5 good reasons that are driving the boom in local broadcast mergers & acquisitions
When Tribune bought a group of 19 local television stations for $2.7 billion a week ago, it was just the latest and biggest case of a consolidation trend that has been building momentum for several years now.
In June, Gannett bought Belo's 20 stations for $1.5 billion. Earlier this year, Media General and New Young Broadcasting merged, and Sinclair Broadcast Group, a specialist in smaller markets, acquired three groups in successive months.
Some media business phenomena are mysterious, but this one is straightforward. Here are some questions being asked as bigger players and bigger deals continue to pop up, along with my answers:
What's driving the mergers and acquisitions?
I see at least five good explanations.
1. The local television business is strong now and for the next several years. The political advertising bonanza every two years continues. Stations are recovering nicely from the recession years of 2007-2009. Their biggest category of advertising -- automotive -- has bounced back more quickly than retail, real estate and other economic sectors.
2. Abundant financing is available. Interest rates are low and are just starting to rise -- which is a spur to get deals done. Big money is eager for solid transactions. Consolidation may soon reach the related cable and satellite sectors, which is evident in unrelated businesses like hospitals.
3. Pent-up demand. Potential sellers who held back in more difficult times now find a host of eager potential buyers.
4. As in any merger, these combinations should yield savings by eliminating duplicated central management functions. Also, the new companies have a bigger sales force and better ad sales story -- a bigger footprint with more markets.
5. A windfall in retransmission fees that cable and satellite systems pay to carry the stations is the biggest impetus of all. The bigger the local broadcast company, the more leverage it has to keep negotiating these fees upward.
Where did the retransmission boom come from and how much money are we talking about?
The basic law requiring cable networks to carry local broadcast stations dates back to 1992. Roughly five years ago, the stations began to be packaged with other cable channels the big networks own. Price levels for the deals have risen quickly since then.
Analysts SNL Kagan reported in November of last year that from a small base in 2008, retransmission income for the industry rose to $2.4 billion in 2012, will hit more than $3 billion this year, and will likely grow to more than $6 billion in 2018.
Local broadcast now has ad revenues just a bit lower than the newspaper industry -- $19.7 billion in 2012 compared to $22.3 billion (not counting separate niche and weekly publications). Imagine the impact on the newspaper industry if it were coming into $6 billion of new revenue over the course of a decade -- with virtually no added expense.
Isn't Tribune Company in bankruptcy? How could it come up with $2.7 billion?
Tribune has emerged from bankruptcy with comparatively little debt (though some unresolved tax issues). The restructured company was able to get a $4 billion line of credit from a group of banks and is using a chunk of that to finance the sale.
Will the deal affect the potential sale of Tribune's newspapers?
CEO Peter Ligouri said no in a conference call with analysts last week, and I tend to agree. The eight papers will be sold if the right offer or offers emerge, but the company does not need the proceeds to complete the transaction.
Any chance Gannett will spin off its newspapers and become a TV/digital company as Media General did and Tribune appears likely to do?
I don't think so. Those splits have happened at News Corp and A.H. Belo with impetus from their CEOs (Rupert Murdoch and Robert Decherd respectively), aimed at boosting stock price for the TV group and giving the publications a fresh start. Media General sold its papers to Warren Buffett as part of a complicated transaction to ease pressing debt problems.
At Gannett, one dollar in six now comes from digital businesses like CareerBuilder and Classified Ventures. These subsidiaries benefit by selling into Gannett markets -- newspapers and TV. So breaking the company up would have a significant downside. Plus, it is not so clear who would want to buy Gannett's 81 community newspapers and USA Today.
Are these deals going to fly with regulators?
The rising level of concentration concerns some advocates of independent media but doesn't appear to rise to their level of an anti-trust issue. If the acquired stations are in a market where a company already has a presence, that might require a waiver or sell-off. But Gannett is trying to circumvent the issue by putting the stations in a separate legal entity and managing their business affairs under a service contract.
Doesn't local broadcast face the same disruptive pressures from digital news and advertising/marketing competitors?
Over time, perhaps. But political, auto and other advertising should hold solid over the five-year investment vista investment firms typically consider. Also local news -- the core of the franchise for most stations -- is much less vulnerable to time-shifting than entertainment programming.
Will the retransmission bonanza and other operating revenue growth be reinvested in newsrooms?
Maybe, but it is early to tell. Bob Papper, a retired Hofstra professor who surveys the industry every year for the Radio Television Digital News Association (RTDNA), just reported that average salaries were down slightly in 2012 compared to 2011. That could simply be the continuation of a trend of replacing higher-priced talent with younger employees.
Papper's estimate of total jobs is due in several weeks, but a year ago he reported 4.3 percent growth during 2011.
While companies will be under investor pressure to build back profit margins, which plunged during the recession, it is safe to say that newsroom funding will, at worst, be stable compared to the continuing declines at many newspapers.