Radio merger and acquisition activity has picked up noticeably in 2011, but television is still waiting for a bellwether deal. Investment banker Chris Ensley at Coady Diemar Partners is out with a report predicting that TV M&A activity will increase this year, but he isn’t expecting a repeat of the volume seen in pre-recession 2007.
“One might expect 2011 to be a strong year for local TV M&A based purely on cyclical attributes of the TV ad spending, as sellers like to sell based on forward projections (i.e., 2012 estimates) that include substantial political advertising, and buyers like to close deals early in an even numbered year so that revenues from political advertising can be utilized quickly to reduce leverage,” wrote Ensley, whose name is likely familiar to our readers from his years as an analyst at Bear Stearns.
“For cyclical reasons, we expect M&A in the local TV industry to pick up in 2011, but for secular reasons, we believe M&A levels are unlikely to match 2007 levels. In 2007, local TV stations were just beginning to develop a second revenue stream (retransmission consent fees from local cable MSOs). While local TV owners have proven adept at developing several new revenues streams, secular issues such as reverse compensation and voluntary spectrum auctions have created some uncertainty in the marketplace. This will likely have the effect of private equity remaining hesitant and prevent the local TV M&A marketplace from returning to previous levels. Nevertheless, with McGraw-Hill announcing its intention to sell its 4 station TV group, our thesis of an improved local TV M&A marketplace may be realized,” said Ensley.
Looking back at 2007, Ensley identified eight TV transactions over $100 million each – totaling over $4 billion in all. Private equity sponsors included such big names as Providence Equity Partners (Newport Television), Oak Hill Capital (Local TV LLC), HBK Capital (New Vision TV), Cerebus (Four Points Media) and Citadel Capital (Ion Media). That was an odd year, just ahead of the 2008 influx of political advertising, and retrans was just building steam as a second revenue stream for TV stations.
Having followed retrans from its inception, Ensley thinks TV groups as a whole have moved to the “middle” of the value range for payments from cable/satellite operators. That’s around 25 cents per subscriber per month for ABC, CBS, Fox, NBC and Univision affiliates and 15 cents for CW, MyNetworkTV, Telemundo and TeleFutura affiliates. But he sees the “high” range at 50 cents and 25 cents, respectively. “If our estimates are in the ballpark, then affiliates of the largest broadcast networks will continue to have significant upside potential in generating retrans fees from cable, satellite and telco providers,” he wrote.
But, there’s a “catch” – reverse compensation. “Instead of celebrating this newfound revenue stream, it looks like local TV operators have more work to do. Station affiliates are now tasked with accelerating the growth of these fees, or risk margin erosion in this important cash flow driver. This is because the broadcast networks, which often provide 40% of total day content on local affiliates (and approximately 53% of during the hours of 7am and 11pm), have begun to assert their bargaining power over affiliates. Networks such as CBS and ABC are negotiating for a percent of retransmission fees from local network affiliates. NBC has floated a plan to negotiate with the MSOs on behalf of local affiliates and to share in the fees generated from these discussions,” Ensley says.
And, as RBR-TVBR readers well know, Fox, which provides the fewest hours of programming of any of the Big Four, is demanding the most reverse comp. And Ensley notes that affiliates who aren’t able to extract from the MSOs the fixed fees demanded by Fox “risk having retrans revenues evolve from a 100% margin revenue stream to a materially lower, and possibly negative, margin revenue stream.”
An unknown at this point is the impact of spectrum incentive auctions proposed by the FCC to open up more current TV spectrum for wireless broadband. That will require approval by Congress and is years down the road. “Should local TV stations in the top 30 markets sell spectrum, we believe it would make for a healthier local market for those remaining broadcasters. These remaining broadcasters might also become a conduit or partner for wireless carriers, as the broadcast signals could alleviate traffic on carrier 4G or LTE networks,” Ensley wrote.
With all those factors in play, television is still waiting for a big post-recession transaction to reset the bar for station trading. Both Freedom Communications and McGraw-Hill are being publicly shopped (and there are rumors about Young Broadcasting). “However, one could argue that neither Freedom nor McGraw-Hill’s 4 station ABC affiliate group represent true ‘bellwether’ transactions. At a minimum, they will provide valuation data points that have been sorely missing in recent years. We would not be surprised if transaction multiples in the coming months coalesce around the prices that these two station groups fetch,” Ensley said.