Private Equity Finances TV Station Purchases as Banks Cut Lending

The ebb in broadcast deals may become a steady flow if Freedom Communications is successful in trying to sell all its eight TV stations, for which the company is reported to be seeking as much as $500 million. Freedom’s board has hired financial experts to evaluate strategic options “that are presented to the company,” a normal process for a company to take, especially after exiting bankruptcy, a spokesman said. “As part of this process, Freedom has been approached by a number of strategic buyers who will need to be further considered and evaluated as part of this larger process,” he said. “There are no recommendations or conclusions at this time."

There are would-be buyers for Freedom, said the veteran broker, President Frank Kalil of Kalil & Co. “They are highly marketable -- properly handled, they will bring good prices,” he said. “The real question is how many people can do it, and the answer is not as many as could five years ago.” In the first three quarters of 2010, $93 million of M&A among TV stations was announced, a record low and an 86 percent decline from the year-earlier period, according to BIA/Kelsey (CD Nov 3 p2).

"We've been encouraging our clients to act as their own banks” by considering half of what they pay for a deal to be debt, and the other half as equity in the property they're buying, Kalil said. “You're really putting all your money in, but instead of considering it cash, you play a mind game” to “bank your own deal,” he said: “Buying for all cash is not as absurd as it might be, considering there are so few places to put that cash now” that earn a significant return. “There are a bunch of” broadcasters backed by private equity looking to strike deals to buy additional stations, “and most of them are flying under the radar,” Kalil said. “It’s just a matter of them finding the right deal and getting it done. There is still a bit of a gap between what the sellers want and what the buyers are willing to pay."

One such private-equity backed broadcaster is Chairman George Lilly of SJL Broadcast Management, who agreed earlier this month to buy back ABC affiliated WJRT-TV Flint, Mich., and WTVG Toledo, Ohio, from Disney after selling them to the company in 1995. Bain Capital’s Sankaty Advisors put up the money to buy those two stations and took a stake in SJL, said Lilly, who sold the last of his stations two years ago, except for holding onto NBC affiliate WICU Erie, Pa. “We're looking collectively to put together a small group of mid-market stations, and they'll be our financial partners all the way through,” he said of Sankaty. “At some point we're probably go back to the banks, when the banks become viable” lenders, “but at this point they're really not,” Lilly said.

"Our plan over the next 18 months is hopefully to add another six or seven stations” located in markets No. 50-100, Lilly said. “We're not interested in the top-20 markets, and that’s a range where we've worked very successfully in over the years and feel very comfortable in.” Flint is the 69th-largest Nielsen designated market area and Toledo is 70th. “We've really been waiting out the marketplace, waiting until the market hit bottom” for broadcasters, Lilly said: It’s “a guessing game as to when the banks will start lending again,” which will happen. Kalil is “convinced this can turn on a dime, but I just don’t know when” banks will begin lending in large quantities again, he said: “That the banks have shut down their broadcast lending departments doesn’t mean they won’t open them tomorrow morning” when they sense they can make more money.

"We believe the television industry is a very healthy industry,” Lilly said. “It’s not that we think the ad-supported side is going to [have] significant growth -- it will be modest growth,” he said. “The real growth” is in revenue from retransmission consent agreements for TV stations to be carried on subscription-video providers, and using more multicast channels and station websites, he added. “These are all the revenue that we've never had before."

Broadcasters Unwilling to Borrow for M&A

The low cost of capital for companies with substantial debt has failed to spark transactions, broadcast brokers and analysts said. Though interest rates are at historic lows, companies that can tap the high-yield credit markets aren’t willing to borrow just to finance acquisitions, they said. “The established operators are streamlining themselves,” said analyst Volker Moerbitz of SNL Kagan. “Nobody wants to get stuck with something uncertain right now.” The operators are more likely to try to sell smaller-market stations, which make up most of the available inventory, he said. New entrants, too small for access to the high-yield market, can’t find lenders willing to finance broadcast transactions, he said.

Despite several recent restructurings, the debt carried by TV and radio stations is still far too high, said Managing Partner Elliot Evers of broker Media Venture Partners (MVP). Station owners are unwilling to walk away from their equity investments at the prices buyers are offering, and lenders don’t want to take massive write-downs on their loans, he said. Just like in the residential real estate business, lenders are increasingly working out underwater loans with borrowers, offering them extensions on interest payments and renegotiating some restrictions to avoid defaults, Evers said. The mantra is “amend, extend, and sometimes pretend” that conditions will improve, he said. Dozens of broadcasters are in a “zombie state,” in which the equity is considered dead-money and management is “working for the bank,” with perhaps unrealistic hopes of a payday down the road, he said. “Those situations can continue for years unless there is a precipitating event like a loan maturity or bankruptcy filing."

In those cases, MVP is trying to work with borrower-lender pairs to move some stations and keep the assets out of bankruptcy or receivership. The owner of Fox-affiliated WWCP-TV Johnstown, Pa., agreed earlier this month to sell itself to a newly formed company set up by MVP’s co-founders. MVP will take control of the assets and assume the debt, which the lender agrees to marginally mark down. The aim is to sell it down the road with a better capital structure, and the original operator gets a warrant on the sale, Evers said. “Typically these things are worth the debt or even less,” he said. “You customize the level of debt dependent on what the company can service, and whether there are sufficient operating losses to absorb the income that is generating from writing down the debt.” The goal is a serviceable debt level and a loan that can be reclassified as performing, he said.

Lending, and with it deal volume, won’t return to the industry until more loans are worked out one way or another, Evers said. The struggle of the airline industry is a good analogy, because it too has expiring inventory, minimal pricing power and disruptive entrants, he said. “The only way they came through was suffering for a decade of multiple bankruptcies,” Evers said. “We're going to have to narrow down the amount of distribution and reset the balance sheets.”