Enterprise: Private Ownership Transforms TV Station Biz

At an industry event this spring, GroupM chief Irwin Gotlieb recounted a conversation he had two decades ago when a top executive in the local TV station business confidently told him, "Hell, we have a license to print money." That's history. Between competition from the Internet, an ebbing ad market and other changing dynamics, the sector would seem to have an ambiguous future--except for flourishing private-equity firms. They seem to have an insatiable desire to buy stations in markets like Des Moines and Albany, not to mention Moline and Elmira.

One indication of how much private ownership is transforming the station business: The head of the Television Bureau of Advertising (TVB) said one-third of its 600 member stations could be privately held by the end of 2008, up from zero a year ago. "That's a pretty startling and noteworthy pattern," said Chris Rohrs, TVB president.

In just the last month, mid-size LIN TV and Nexstar, plus the smaller Lincoln Financial, have put their holdings up for sale. Then last week, the second-largest operator, News Corp., upped the ante--putting nine of its stations on the block, all in the top-50 DMAs. (Tribune, the fifth-largest group, according to B&C, is also going private in a massive transaction, while Clear Channel is selling its 56 stations for $1.2 billion and The New York Times Co. garnered $575 million for just nine stations.)

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Analysts say the most likely buyer for the Fox stations--with the value estimated somewhere in the $1 billion-$1.3 billion range--is one of the private-equity giants.

"People think prices are very high and are taking the opportunity to cash out," said Bob Prather, president-COO of Gray Television, who added that his company has no plans to sell any of its 36 stations--at least in the near-term.

To be sure, one motivation for the News Corp. sale is the chance to raise capital for its bid for Dow Jones. But a source said the company was also looking to reduce its "bet on the station business a little bit." The business is "still getting growth, but it's not like it was."

News Corp. is far from giving up altogether; it's holding onto 26 Fox stations it owns in the country's largest markets and its nine profitable duopolies. Overall, it still expects to generate some $900 million in profit from its station business this year, the source said. News Corp. declined comment.

The private-equity interest comes as the prospects for the local TV ad market appear so-so. Any fair gauge--despite Wall Street pressure for year-over-year increases--involves looking at a two-year cycle, where every other year brings a bump from the Olympics and federal elections. But a look at comparisons of recent Olympic/election years and separately, the so-called "off-years," shows lackluster results.

In Olympic year 2002, the spot market generated $17.2 billion. That increased barely to $17.3 billion in 2004, according to TNS Media Intelligence. In 2006, it dropped back to $17.2 billion--making it virtually flat over the last three "on-years."

In the off-years, the pattern looks to be the same. In 2003, spot dollars were $15.5 billion, according to TNS. Two years later, the intake was $15.6 billion. With auto advertising struggling, 2007 doesn't appear as if it will break the mold. "The overall broadcast [station] industry is kind of in a lull right now," said Erik Kolb, an equity analyst with Standard & Poor's. "Advertising is relatively weak."

This may be one reason that private-equity firms are so interested. Part of their modus operandi is to buy companies that are potentially overlooked and undervalued--then use shrewd management to build their worth, without the pressures from Wall Street to show impressive results every three months. They're "less of a slave to the quarterly earnings cycle ... they can focus more on the long-term outlook," Kolb said.

Still, while acknowledging that the local TV market is under a fierce challenge by the fast-growth Internet, renowned spot buyer Kathy Crawford said her enthusiasm for the effectiveness of local TV hasn't dimmed much, particularly for a marketer's specific needs. "You have to look at it from your own clients' perspectives," said Crawford, the president of local broadcast for MindShare.

And local stations are moving aggressively to establish new revenue streams that likely excite private investors. Perhaps topping the list are retransmission consent dollars, where station groups are now deriving payment from begrudging cable operators for the rights to carry their stations. Particularly demanding is Sinclair, which recently said it would receive $60 million this year--up 136% over 2006. Going forward, private-equity firms can count on these revenues to grow as deep-pocketed Verizon and AT&T pay to launch TV services to compete with cable and satellite providers. So far, both telco TV providers are only in a fraction of the country, but looking to expand their footprints fast.

There's also a potential boon from the launch of digital multicast channels, in which stations can program up to four channels in their markets. The separate channels can offer local weather or sports (such as hyper-local coverage of high schools)--or other creative and innovative programming. It essentially offers a blank slate for a station that has programmed a single station for half a century to create three others.

If the multicast programming is appealing, MindShare's Crawford thinks increased ad dollars will follow. "Will they be able to make more money in a declining spot marketplace?" she asked. "In the future, having more than one station gives them the opportunity to make more, albeit charge less for individual spots, but the aggregate will be more."

Furthermore, stations are bulking up their Web sites by using video as an asset, looking to challenge the local newspapers' Internet presence. Depending on consumer behavior, there's also the opportunity to stream programming on wireless devices and syndicate it to other Internet sites, a la Hearst-Argyle's recent deal with YouTube.

"We have very viable future prospects in this digital world," said TVB's Rohrs.

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