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Environment ripe for U.S. TV station deals

Date March 23, 2012

(Reuters) - A confluence of factors ranging from a robust advertising market to the growing importance of retransmission fees and more funding for deals, is setting the stage for a new wave of television station mergers over the next 12-24 months.

Newport Television, a group of 56 stations owned by buyout shop Providence Equity Partners, is the latest company to hit the auction block. Citing sources familiar with the matter, Reuters reported exclusively on Friday that Providence had retained Moelis & Company to "explore strategic alternatives," including a possible sale of the company.

One of these sources described the process as in its "real early stages" and said it was premature to talk about bidders or valuation.

A deal for Newport Television, if completed, would mark the latest in a new wave of merger activity among local TV station owners.

Just last fall, Sinclair Broadcast Group bought 15 stations from Freedom Communications and Four Points Media for a combined $585 million. Around the same time, E.W. Scripps bought nine stations from McGraw-Hill for $212 million.

Those deals raised optimism among both potential buyers and sellers for a break in the consolidation drought that started in 2008 during the economic downturn, leaving banks tight-fisted and the advertising-dependent television business uncertain.

Now, more funding is available from banks to finance deals as the economy and the outlook for TV stations improves, said Mark Fratrik, chief economist at research firm BIA/Kelsey.

"I think it will be an uptick from previous years. I'm sure there are established TV groups that are looking for possibilities," he said.

A return to healthy ad revenues, boosted this year by the Olympics and the U.S. presidential election, puts the larger companies in a better position to make moves, added Jimmy Schaeffler of The Carmel Group.

"Car and political ads are coming back. It's going to be a good year for both," said Schaeffler, who listed Hearst Television as another potential station acquirer along with Sinclair.

MagnaGlobal forecasts local TV advertising growth of roughly 3.7 percent this year. A representative for Hearst declined comment. Calls to Sinclair Chief Financial Officer David Amy were not returned.

Lin TV Corp is one of the larger companies forecasting a pickup of deals ahead. "I really believe that 2012 will be a year of some significant M&A in the industry," Lin Chief Executive Vince Sadusky told analysts on a conference call this month, citing improving debt markets as one reason.

Sadusky also said scale was becoming more important for players wanting to be in the business for the long term.

Size is key when negotiating with cable operators who pay broadcasters to transmit their signals, a significant revenue stream in addition to advertising. It's simple math: more stations equals more leverage to negotiate higher fees.

"Our view is that more television broadcast consolidation is necessary for station owners to have more clout and negotiating leverage when they sit down with their network partners and/or (cable distributors)," wrote Gabelli & Co Inc analyst Barry Lucas in a summary report of the investment firm's "Entertainment & Broadcasting Conference" held on March 15 in New York.

EXPLORING OPTIONS

In addition to Providence's Newport Television, Nexstar Broadcasting Group is also looking at options. Last July, the company said it was exploring strategic alternatives including a possible sale. And just last week, Young Broadcasting, owner of 10 stations, said CEO Tony Cassara was exiting to pursue other interests including "ownership of other broadcast stations."

Nexstar and Lin were both on the buy side of consolidation last year. But Gabelli's Lucas thinks that both could be opportunistic sellers this year.

Lin TV, which owns 34 stations in 15 mid-sized markets across the country, has been owned by private equity firm Hicks, Muse, Tate & Furst since 1998. In May 2007, the buyout shop hired a financial adviser to explore a possible sale.

Though no deal materialized, the firm's 14-year ownership of Lin - which is twice the typical exit horizon for private equity firms - led Lucas to surmise that it "would still like to monetize its holdings."

Not unlike Newport Television and Lin TV, many television station groups not part of a larger parent company, such as Belo Corp or Gannett Co Inc, are owned by private equity firms that have reached their exit horizon. Further, these private equity-owned station groups are generally small in size and need to be part of a bigger network of stations to take advantage of economies of scale.

For instance, Four Points, one of the companies Sinclair bought last year, was owned by Cerberus Capital Management and only consisted of seven stations.

The biggest efficiencies come from owning two stations in one market, because they are cheaper to operate since one infrastructure and back office team can serve two stations, allowing the owner to keep more of the revenue.

The Federal Communications Commission is considering loosening its rules which currently allow companies to own up to two stations in a single market, depending on the size of the market and other factors.

The limits are meant to keep one owner from exerting too much influence in a market but investors argue that television faces increasing competition from the Internet as a source of news and entertainment.

(Reporting by Lisa Richwine and Peter Lauria; Editing by Tim Dobbyn)

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