer, the Alamo and National rental car firms, an Israeli bank, the Mervyn’s department store chain, and for the past few months, it’s been one of the big funds in the hunt for troubled automaker Chrysler.

Just three weeks ago, Cerberus Capital Management, a $22 billion private investment fund and a fast-rising star on Wall Street, put another notch on its belt in buying 191-year-old gun maker Remington Arms for $370 million.

With all of the above ammo (and more) in its $60 billion portfolio, what would Cerberus want with a handful of small-market TV stations that CBS Corp. was looking to unload? Nobody at the 15-year-old fund named after the mythological three-headed dog that guards the gates of Hades is talking. But CBS execs were truly thrilled when Cerberus agreed in February to pay $185 million for seven small-market stations, two of which are weak low-power outlets in Palm Beach, Fla.

In the era of insta-access, go-anywhere digital media and personalization, aren’t old-fashioned broadcast TV stations considered a moribund investment? Particularly for stations in the bottom third of the nation’s 210 TV markets, places like Eureka, Calif. (market No. 193), Abilene-Sweetwater, Texas (No. 164), Marquette, Mich. (No. 178), and Elmira, N.Y. (No. 173). These are hamlets with fewer than 115,000 TV-equipped households, a limited traditional advertising base and average household after-tax incomes $10,000-$15,000 below the national average of $52,500.

But that disconnect is precisely the point, Wall Street and broadcasting biz veterans say. In a moment of mania for media deals among private investors, fund managers are increasingly thinking small is beautiful.

“In smaller markets, there aren’t as many (media) challengers to over-the-air stations,” says Mark Fratrik, veep of consulting firm BIA Financial Network. “While they face competitive challenges, television stations still generate a decent cash flow. There are opportunities for management to improve the fortunes of local TV stations by bringing new ideas and new strategic thinking.”

The CBS-Cerberus deal is one of a number of similar transactions from the past year that will see the transfer of dozens of stations deep in heartland markets from traditional broadcasting companies to the shadowy world of high-finance and private equity.

Providence Equity Partners recently cut a $1.2 billion deal with radio giant Clear Channel Communications (which itself is in the midst of a prolonged bidding skirmish to be taken private for $19.5 billion) to buy its 38 TV stations and 18 digital multicast channels. There’s talk of USA Today parent Gannett Co. putting its 22 TV stations on the block, which would test private equity’s appetite for higher-priced stations in larger markets.

Fratrik and others believe that as big fish in small ponds, small-market TV stations could have a significant branding advantage over large-market stations in launching digital offshoots and new media applications via the Web. In many markets, the old-guard CBS, NBC and ABC affiliates are community institutions with awe-inspiring loyalty among viewers.

“We still do 60 and 70 shares with our news in some of our markets,” says Jim Yager, president and CEO of Barrington Broadcasting, citing WLUC-TV, the company’s NBC affiliate in Marquette, Mich. (“Someplace Special,” according to its on-air slogan).

Chicago-based Barrington owns 21 stations in markets ranging from Flint, Mich. (No. 66), down to Kirksville, Mo.-Ottumwa, Iowa (No. 199). The company was formed in 2003 by Yager and a few other broadcasting vets with a bankroll from Pilot Group, a private investment concern co-founded in 2003 by industry zelig Robert Pittman as part of his post-AOL Time Warner comeback.

“Small-market stations are one of the best-kept secrets in TV,” Yager says.

Madison Avenue is abuzz with talk of how newspapers and phone books are bleeding classified advertising dollars to Web and digital platforms. But in small town U.S.A., the migration of classified dollars is from print to local TV, Yager says. As over-the-air network entities, broadcast TV stations are guaranteed a channel position on the local cable operator’s channel lineup — at a price that is rising as broadcasters become more militant about demanding high retransmission consent fees than in the past.

Some in the industry are skeptical that the newly minted broadcast station owners will do much, if any, investing from afar in their stations, or have the secret sauce to boost the margins of what is already a 15%-20% margin business.

Cerberus, headed by Drexel Burnham Lambert alum Stephen Feinberg, is among the most active private equity players in the country, but it had not dabbled much in media until the CBS stations purchase. Providence Equity, on the other hand, is among the present owners of MGM and Warner Music Group.

The big question as private equity groups load up on TV stations in the sticks is, who’s going to emerge to buy them at a premium when the day of return-on-investment reckoning comes for all of those public-market-shunning investors?

Observers point to the rise during the past decade of a new breed of super-groups composed of dozens of stations in tight regional clusters — mostly in the South, Southeast and Midwest — designed to give them maximum clout with advertisers, cable operators and other key vendors. At present, the big players include Atlanta-based Gray Television, with 36 stations; Richmond, Va.-based Media General, with 23; Providence, R.I.-based LIN TV Corp., with 30; and Montgomery, Ala.-based Raycom Media, with 42.

The hope is that they’ll be robust enough in a few years time to lay out premium bucks for thriving, digitally enhanced stations. The corresponding fear is that some of these independent outfits will hit the skids and flood the marketplace with asset sales just as Cerberus and Providence, et al., will be looking to do the same.

For now, however, there’s good news from the public markets for those who are venturing into the station business in a private, quarterly earnings-free zone. In recent weeks, shares of Gray Television, LIN and Media General have been trending upward, with Gray and LIN trading near 52-week highs.

“It’s like watching a bet on which way the market will swing,” says a longtime midmarket TV and radio station broker who’s anticipating a busy year.

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