On The Money

The Other Consolidation Wave

12/23/2013 12:15 PM

Reports have been rampant over the last six months about the coming consolidation wave that is poised to sweep over the cable industry, initiated by Charter Communications and Time Warner Cable and later the rest of the sector. While that speculation has helped lift cable stocks more than 45% this year, there has been an actual acquisition binge going on in the broadcast industry that makes the cable M&A juggernaut seem kitten-like in comparison.

BIA Kelsey recently issued a 55-page report entitled Local Television Stations Profiles and Trends for 2014 and Beyond, with the biggest tidbit being that local TV station stocks were up an astonishing 185% in the first nine months of the year, fueled in part by the windfall that has become retransmission consent, better ad revenue and a consolidation wave that has struck the business full-force.

I spoke with BIA Kelsey’s chief economist and author of the report Mark Fratrik recently, who said a lot of the growth in the stocks has been because of consolidation over the past year, something that people in the cable industry are well aware of. Broadcast station groups like Nexstar, Gray Television, Gannett and the consolidation king, Sinclair Broadcast Group, have been snapping up stations all over the country with an eye toward establishing or building on existing duopolies in as many markets as possible. Sinclair has spent about $3 billion over two years to acquire more than 100 stations, growing its duopoly footprint to about 49 markets across the country. Station groups like duopolies because it gives them a bigger chunk of local advertising and can give them some serious negotiating clout come retrans renewal time.

And their stocks have skyrocketed. While the BIA Kelsey study stated that shares in about 55 broadcast companies rose 185% in the first nine months of the year, the top six station groups have done even better for the full year. So far, Sinclair stock was up 168% to $33.78 each on Dec. 20 from $12.62 on Dec.31, 2012; Nexstar rose 381% during the same period; Media General was up 420%; LIN Media increased 258% and Gray TV rose 550% from $2.20 per share to $14.31 each. The laggard of the group was the one saddled with low growth newspaper assets – Gannett Co., which rose just 54% in the period.

Other analysts have said that retrans is a driving factor in broadcast consolidation – retrans fees were expected to reach about $3.3 billion in 2013 and rise to $7.15 billion by 2018, according to industry research group SNL Kagan.

BIA Kelsey is a little more conservative – they expect retrans fees to hit $6 billion by 2018 – but they are no less optimistic. Even moves by the Federal Communications Commission to curb some of frenzy – they have asked for more information regarding Sinclair’s purchase of Albritton Communications and said that Gannett Co. would have to divest a St. Louis broadcast station (No. 2 in the market) for its deal with Belo to pass regulatory muster – can’t totally dampen the enthusiasm. Nor can recent moves to do away with the UHF discount, which only counts half a UHF station’s audience toward the 39% local ownership cap (versus all of a VHF station’s audience).

 “It may slow things up a bit,” Fratrik said of recent developments. “But there are a lot of acquisitions going on and it’s not clear how many more could happen.”

He’s more concerned about Aereo, the over-the-top company that has been offering a mix of broadcast stations and cable channels in select markets that could be a retrans killer. And he worries about the overall advertising pie, while growing is beginning to show signs of continued fragmentation.

BIA Kelsey estimated that total media spending will reach $132.7 billion in 2013, up slightly from $132 billion in 2012. The research house expects local TV stations to take about 14.9% of that pie, but online advertising is beginning to chip away.

“By 2017, around 30% of all local media advertising falls into the online digital bucket,” Fratrik said.

Another fragmented market, that who knows, in three years time could be the focus of a whole new wave of consolidation.