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Uncertainty Stalling TV Station Trading Market

Over the last several months, TV station dealmaking has slowed considerably. Blame uncertainty over the new FCC local ownership regs, the incentive auction, retrans, reverse comp and a possible rewrite of the Communications Act, say the market experts.

Buyer's market in broadcast M&A? Hardly. Not exactly what you'd call a seller's market, either.

So what kind of a deal market is it?

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"Tuck under, bolt on," as Nexstar CEO Perry Sook colorfully put it, characterizing his own company's approach during its 2014 fourth-quarter earnings conference call with analysts last week.

Bishop Cheen, independent analyst and SNL/Kagan consultant, attributes the 60-to-zero slowdown to a single factor: "Two words — Thomas Wheeler. That's what happened to M&A."

On March 30, 2014, the FCC chairman and the two other Democratic commissioners voted 3-2 to impose tough restrictions on joint sales and shared services agreements and require many of those already in place to be unwound over the next couple years. Such agreements enabled broadcasters to operate two stations — duopolies — in markets where the rules say they may own only one.

After several years of heady action, station trading action dropped off sharply starting just about a year ago.

Brand Connections

In 2013, the biggest deal year in at least a decade, volume totaled nearly $10 billion. Last year, it barely scratched its way to $5 billion, and much of that was thanks to deals that had been in the pipeline for a while.

This year, who knows.

To be fair, Wheeler's FCC reign may be responsible for much of the slowdown, but not all of it.

The incentive auction, retrans/reverse compensation and what could be a landmark rewrite of the Communications Act of 1934 have also coalesced into a big, dark cloud of uncertainty that has potential sellers sitting out the weather until it clears.

Buyers, meanwhile, still have an appetite.

During Sinclair's 2014 fourth-quarter earnings conference call with analysts and investors, CEO David Smith acknowledged that he anticipates a much slower deal pace for the company this year, in part because it's nudging up against the national ownership cap that limits the reach of any group to 39% of U.S. TV homes.

Nonetheless, Smith said: "I would expect some activity there and it will be significant relative to our free cash flow but not nearly as much as it was in years past."

Smith's observation is congruent with those from his peers at Gannett, Media General and Nexstar. All have indicated a desire to grow and, with the exceptions of Sinclair and Tribune, all have ample headroom under the 39% cap.

"I would say we wouldn’t do a transaction just for scale's sake," said Nexstar CEO Perry Sook during the company's recent fourth-quarter earnings conference call. "But ... at 18% of the U.S. we could double the company — in fact more than double the company — in reach without bumping up against the cap."

Let's see: willing (even eager) buyers; a deal climate that, typically, would be attractive — an off political year followed by what's likely to be a record political advertising year -- relatively cheap, plentiful debt.

But instead of getting in the game, sellers are sitting on the sidelines.

Once again, the FCC gets credit (or blame): The spectrum incentive auction now set for early next year has a lot of broadcasters seeing a pot of gold at the end of a different rainbow.

"I think the spectrum auction numbers have slowed down the deal market even more," says Larry Patrick of Patrick Communications.

The recent AWS-3 wireless spectrum auction, which generated nearly $45 billion in proceeds, coupled with recent even headier projections from Greenhill & Co. for broadcast spectrum, is prompting virtually every broadcaster to hit pause and rerun the numbers.

CBS and Fox, for instance, signaled a while back they weren't interested in selling. Now they say they're paying close attention to those spectrum valuations. Even David Smith, who's openly opposed the auction, is saying Sinclair's keeping a close eye on the numbers and not rejecting participating in the auction out of hand.

Station owners with duopolies or better, particularly in larger markets, see a way to stick with the core business and simultaneously enhance shareholder value by selling excess spectrum.

Where it gets a little funky is in smaller markets. There, station owners that might have been prompted to sell to consolidators are seeing staggering spectrum valuation estimates.

"We get people in those small markets saying wow, my station is worth $100 million," says Patrick. "The FCC is not playing fair. They should have said those stations are worth zero."

Why? Likely spectrum buyers including Verizon, AT&T and others are far more interested in big markets because that's where the pools of wireless subscribers are deepest.

"Some of the slowdown may be related to people thinking not about if they're going to get out, but how they're going to get out," says Damian Riordan of Peloton Media Advisors, a boutique financial advisory firm. "You don't want to sell your business for a nine or 10 multiple [of cash flow] when you discover you could sell spectrum for who knows how much."


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