There’s no federal election windfall this year, but high-yield bond analysts Bishop Cheen and Davis Hebert at Wells Fargo Securities still see good core ad growth for local television. And when the political bucks return in 2012, look for more de-leveraging – which is something that bondholders really like.
“All indications now point to core advertising having another growth year in 2011. We have opined that the recovery of core local advertising in 2011 and beyond remains the key for local TV stations, despite much focus on retransmission consent fees and political ad revenue in election years. Core advertising still makes up the lion’s share of a local TV station’s top line (as much as 75%–85%, depending on political). Auto advertising has been a key component of a recovery that was much quicker than expected in 2010. Although core ad sales should have much more difficult comparables in 2011, we are forecasting core advertising to be up by low- to mid-single digits this year, banking on a continued recovery in auto ad sales and a modest recovery in other categories, including telecom and retail. That said, we have been hearing the “lack of visibility” phrase consistently over the past three years, thus it remains uncertain if a world event or economic double dip could throw the recovery off. But, at this stage in the game, the ad spending recovery seems to be firmly in place in 2011, despite the lack of “events” such as the Olympics,” the analysts wrote in their semi-annual update.
That outlook for local TV, by the way, is rosier than their view of radio, although that medium is also expected to have growth in 2011.
Cheen and Hebert noted that TV groups were able to use free cash flow to pay down debt and de-leverage in 2010 as cash flowed in from the political campaigns, so it is bad news for bond investors that the flow of free cash flow will be less in 2011. “Now, the good news: Political will be back in 2012, for what is expected to be another contentious presidential election year. Despite much press about candidates using grassroots Internet campaigns and social networking, elections are still very much dependent on TV advertising, and we don’t expect that to change before 2012,” the analysts wrote.
And don’t forget retransmission consent cash. Despite lots of press about efforts to change the retrans rules, the Wells Fargo analysts don’t think the FCC wants to get involved in mediation of the disputes between broadcasters and cable companies. They do note, though, that a long-term risk for station owners is broadcast networks demanding a chunk of the retrans cash when affiliation agreements come up for renewal. “Although local broadcasters appear willing to accept such terms, the sharing breakdown remains up in the air. Ultimately, we think having the network parent’s clout at the negotiating table with cable MSOs and satellite companies is a positive for the space. For example, without the network parent, a local station group may negotiate $0.20 per subscriber in a retrans deal. Meanwhile, a situation with a network’s involvement might yield $0.50 or higher per subscriber, with the network and affiliate group splitting the pie two ways,” they theorized.
On the M&A front, Cheen and Hebert think there may be some action in 2011 after a three-year stall. “We think some companies, such as Gannett, would be looking to diversify away from their deteriorating newspaper business, while highly leveraged broadcasters that have financial sponsors could be attracted by a deleveraging acquisition. Now that the depressed 2009 cash flow figure is in the past, sellers can use 2010 and 2011 cash flow numbers, as visibility seems to have improved for this year,” the two wrote. As for potential sellers, Freedom Communications is already being shopped and the analysts figure the creditors-turned-owners of Young Broadcasting could look to exit if deal flow picks up.
RBR-TVBR observation: We’re still waiting for a major deal to reset the multiple bar in television post-recession. The Hubbard-Bonneville deal in radio set a low bar of eight times cash flow in radio. What will it be for television stations?