Media General-LIN Deal Spurs Consolidation Talk

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Media General has kicked off what some analysts believe could be a secondtier consolidation wave in the broadcast-TV industry, in part a direct response to Federal Communications Commission actions to curb TV station dominance in individual markets.

Media General agreed to pay $1.6 billion in cash and stock for Austin, Texasbased LIN Media, creating, if the deal goes through, what would be the second largest pure-play television station group in the country. The enlarged Media General, with 74 stations in 46 markets, would generate about $1.2 billion in revenue and $491 million in cash flow, and would reach 26.5 million households, or 23% of the TV homes in the U.S. The deal is slated to close in the first quarter of 2015.

This latest broadcast-industry merger comes amid moves by the FCC to rein in joint negotiations of retransmission- consent contracts. FCC chairman Tom Wheeler has proposed eliminating coordinated retransmissionconsent negotiations by two or more stations in a given broadcast market, a move that many believe is aimed at curbing rising cable prices. Cable operators say retransmission costs — which have skyrocketed from $28 million in 2005 to $2.4 billion in 2012 — are a major component of rising cable bills.

On the flip side, retransmission revenue is key to broadcasters’ growth. Media General had expected retrans revenue at its stations to grow 40% this year, for example.

Joining broadcast forces can help in talks with big distributors. LIN CEO Vincent Sadusky, who would be CEO of the combined company, said it would reach about 4 million homes in Time Warner Cable’s footprint and another 4 million served by satellite-TV giant Dish Network.

“Scale is helpful when you’re dealing with companies that have pretty terrific national scale on a pay TV basis,” Sadusky said.

Noble Financial Group media analyst Michael Kupinski said he considers the Media General/LIN deal to be a direct response to recent FCC actions. “This gives them an opportunity to get a bigger platform to resolve some of those issues,” Kupinski said in an interview. He also foresees more second-tier moves.

That thinking was reflected in market moves Friday. Media General and LIN shares were up 14% and 32%, respectively, in early trading, but other broadcast stocks were up, too. Among the biggest gainers were Gray Television (up 15%) and E.W. Scripps (up 6.4%).

Broadcasters have engaged in a consolidation wave for the past three years that has involved bigger players. Sinclair Broadcast Group, the largest pure-play station group, with 167 stations in 77 markets, has spent about $3 billion acquiring stations in that time frame. Nexstar Broadcast Group, a pioneer in extracting cash for retransmission, has spent nearly $1 billion over two years on deals.

“We’re looking for the industry to merge into four or five large super groups,” Kupinski said.

As larger groups like Sinclair approach a federal cap that limits a single broadcaster to owning stations that reach 39% of U.S. TV households, they don’t have much room to expand further. Now the time seems to be ripe for mid-tier groups like Media General and Scripps to enter the fray.

Some local stations could hit the market in the wake of the deal in markets where Media General and LIN overlap, including Birmingham and Mobile, Ala.; Savannah, Ga.; Green Bay, Wis.; and Providence, R.I.

TAKEAWAY

Media General’s deal to buy LIN Media may launch a second-tier consolidation wave among station groups, partly to counter FCC actions to curb coordinated retransmissionconsent negotiations.

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