Volume of transactions spikes in 2013 as big groups look to get bigger

Forget New York, Silicon Valley or even Sun Valley: The locus of the action in media M&A this year has been in places like Seattle, St. Louis, Houston and Phoenix.

TV stations in medium and small markets have been changing hands at a torrid pace, fueled by a perfect storm of eager buyers, motivated sellers and low debt-financing costs.

The value of U.S. broadcast TV station transactions this year skyrocketed to a whopping $10.4 billion as of Oct. 31 — compared to $1.8 billion for the same frame in 2012, according to analysis by media research firm SNL Kagan.

The 2013 tally includes Comcast’s accelerated purchase of General Electric’s outstanding 49% stake in NBCUniversal. In that $16.7 billion deal, about $1.8 billion was ascribed to the value of the Peacock’s 10 NBC O&O stations and 15 Telemundo O&Os, according to SNL Kagan.

The new-model Tribune Co. made headlines with its $2.7 billion acquisition of 16 stations from Local TV Holdings. Gannett Co. nearly doubled its TV holdings by scooping up 20 Belo Television outlets in a $2.2 billion deal.

Those are big numbers for an advertising-dependent sector that has been fending off dinosaur perceptions in the digital age. What gives?

Simply put, it’s about retrans and politics.

The new revenue stream that local TV stations can now count on from multichannel video program distributors — or MVPDs, which includes cable and satellite providers — through retransmission
consent fees have been incentive for the biggest of the broadcast groups to get bigger. And the gusher of political advertising dollars unleashed by the 2010 Supreme Court decision striking prior spending restrictions shows no signs of slowing down.

Most of that money flows to local network-affiliated broadcast stations.

No media concern has been more in the hunt for big game this year than Sinclair Broadcast Group. Already one of the biggest broadcast groups, Sinclair since January has added 57 stations to its arsenal in five transactions valued at nearly $2 billion. The biggest was the $985 million buyout in July of seven Allbritton stations, including the powerhouse Washington, D.C. ABC affiliate WJLA-TV. Sinclair at present has 164 stations (and counting) in 77 markets.

“We’ve tripled in size in the last 18 months,” says David Amy, Sinclair Broadcast Group’s exec VP and chief financial officer. “The opportunity doesn’t come around very often when you’re in a position to use the strength of your balance sheet to make deals and have the cost of capital as low as it is. From an M&A standpoint, it was like the perfect storm.”

Amy notes that a big factor in the latest wave of station sales has been the exit of private equity players and the return of what he calls “television people.”

Private equity funds began dabbling in TV station investments about eight to 10 years ago. But the cratering of the local advertising market in the 2008-09 economic meltdown threw a curve in the ROI models for those investments. That put added pressure on smaller operators with PE money behind them to sell.

Today’s buyers are companies that intend to operate stations for the long haul, not flip them.

Like everything else in TV, the broadcasting biz has also become more complicated in the past five years, between the need to negotiate retrans pacts with MVPDs, to wrangling with network partners that demand a slice of local retrans coin. And it’s a highly local business that demands continued investment in manpower and technology. Sinclair execs have been bemused by tales of short-sighted management that they’ve heard about from some of their new stations.

“At one station group we brought, private equity owners were contemplating putting up a sales center in India to handle local advertising,” Amy says. “We’ve gone in to stations and said ‘What do you need’ and they’ll say ‘How about some chairs?’ They were so focused on making a buck next week, they forgot about how to run a business for the long term.”

The pace of station trading will undoubtedly slow in 2014, given that so much ripe fruit has been picked this year. Also, sellers may be less motivated to move quickly if political spending is strong for the mid-term elections.

Meanwhile, watchdog orgs warn of the dangers of allowing a handful of companies to dominate local markets. Pure-play broadcast groups like Sinclair say they need more scale to remain competitive in a world ruled by giants. There’s clearly merger momentum ahead for major cable operators (John Malone is back in deal mode) and possibly satcasters DirecTV and Dish Network.

The larger question of broadcast and cable ownership limits is expected to be tackled by the FCC next year as a component of its regular review of its media ownership rules. As part of that process, some in broadcasting are girding for the retrans issue to become a political football as MVPDs press for more regulatory controls to be placed on the process.

One of the built-in upsides in many recent station acquisitions is that the acquiring entity can automatically command higher retrans rates for newly purchased stations through grandfather clauses in MVPD deals. This dynamic has been significant enough to cause SNL Kagan to revise its estimate for total broadcast retrans revenue for 2018 to $7.1 billion, up from its earlier forecast of $6 billion. That’s also a big jump from $3.3 billion this year.

Comcast, the nation’s largest cable operator, recently warned subscribers that it will add a $1.50 “broadcast TV fee” to monthly bills when warranted to help offset rising retrans costs. That has been seen as a not-so-subtle way of positioning retrans as a consumer issue to pressure the FCC to address MVPD complaints.

Another unknown adding sizzle to the broadcast sector is the promise of the FCC conducting spectrum auctions in 2015 to enhance the capacity of wireless communications services. The prospect of station owners getting the chance to sell off their spectrum allocations in an auction environment has been a catalyst for some sales.

Still, the most attention-getting station deals of the year have been undertaken by companies deeply rooted in broadcasting. The gameplan for Tribune, Gannett, Sinclair et al is to enhance the viability of local broadcast stations and their digital offspring, even in small markets. It’s not about being positioned for an opportunistic windfall (though MVPDs might argue otherwise).

“This is a tough, competitive industry,” Amy says. “We’ve got to be running at 100 miles an hour while everybody else is running at 70 miles an hour.”

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