TV Stations Rebound, But How High?

When the economy starting hammering the broadcasting business last year, Gray Television President-COO Robert Prather kept the faith, telling security analysts that he was putting most of his personal wealth into his company's depressed stock, then trading at around $4.

After months and months of stomach-churning uncertainty that saw those shares trade as low as 19 cents a year ago, Prather should be feeling a little better about his retirement strategy.

Since the end of the first quarter, Gray shares, along with those of other pure-play station groups, have rebounded nicely. Gray closed yesterday at $2.15.

While covenant violations, loan defaults and bankruptcies still loom over the beat-up sector, the upward swing in stock and debt prices is a sign that investors think revenues -- and the broadcasting business -- have bottomed out.

"My impression was that Wall Street six months ago thought that we were all going into bankruptcy or restructuring or something," Prather says, noting that improving bond prices apparently led the way. "Somewhere along the way they realized that wasn't going to happen and that there was some value in these groups in stock and bond prices."

Prices are still but a fraction of historic highs. But for the few publicly traded pure-plays -- including Gray, Belo, Nexstar and LIN -- it's psychologically and financially reassuring to climb out of the dangerous depths of the penny-stock pit.

Says Nexstar Broadcasting CEO Perry Sook: "I think it's a realization by investors that the end of the world didn't happen, that the stock and debt sell-off was ridiculously overdone and as the stock market in particular tends to look forward to recovery in 2010, plus political revenues, these stocks are incredibly cheap by historical standards."

A snapshot: Since the end of the first quarter, Belo shares are up over 500 percent; Gray, nearly 500 percent; Nexstar, more than 300 percent; and LIN, nearly 300 percent.

"What I'm hearing is an awful lot of ‘It's not perfect, but it's getting better and getting better faster than we thought it would,' " says station broker and investment adviser Larry Patrick of Patrick Communications.

But what optimism there is, is guarded.

"We have six different models running right now for 2010," says Sook. "The worst case: No growth in core revenues. The best case: mid single-digit growth. The art in forecasting is not only how much but when."

The other good news is that the improving economy and thawing debt markets may lead to more refinancings. That's key to relieving oppressive debt burdens and gaining breathing room on debt-related covenants.

"I think you'll see more heavily leveraged broadcasters potentially coming to tap debt markets over the next 60 to 90 days," says Barry Lucas of Gabelli & Co. "That's available partly because there's anticipation the economy is going to get a little bit better over time."

A recent sign: Sinclair Broadcast Group is buying back two different series of notes for better prices than proposed just two months ago. It also plans a private placement of 12 percent notes and will begin paying back a loan that Cunningham Broadcasting, for whom Sinclair operates six stations under an LMA, defaulted on.

Sinclair said in mid-July it faced a cross-default on the Cunningham loan that could push it into bankruptcy.

Activity in the high-yield, or junk, category is one catalyst for improving equity and debt prices, says Richard Schmaeling, senior vice president-CFO at LIN Television.

"The high yield market has recovered dramatically," he says. "A lot of people saw high-yield bonds running and piled on."

Add that to companies renegotiating covenants (for a price, of course), improved cost structures and technical buying linked to anticipation of an improving ad market and the rebound in equity and debt prices is easily explained, Schmaeling says.

But he seasons that stew with a healthy dose of salt.

"We think that the reality is that consumer spending is going to take quite a long time to recover to pre-recession levels," he says. "It's not going to come roaring back. Consumer credit continues to contract and likely will contract into 2010. Unemployment is likely to stay high. We're not going to see a ‘V' recovery in advertising."

Kevin Shea, a managing director at Loughlin Meghji & Co., which provides various advisory services to financially distressed firms in or out of bankruptcy, sees little reason for optimism -- yet.

"I have talked to some CEOs, and frankly they don't know why their stock is up," he says. "When I look at pacings, information on clients' traffic systems, I don't see any activity that translates into rising stock or bond prices.

"The best thing I can say about the business, and this is not the beginning of any meaningful trend, is we're seeing the slope of decline is less severe.... I think broadcasters are looking for reasons to be optimistic. I don't think comparing to low standards is reason for optimism."

A recent report from David Wyss, chief economist at Standard & Poors, adds perspective: "The economy seems to be coming out of the longest and deepest recession in postwar history, but we expect the recovery to be slow," Wyss writes. "The recent data have turned less upbeat, as the initial impact of the stimulus package boosted third-quarter numbers. Still, the continued calming of financial markets and the stabilization of housing suggest the recession is technically over, even if it won't feel like it for a few more months."

It has been a particularly rough period for station groups. While bankruptcies are up across the board in all sectors, station groups account for an unusually high number of filings over the past 18 months. Among them: Tribune, Young, Pappas, New Vision, Freedom and Equity Media.

There's a lull at the moment, says Shea, but filings may ramp up again next year. "A number of broadcasters have had covenants relaxed or in forbearance periods running from now to sometime in early to mid 2010 at which time covenants step down again," he says.

A second factor for the pause: "Lenders are waiting to see what the third quarter looks like," Shea says. "No one is taking any formal action right now."

If there's a motto for the broadcast business this year, it's "less down is the new up."

"Stocks are up, but I don't know that business is up that much over last year," says Gabelli & Co.'s Lucas. "The decline in the core business appears to be abating. My only issue is I'm getting tired of less down being the new up. I'd like to see the new up."

That's probably going to have to wait until the second or third quarter of next year. And even then, it's likely to be up so little as to be nearly invisible.

BIA/Kelsey projects 2010 revenues for virtually all the U.S. television markets will increase about $100 million, to $16.2 billion. That's a 0.6 percent increase spread across 200-plus television markets and so far off the recent industry peak of $22.8 billion in 2006 that it's a little surprising that stocks didn't fall further.

Others are more optimistic. Each fall, the Television Bureau of Advertising reviews the revenue forecasts for the upcoming year of industry analysts and sales rep firms. The consensus for 2010: 3.6 percent to 6.1 percent.

With upticks in stock and debt prices, can a restart of the M&A market be far behind? Depends on whom you ask.

Shea projects private equity will be the bellwether: "I see the first M&A deal getting done by a private equity investor that buys a [station] platform and pays cash on the expectation they'll finance it later."

Schmaeling has a somewhat different take. "There's no doubt that for companies like LIN, credit availability is significantly better than back in March. Does that lead to M&A? I think it likely does over time, when there's more stability in the outlook.

"I don't share the view that some of my colleagues have that private equity is going to come back into the sector in a big way," Schmaeling adds. "A lot of private equity money got burned in the broadcast space in a big way."