Who would have thought a year ago that TV stations in markets like Tucson, Ariz.; Fresno, Calif.; and Birmingham, Ala., would suddenly be hot acquisition properties?
Station sales have been on fire this year, thanks to the tailwinds provided by growing retransmission consent revenues, the boom in political ad spending and in some cases, spectrum prospecting in advance of the FCC’s planned auctions next year.
The flurry of activity promises to reshape the local TV landscape into a cluster of mega-groups dominated by a handful of companies including Tribune Co., Gannett Co., Sinclair Broadcast Group and Nexstar, as well as network titans CBS Corp. and Fox.
Federal Communications Commission regulations prevent one entity from owning stations that reach more than 39% of U.S. TV households. But the deal activity in recent months has mostly involved stations in markets that represent 1% or less of the nation’s TV homes, which allows even sizable groups like Gannett and Tribune room to grow. Sinclair, which has long been one of the largest station groups by volume and reach, has closed $587 million worth of station acquisitions in three transactions since April.
During the wave of consolidation that occurred in top TV markets in the late 1990s, the majors bemoaned the shift as dampening competitive bidding for syndicated programs, particularly big-ticket off-network offerings, by thinning the overall herd of station owners. This time around, however, there’s a sense that stations in smaller markets will be better served, and have more money to spend on programming, if they’re part of larger entities.
Gannett surprised the broadcast biz last month with its $2.2 billion deal to acquire Belo Corp.’s 21 stations. Tribune on July 1 unveiled an agreement to fork over $2.73 billion for 19 stations owned by Local TV Holdings. Both deals are an effort by the companies to reap the rewards of scale and expanded reach in a marketplace re-enegized by new revenue streams. Tribune’s Local TV buy was followed a week later by news of its decision to spin off its newspaper holdings into a separate company, all of which has fueled chatter that Tribune is preparing an IPO down the road.
The $684 million merger of Media General and Young Broadcasting last month created another hefty-sized group, with 30 stations in midsized markets. And the new entity is probably not done shopping. In a hothouse M&A environment, other station groups that could easily be buyers or sellers in the coming months include Hearst Television, LIN, Meredith Corp., Entravision, Gray Television, E.W. Scripps, Raycom and Granite Broadcasting.
“The smart money is buying up TV stations to gain size and scale and attract a bigger share of local advertising dollars and political spending,” said Ed Atorino, who follows the broadcast TV biz for investment firm Benchmark Co.
The retransmission consent revenue that local stations have demanded from cable, satellite and telco operators in recent years has been a huge driver to dealmaking, Atorino said.
The more stations a company brings to the table, the greater the leverage with the larger MVPD providers that need to come to terms with owners in multiple markets. In many cases, the larger station owners have clauses in their contracts that call for newly acquired stations to be paid retrans coin at the same rate as their other stations — meaning that a company acquiring stations with less favorable retrans pacts will see instant revenue gains.
Moreover, the first wave of retrans deals that involved signifi cant cash for broadcasters — a charge led by Fox, CBS and ABC in 2009 and 2010 — are starting to come up for renewal in many markets. Investors are betting those deals will get richer, which is one reason the MVPDs are starting to look to rein in programming costs in other areas by dropping lesser-performing channels.
Political advertising has spiked in the past three years in part because of the 2010 Supreme Court ruling that paved the way for unbridled spending by “SuperPAC” political action committees. Most of that money has flowed to local TV stations because of the need for campaigns to target voters on a regional basis. Local TV’s haul from campaign and issue-oriented blurbs is expected to top $3 billion in 2014, even without the goose provided by a presidential election. Spending on broadcast and cable outlets hit $3.88 billion last year, with the lion’s share going to broadcast, according to Kantar Media’s Campaign Media Analysis Group.
Benchmark’s Atorino sees the potential of the FCC’s spectrum auctions skedded for next year as another motivating factor for station sales in smaller markets. The FCC is trying to persuade station owners to give up some or all of their spectrum — the bandwidth allocated for their signals by the FCC — in order to keep up with the demand for WiFi and other wireless services.
Spectrum is the textbook example of the finite resource that may gain in value as demand for it grows but the supply remains fixed. Benchmark’s Atorino credits Sinclair Broadcast Group chief David Smith for being vocal about the potential of spectrum-squatting as one rationale for Sinclair’s seemingly insatiable appetite for station deals.
“He’s a spectrum opportunist,” Atorino said. “There is no more spectrum being created. At some point down the road, that resource is going to become increasingly valuable.”