Capital spending

Hearst's $520 million deal part of larger scheme

NEW YORK — Imagine paying more than a half-billion dollars for a TV station barely contained in the Top 20 markets and being grateful for it.

It’s easy if you’re Hearst-Argyle Television, the station is Sacramento’s KCRA and the deal also includes a local marketing agreement, or LMA, for the market’s WB affiliate.

Still, the $520 million that Hearst-Argyle agreed to fork over to Kelly Broadcasting Co. late last week struck casual observers as breathtakingly steep compared with, say, the $385 million paid just two years ago to buy Los Angeles’ KCAL.

And though it technically includes two stations, the price for Kelly’s Sacramento properties even dwarfs the historic $450 million that Boston’s perennial market leader — ABC affiliate WCVB — went for in the go-go ’80s.

What gives? Enough of a tax break to make the Hearst-Argyle acquisition profitable — or, as the official statement puts it, “immediately accretive” — from the get-go.

It must be some tax break, indeed, considering that KCRA and the KQCA local marketing agreement together generated only $65 million in sales last year.

That means Hearst-Argyle, which is between 50% and 60% owned by the privately held Hearst Corp., is paying eight times the two stations’ revenues. His-torically, eight times their earnings would be considered appropriate.

Yet Wall Street tended to applaud the deal, and not just for the rapid write-off of good will associated with the properties’ FCC licenses.

“With KCRA, you got NBC’s great demographics,” an entertainment analyst explained. “But there’s no doubt that NBC’s going to skew older now that ‘Seinfeld’s’ gone.”

Hence the premium placed on WB affil KQCA. “It’s not just young,” the analyst said. “It’s also in a rapid growth phase.”

The deal offers up affiliate diversity in addition to that of the demographic kind. Historically, Hearst-Argyle has been deemed overly dependent on ABC, with which nine of its 12 stations were affiliated as recently as this year.

KCRA is not only an NBC affil, but also, as the May sweeps attest, dominates the market: KCRA recorded a total-day share of 19, compared with 12 shares each for the affiliates of CBS and ABC.

Small wonder, then, that KCRA was estimated to have accounted for nearly $400 million of the $520 million package.

The fit drew geographic praise as well for further concentrating the self-styled “pure play TV broadcaster” in economically advantaged markets like Sacramento, which ranks among the 15 fastest-growing in the country.

Some of these attributes have already been cited by Moody’s Investors Service in its confirmation that the deal does not jeopardize Hearst-Argyle’s invest-ment-grade debt rating.

The “stable” outlook Moody’s accorded the New York-based station group is especially noteworthy in that it incorporates Hearst-Argyle’s winning bid last May for Pulitzer Publishing’s nine TV stations and five radio stations.

Those stations were won for $1.15 billion in Hearst-Argyle stock and the assumption of $700 million in debt — an amount that puts real teeth into the company’s public statement earlier this year to attain household coverage of at least 20% within five years.

Once the Kelly properties are in place, Hearst-Argyle, barely a year old itself, will have four years and only 2.4 percentage points to go.

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