Few Media Deals Expected, Because of Financial, Strategic Hurdles

Cable operators and programmers as well as TV networks and station groups seem to be watching closely the reports of talks between Comcast and GE over the fate of NBCU. But the outcome may not affect those industries much, said investors, brokers and executives. Cable system consolidation has mainly run its course for now, TV station combinations are likely at the regional not national level, and large-scale deals to combine pay-TV channels haven’t all paid off yet, they said. Advertising-dependent media including radio and TV stations won’t probably bulk up until ad sales start to rise, survey participants said. They agreed that may be a ways off.

The Comcast-NBCU story doesn’t signal much about the state of credit markets for financing to make other deals because it may not involve much borrowing, said Vice President Mark Fratrik of BIA/Kelsey, an industry researcher and investment banking firm. “It’s still too early to say the credit and equity markets have opened up, although that could happen some time in the future,” he said. “There may be transactions if the credit markets do open up, and we see a rebound in advertising.” An ad rebound isn’t a sure thing and companies with cash are still holding on to it, said cable industry lawyer and consultant Steve Effros. “I think everybody is guarding their wallet very carefully at the moment, and I think they will continue to do so.”

Large cable operators and programmers have plenty of cash and access to borrow more for major takeovers, executives and investors said. But investors haven’t generally rewarded deals of that kind by bidding up the buyers’ stock, and the cost reductions from the combinations can be limited, they said. The only cable channel on the block is Cox Communications’ Travel Channel, which hired bankers to consider alternatives (CD June 11 p12), they said. A sale of the channel could set a valuation benchmark for future cable network deals, they agreed. A Cox spokesman didn’t reply to a message seeking comment.

“Every big cable operator owns all the cable systems that he or she will really need,” said a veteran cable and broadcasting executive. “Everything below that is really mom and pop rationalization, and the big guys don’t play. The one area where deals will get done” is combining under common ownership cable channels in similar genres. TV station deals are likely, but the “reality is that television advertising will be lucky to get back to levels of 50 percent of its all- time high,” so “all you are going to see are deals done at the regional level.”

“You'll continue to see TV stations trade ad hoc” in “some small transactions,” agreed analyst Chris Marangi of media investor Gabelli & Co., which had $21 billion in assets June 30. “But a lot of the station owners are liquidity constrained, and for the moment that has held back consolidation.” Cable networks, on the other hand, “are amongst the most desirable media assets -- I think all of the conglomerates would like to own more of them,” he said. “I don’t think you'll see any big cable MSO [multiple system operator] deals, although there probably has to be some resolution with Charter,” which is in bankruptcy reorganization. Marangi said he’s “intrigued about the possibility of AT&T or Verizon buying one of the satellite players” -- DirecTV or Dish Network.

“I guarantee you” MSOs smaller than the 10 or 15 largest “would be for sale, having talked to some of the smaller operators, they would definitely like to sell,” said long- time media investor Mark Greenberg. What’s holding up deals is that major operators don’t want to pay as much for the systems as owners want, Greenberg and others said. The shrinking of affiliate compensation from broadcast networks to stations and the increasing viewership of shows on DVRs makes it “hard to see how local broadcasting does better over the next couple of years,” Greenberg said. “The one or two stations in each market that are news leaders, they'll survive and do OK.”

Less-restrictive FCC media ownership rules would make it easier for media companies to buy TV stations in markets where they already have stations, as some industry players want, said a broadcast executive. “I don’t think you're going to find any strategic owner of any size … who will have any interest buying stations far afield. What they'll be looking for is so-called tuck-in acquisitions.”

The commission probably won’t have many deals to review soon, some said. “I wouldn’t worry too much about the FCC’s resources for fear of a lot more of these big deals coming down the pike,” Fratrik said. That leaves broadband planning and network neutrality at the top of the FCC’s to-do list, Effros said. “There are people who are going to be looking at media consolidation … but I think network neutrality is going to be at the front of the agenda.”

Reversing ratings declines would improve the market for TV stations, said analyst Chris Scheuer of Thrivent Financial, with about $63 billion in assets including Time Warner stock. “Maybe advertisers will be a little bit more cautious about their spending until they see that the consumer is back to spending in full force.” The TV industry has restructured more quickly than radio, but it’s still hard to get money for deals in either, said Managing Director Brian Pryor of broker Media Venture Partners. “You're going to get further along the restructuring cycle, clean up people’s balance sheets, before the deal market can open up. Lack of access to capital is sort of a buyer’s issue and leverage is sort of a seller’s issue.”

Several independent cable networks are considering mergers, partnerships and other deals short of outright sales, President Garrett Baker of cable broker Waller Capital said. “There is consolidation activity going on in the sector. And I would expect it to increase if the NBCU deal went through.” Others aren’t so sure. “The executives have gotten the message from shareholders that growth for the sake of growth is not a good use of shareholder capital,” Scheuer said. “It’s certainly not apparent that the market is giving these companies much credit for the cable networks that they own.” Even if Comcast and NBCU merge operations, Greenberg said, “it doesn’t mean bigger is better.”