Local Dominance Could Drive Deals

Author:
Publish date:

With a court-ordered relaxation of media cross-ownership rules starting to settle in, Lowell "Bud" Paxson said he's fielded a flurry of inquiries from companies interested in buying his TV stations — including some cable operators.

Paxson, the chairman of Paxson Communications Corp., declined last week to identify any of the potential acquirers, including MSOs, who've asked about his 65 TV stations and his Pax TV network. And some industry observers are skeptical about his claims of burgeoning interest in the mostly UHF stations.

But a cadre on Wall Street agrees with Paxson at least on one thing: The easing of cross-ownership strictures will prompt some cable operators to buy TV stations so they can become the king of local media in a specific market.

"Vertical integration of cable and broadcast television is going to happen in a variety of ways," said Blair Levin, a Legg Mason media analyst and former Federal Communications Commission chief of staff. "Everybody is talking to everybody."

Earlier this month, a federal court ordered the FCC to scrap a rule that effectively prevented common ownership of a cable system and a TV station in the same market. In a second decision, the court instructed the FCC to reconsider a rule that set a national limit on TV-station ownership.

A number of securities analysts, including Levin and Sanford Bernstein & Co.'s Tom Wolzien, are predicting that a range of media companies — from MSOs to conglomerates such as Viacom Inc. — will take advantage of those changes by playing the local card and attempting to dominate individual DMAs.

LOCAL MUST-BUYS

For cable operators — particularly those whose parent companies also own broadcast stations — that means possibly acquiring or doing swaps to obtain TV stations in cities where they already own major cable clusters. The aim: crafting formidable local packages for advertisers, containing both cable and broadcast avails.

"If you're a cable operator in a major market and own the first or second biggest station, that ad-sales proposition can be very competitive," said Decker Anstrom, president of Landmark Communications Inc., parent of The Weather Channel. "You'd have the ability to create a must-buy advertising situation. You'd be creating a partnership where you should be able to chip away ad share from other TV stations and newspapers."

The issue is particularly relevant for companies such as Landmark, with varied holdings that include cable properties — either systems or networks — as well as TV stations and newspapers.

There are a number of media groups with similar holdings. E.W. Scripps Co. owns cable networks such as Home & Garden Television and Food Network, TV stations and newspapers.

The Washington Post Co. owns the MSO Cable One Inc., Post-Newsweek Stations Inc. and newspapers.

Hearst Corp. has stakes in Lifetime Television and A&E Network, as well as TV stations and magazines. Belo Corp. owns or has pieces of several local cable news channels, newspapers and TV stations.

And Tribune Co. owns stakes in cable networks such as the WGN Superstation, as well as TV stations and newspapers.

These companies are also expecting the FCC to soon ease a longstanding prohibition against companies owning TV stations and newspapers in the same DMA.

Levin cited Cox Communications Inc. as an obvious candidate to pick up TV stations. The MSO Cox is majority-owned by Cox Enterprises Inc., a media mini-conglomerate that also owns broadcast stations, radio and newspapers.

Cox could look to acquire TV stations in one of its cable markets — "a second-tier city where you can dominate local advertising," Levin said.

The MSO owns cable clusters in Phoenix; San Diego; Providence, R.I.; Norfolk, Va.; and Oklahoma City.

"The question is, where is it that you can create a market where you can dominate? That means not just how can you get bigger, but how can you increase revenue?" Levin said.

MSOS: NOT SHOPPING

Cox — and MSOs in general — insist that cross-ownership rule changes won't send them on any buying sprees for TV stations, or anything else.

"The relaxation allows us more flexibility, but we're not actively pursuing any acquisitions," a Cox Communications spokeswoman said.

At The Washington Post Co., chief financial officer and vice president of finance Jay Morse said: "The synergy of having this cross-ownership hasn't been proven. We're on the sidelines."

Some analysts are also skeptical about the prospects of debt-ridden MSOs looking to buy TV stations.

"We haven't had any cable companies express that they're interested in broadcast," said Standard & Poor's analyst Richard Siderman. "I see cable modems as more important than local ads."

At Salomon Smith Barney, analyst Niraj Gupta wrote, "MSOs are likely to expand into TV-station distribution only to the extent that attractive content properties are packaged with the TV assets." He cited ESPN, and its parent — ABC owner The Walt Disney Co. — as an example.

Nevertheless, Paxson believes his pool of potential buyers includes MSOs. Other suitors for Paxson stations are already known to include Metro-Goldwyn-Mayer Inc., which holds stakes in Rainbow Media Holdings Inc.'s four cable networks. Paxson's stations also might be a good fit for Disney's ABC group.

Paxson is in the process of trying to extricate his company, through arbitration, from its partnership with NBC. The broadcast network spent $415 million for a stake in Paxson and has an option to eventually acquire control of it.

"We tell all [potential buyers] that until we're free of NBC, we're not in a position to negotiate," Paxson said.

If he gets his divorce from NBC, Paxson said he wants to either sell all his stations or find a strategic partner to replace the Peacock Network.

LANDMARK CASES

In addition to ad advantages, a cable operator that owned a TV station in a market could cross-promote, hawking cable modems and even basic-cable subscriptions on the broadcast outlet, Anstrom noted.

Or the cable system could use its TV station to create a 24-hour local cable news channel, according to Anstrom. In Las Vegas, Landmark's KLAS has partnered with Cox and a local newspaper on such a service.

Some suggest that a cable operator that owns a TV station in its market could withhold the over-the-air signal from direct-broadcast satellite, thus gaining a competitive advantage. But one skeptic last week questioned whether a station's affiliate agreement with a broadcast network would allow that to happen.

In a March 1 report, Wolzien also suggests that companies like Viacom need to look for growth in local markets by "increasing their local media concentration," or buying more TV stations to create duopolies.

For their part, media companies claim they are in no rush to buy or sell their stations, even if they are permitted to own two stations in a market, which could allow them to cut costs via synergies between the two outlets.

Duopolies will make life harder for MSOs, according to Anstrom. Broadcasters will have more leverage in retransmission-consent talks if they're negotiating for two stations, he said.

"In those markets, the broadcasters would have a stronger position with cable operators," Anstrom said.

SCRIPPS, BELO VIEWS

E. W. Scripps will "probably look at duopoly," CEO Ken Lowe said last week at a Bear Stearns & Co.-sponsored media conference.

However, Lowe said Scripps is in no rush to sell its 16 TV stations — mostly ABC and some NBC affiliates — since it has used retransmission consent to launch its cable networks and obtain renewals for them.

But he left the door open for their possible sale, stressing that the expansion of the Scripps cable-network unit continues to be his company's top priority.

"If in between deregulation, cross-ownership, all of the above, we see opportunities, as Scripps has in the past — for example, in a deal for our cable systems with Comcast in the early 1990s — we'd be open to any and all areas that might allow us to expand our cable-network presence," Lowe said.

Disney and NBC last year surfaced as interested in buying Scripps, according to sources. Its TV stations and cable networks would be a nice fits for either media giant's broadcast and cable portfolios.

Belo CEO Robert Decherd, who also spoke at the Bear Stearns conference, called his company a potential acquirer — at the right price.

"Sellers still have an unrealistic expectations of what these assets are worth," he said. "Operating companies like Belo have to be very patient and not get caught up not even zero-sum gain, but negative-sum gain, just because regulation has changed or eased."

In addition to its TV stations, Belo owns Texas Cable News and NorthWest Cable News, and is partnering with Time Warner on local-news channels in Charlotte, N.C., Houston and San Antonio, Texas.

Related