Tough Talk About Even Tougher Times

Few people have a better perspective on the broadcasting industry and what's ailing it these days than Larry Patrick.

As managing partner of Patrick Communications, a leading station broker and appraisal firm, he regularly examines stations' operations and their books as he helps them refinance, buy or sell. And he stays well grounded in the business through the ownership of a string of small-market radio stations.

Unfortunately, Patrick sees dark days ahead for broadcasting.

In this interview with TVNewsCheck Editor Harry A. Jessell, Patrick says the industry is just beginning to feel the full impact of an economic "tsunami" generated by the tight credit markets and the sharp advertising slowdown.

He says to expect more foreclosures and bankruptcies, greater pressure to cut costs, sinking station prices and a dearth of station deals as owners await better times, which may not come until 2010.

The news is not all bad. Broadcasters with heaps of cash may be able to pick up stations at bargain prices from owners who have to sell as the banks press in.

What the industry really needs is a roll-up of some of the mid-size publicly traded station groups, he says. The regulatory and financial hurdles may not be as great as the difficulty of settling on which of the CEOs would run the surviving company.

An edited transcript:

What effect is the subprime lending meltdown and credit crunch having on TV broadcasting?

The whole economic meltdown is a very tough body blow for broadcast lending overall. If you are a broadcaster who paid a high price for your assets and you're at a point where you desperately need to refinance, at the moment at least, those refinancing options are extremely limited.

Banks are either not loaning or they're loaning at much lower multiples than they were just a year or two ago. If you're a seller, the difficulty is that many of the buyers who legitimately would have had a strong interest in your station or stations can't swing the deals these days.

Let's say you want 12 times [cash flow] for your station. In the past, a buyer might say that's OK because I can borrow 7 or 7 ½ times from a bank and do the rest with equity. But now the bank is saying: "Look, if we do it at all, we will only do it 5 times." So, suddenly, you have to put in so much more equity and the deal may not make sense anymore.

Look at it from the seller's side. When the multiples come down on the lending side, it translates into lower multiples for the pricing. So, instead of 12 times today, maybe suddenly you can only get 10 times. If you're in desperate trouble, you take it and run. If you can hang on, you just don't sell. You sit there for a while.

Are there some station groups in trouble because they need to refinance and can't?

That's correct.

How widespread is that problem?

I can think of a half-dozen, at least, who are in that situation where they have a lot of leverage and they're trying to figure out how they can refinance. That's very difficult.

Are we going to see some more bankruptcies like Pappas?

I think you probably will. We've been asked to appraise stations with the idea of selling and the people that are calling are not the broadcasters. They're the banks that are saying: "We're going to move towards foreclosure." That's a very bad thing for the industry when that happens.

On the other hand, where there are losers there are always winners. The station that is taken over by a bank may come back out on the market at a dramatically lower price.

If you're a private company and you have dry powder, you have cash in the bank and you have a good relationship with your lenders and you are not particularly highly leveraged, this may be one of the great shopping times.

You're going to see a handful of stations, maybe more than a handful, that will come on the market that you would have passed by in 13 or 14 [multiples] times, but now they're asking 10 or 11 times. Maybe, you can get yourself a little bit of a bargain.

The trading multiples on all stations are probably drifting down slightly. I was in Texas last week at the request of a bank visiting a station. It's a very nice station and it's a profitable station. It's sitting there doing several million dollars in cash flow and there's nothing wrong with the station.

The problem is that the company borrowed a lot of money to do improvements, to buy out some shareholders and do a number of other things. Then, the bank itself got in trouble. It wound up with a lot of bad loans and was liquidated and sold to another bank.