Broadcast M&A Uptick Seen, as Lending Pickup Accompanies Ad Increases

A strong ad market is bolstering values of radio and TV stations, with political spots making 2012 a better year for TV but with more limited benefit for radio, executives said. They said money from retransmission consent deals makes TV stations attractive as well, although as with radio stations, buyers and sellers remain apart on valuations. Buyers often want to pay 6 to 8 times annual cash flow, while sellers want a multiple of 8 to 10, executives said. “The seller is looking at 2012 with all the Olympics” and political ads for TV stations, whose potential acquirers are basing their values on 2010 and 2011 figures, said Chairman George Lilly of SJL Broadcast Management. It bought back two ABC affiliates in 2010 from Disney, which it had sold . “You've got a little bit of a spread here” between buyers and sellers, Lilly said.

There was $1.03 billion in TV M&A last year. That was a severalfold increase from 2008, ‘09 and ‘10, Wells Fargo analyst Marci Ryvicker wrote investors after attending the NAB Show last month, where she said M&A was “all the buzz” (CD April 20 p16). Stations are likely to make more acquisitions in 2012 to add to existing holdings, rather than investors who don’t run broadcasters looking to make deals, executives said. “There definitely needs to be consolidation, but the only way I think it makes sense in today’s world is to do stock-for-stock deals because very few station groups need to add any more debt,” said President Robert Prather of Gray, with 36 TV stations. “It makes a lot more sense if you can merge some groups together and form a really strong group -- with 25 or 30 percent of the households, I think you have a lot better chance of standing up the networks."

Radio M&A totaled $3.88 billion last year, down 91 percent from 2000 but up severalfold from 2007, ‘08, ‘09 and ‘10, Ryvicker said. Cumulus Media, whose $2.4 billion deal to buy Citadel was by far the biggest broadcast deal of 2011, agreed Monday to sell 55 radio stations to Townsquare Media, paying $116 million cash and 10 stations. Radio stations will consolidate some more this year, but because they have less financial wherewithal to get loans they'll likely mostly be on the sidelines for now, executives said. “People are just working through their balance sheets,” said CEO Jeff Smulyan of Emmis Communications. It owns 20 radio stations and said last week it’s getting $96 million to repay debt as part of selling rights related to WRKS(FM) New York (http://xrl.us/bm5vyf).

"People are skittish, they are worried” about taking on additional debt, although the market for credit has improved a little since the summer, Smulyan said. So-called staple financing, where the investment bank advising a company on an asset sale is willing to finance the property’s purchase, is being done at “very low” cash flow valuations because lenders aren’t willing to take on too much debt, he said. Emmis is “close to sort of getting our balance sheet fixed, and then we will look at other opportunities” to buy radio stations, Smulyan said. “We're close to that” and executives were “cautiously upbeat in Las Vegas” at the NAB Show, he continued. All U.S. radio stations may get $400 million in political ad sales this year, “much smaller” than the several billion TV is expected to get, Smulyan said. After a “tough” March for radio commercials industrywide, Q2 looks “a lot better,” he said. There will be “slight” and not “bombastic” radio ad sales growth, and listenership “has held up remarkably well” unlike for TV’s “massive fragmentation,” Smulyan said.

The TV “ad market is very strong right now,” with Q2 also “strong,” Prather said. “It’s going to be a real strong year for us, but we need to be conscious of it being a real challenging time” for the industry, and “we're preparing to be a lot more efficient,” he said. Gray is “focusing on paying down debt” and “getting our balance sheet in better order,” Prather said. Retrans has been a growing business for TV station owners, which need to “get bigger to battle with networks on retransmission money,” given networks want a share of what affiliates get from subscription-video providers, he said. That concern can be reflected in station valuations, as “people are worried about what the networks are going to take away from them,” Prather said. Any added value for broadcast spectrum, which the FCC is trying to get stations to agree to auction and share proceeds with the government, is “so far in the future” that “it’s pure speculation at this point,” he said.

Spectrum and retrans “both represent upside potential” for TV stations and “growth above and beyond the modest growth we might expect from our advertising business,” said Lilly. “The biggest problem right now is just the spread between price expectations between seller and buyer.” Bankers are “starting to loosen up” on lending, he said. “Under the right circumstances, we're definitely a buyer” and the company has backing from private-equity investor Sankaty Advisors, he noted. “We're actively looking to add to the ABC group."

Radio and TV activity has increased from a year ago, with more deals likely on the TV side, said longtime broadcast lawyer Lew Paper, who recently joined the Wilkinson Barker law firm. An improved economy, better “performance” at radio and TV stations, and greater availability of debt financing now than during the last few years all will help improve “deal flow,” he said. Established lenders like GE Capital are likely to finance more deals, as are regional banks and others, Paper said: “The gap between buyers and sellers is narrowing” as some sellers are under financial pressure to part with their stations.