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Station M&A: Wait Till Next Year

By all accounts, local television is robust once again. Automotive advertising is riding high, retransmission consent is a consistently bankable revenue source, and the Supreme Court has made it easier for political candidates to flood stations’ air with their message, and their money.

If business is so bullish, one might assume that the type of sanguine mergers and acquisitions (M&A) seen in the prerecession recent past, such as the three stations Raycom grabbed from Lincoln Financial for almost $600 million late in 2007, will start picking up again. But such an assumption appears to be wrong, according to many industry insiders.

While deal-makers are typically loath to show their hand, several station brokers and group chiefs suggest that the deal market will continue to be whisperquiet for the foreseeable future, as no one can seem to agree on what TV stations are worth anymore. The industry watchers were unanimous in mentioning the considerable gap that remains between those looking to acquire and those looking to offload.

“There’s a divide between buyers and sellers still,” says News-Press & Gazette President David Bradley. “A lot of sellers want to see how this year comes together before considering deals.”

For the first time in years, station executives are eager to report earnings that don’t begin with negative numbers. Bellwether broadcaster LIN TV, for one, predicted a 23% revenue increase for the first quarter, on the strength of a 54% leap in automotive advertising. Stations are increasing advertiser inventory and community reach through multicast channels and mobile, and retrans cash is growing considerably. Gray TV, for one, reported last week that retrans revenue was up 346% in the fourth quarter of 2009.

Cash flow continues to make broadcasting an attractive business for many private equity firms that dominated the acquisitions market before the recession. “Everyone’s looking for a deal,” says Kalil & Co. President Frank Kalil. “They all know that broadcasting is a great industry with money to be made.”

But it’s not without considerable risk, as groups in Chapter 11 like Tribune, Freedom and Young Broadcasting—not to mention PE firms that were humbled by short-sighted station deals in recent years—can attest. Mix in strained network- affiliate relations and the FCC’s hunger for broadcast spectrum, and it’s not hard to see why no clear station valuations are emerging.

The investment banking firm M.C. Alcamo & Co. valued the six pure-play, publicly traded broadcasters, including Fisher and Nexstar, at a whopping 13.7 times average multiple. Earlier this year, Alcamo valued 14 non-pure-play broadcasters, several laden with newspaper holdings, at an average 10.3 X. While those valuations are well off from what stations sold for before the recession, most set the bar even lower these days.

While valuations, of course, vary greatly from station to station, an informal poll of several broadcasting veterans set the average at 8-10 X. “It might be a 10 or 11 if it’s a good fit, but most would be 9 or 10 tops,” says one group chief. “You’re not going back to 15 or 16.”

That’s due in large part to over-leveraged station groups, as well as lenders—some of which committed “career killer” creditextending missteps in recent years, in one broker’s words—rethinking their lending practices. Patrick Communications Managing Partner Larry Patrick says a $100 million deal in the recent past used to see the lender put up $70 million to $80 million. Now, the buyer has to put up that much. “It’s the reverse now,” he says. “You have to put up so much equity.”

Still, bargains are out there, itchy private equity firms are sitting on cash, and everyone’s at least keeping their eyes wide open for a good fit. Schurz Senior VP of Broadcasting Marci Burdick says her group favors strong news outlets in smaller markets. “We like big fish in small ponds,” she says. “The medium markets tend to be more resistant to strong ebbs and flows in the economy.”

Telemundo is eager to capitalize on the wildfire Hispanic growth in the U.S. “If we see the right station in the right market, we will acquire it,” says President Don Browne.

The groups that took the biggest lumps in the recession are, not surprisingly, getting the most attention from the tire-kickers. “Most of the conversations that I am involved in or aware of involve new private equity sponsors looking to acquire companies that are either in or just out of a restructuring process,” says Nexstar Chairman/President/CEO Perry Sook. “I don’t think you will see much activity from companies with legacy capital structures in this business just yet.”

But once that first deal lands, many believe some blockbusters will, at long last, follow. “More and more people are sticking their heads out of the hole and looking to get something done,” Kalil says. “There’s smoke—we just haven’t seen the flames yet.”