If you believe in the dictum “follow the money,” last week offered a sad commentary on the state of the television business.
Some of Wall Street’s biggest takeover players jumped at the chance to pour billions of dollars into the lackluster radio business, agreeing to buy giant Clear Channel for $26.7 billion. They can’t, however, muster any enthusiasm for the TV business and immediately put the company’s stations on the block.
Sluggish, ailing radio—battered by satellite services, iPods and repelled listeners—
is a better bet than local TV? The flurry of recent deals involving TV stations offers a chance to see how Wall Street’s presumed “smart-money” players are thinking about the business. A substantial injection of outside money would be a big sign of confidence, evidence that investors without a vested interest in the stations business see a future as bright as the one touted by industry insiders.
Private-equity money was plentiful in the biggest TV auction this year, the $12.3 billion sale of Univision Television. But that was seen more as a vote for the surging Hispanic-media market.
There’s still hope that private equity can juice up the TV market. The biggest chance is the proposed breakup of Tribune Co. and the intended sale of its $4.5 billion TV portfolio. Another is the sale of The New York Times’ $500 million group. Finally, of course, is the Clear Channel sale.
The optimistic TV picture—painted by players from CBS CEO Leslie Moonves to Nexstar CEO Perry Sook—expects stations to boost cash flow by collecting hefty cash payments from cable operators, creating new businesses on digital broadcasting, and using technology to reduce costs, particularly in news production.
The pessimistic picture shows stations struggling to continue growing revenues at an average of 3% or so, surging in an election year only to plunge the following, odd-numbered year. Meanwhile, they’ll be slammed by cable systems getting increasingly sharp at selling local ads; by Websites that start targeting local consumers more successfully, particularly on behalf of car dealers; and by networks that diminish the importance of affiliates by pushing their top primetime hits onto YouTube and iTunes.
Clear Channel, now led by CEO Mark Mays, is best-known for dominating—sometimes abusively—the radio industry. Its TV group is far more modest. Ranked No. 17, it owns 42 stations covering 24 markets, including duopolies.
The company has just two stations in the top 25 markets. The stations—KTFY San Francisco and KVOS Seattle—are hot, but they’re independents, unaffiliated with major networks. Affiliates of strong networks are WKRC Cincinnati (CBS); KTVX Salt Lake City (ABC), which is paired with CW affiliate KUCW; and WOAI San Antonio (NBC).
Mark Fratrik, a VP at broadcasting research specialist BIA Financial, estimates that Clear Channel’s stations generated $315 million last year. One Wall Street executive, asking not to be named, pegs operating cash flow at $100 million. That could translate into a $1.2 billion valuation of the entire group.
The Tribune portfolio has a far more interesting geography. Its 26 stations are in nine of the top 10 markets, 17 of the top 25. Unfortunately, most are affiliates of the CW network, often unable to support a limited news operation. Tribune has many CW stations with just one evening hour of news a day and none in the increasingly lucrative early-morning hours.
“It’s very hard to run a standalone CW affiliate because it’s hard to support news,” says an executive with one top broadcast group. “And that’s where strong stations really make money.”
Tribune is trying to energize its auction by splitting off its three biggest stations and offering them for sale separately. That might trigger big tax bills but might also draw in giant broadcasters that would otherwise be unable to bid or uninterested in bidding, definitely CBS and possibly even Disney’s ABC.
Tribune bankers have begun shopping WPIX New York, KTLA Los Angeles and WGN Chicago, according to the Los Angeles Times. The package is valued at more than $2.5 billion, about 70% of the estimated value of Tribune’s entire 26-station portfolio.
There’s a long list of potential buyers for at least chunks of the group, including Gannett and Hearst-Argyle, which are also interested in Tribune’s venerable newspapers, including the Chicago Tribune and Los Angeles Times. Other possible shoppers include Cox, Media General and LIN TV.
The most obvious buyers are owners of stations in the same markets, which could operate more efficiently and, hence, justify a higher price than other buyers.
“The duopoly play is always, first and foremost, the compelling play,” says Elliot Evers, managing director of investment banker Media Venture Partners.
But financially, broadcasters would be best-served by a strong vote of confidence by some big private-equity funds. Why should radio guys have all the fun?
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