Hey everyone, this is Brad. It's my week for lead blogging, and I found this article about the financial crisis and its effect on TV stations. It's an interview with Larry Patrick, managing partner of Patrick Communications. He's saying that the down economy might make it hard for the smaller stations to stay afloat. He predicts more bankruptcies and foreclosures to come. I think it's interesting that he doesn't think broadcasting should be publicly traded. His argument is a good one, what good does it do to be a publicly traded broadcast company right now? Profits and ratings are both down, and there's no real prediction of a turnaround until around 2010.
http://tvnewsday.com/articles/2008/10/07/daily.1/
Tough Talk About Even Tougher Times
TVNEWSDAY, Oct 7 2008, 12:24 AM ET
Few people have a better perspective on the broadcasting industry and what's ailing it these days than Larry Patrick.
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As managing partner of Patrick Communications, a leading station broker and appraisal firm, he regularly examines stations' operations and their books as he helps them refinance, buy or sell. And he stays well grounded in the business through the ownership of a string of small-market radio stations.
Unfortunately, Patrick sees dark days ahead for broadcasting.
In this interview with TVNewsday Editor Harry A. Jessell, Patrick says the industry is just beginning to feel the full impact of an economic "tsunami" generated by the tight credit markets and the sharp advertising slowdown.
He says to expect more foreclosures and bankruptcies, greater pressure to cut costs, sinking station prices and a dearth of station deals as owners await better times, which may not come until 2010.
The news is not all bad. Broadcasters with heaps of cash may be able to pick up stations at bargain prices from owners who have to sell as the banks press in.
What the industry really needs is a roll-up of some of the mid-size publicly traded station groups, he says. The regulatory and financial hurdles may not be as great as the difficulty of settling on which of the CEOs would run the surviving company.
An edited transcript:
What effect is the subprime lending meltdown and credit crunch having on TV broadcasting?
The whole economic meltdown is a very tough body blow for broadcast lending overall. If you are a broadcaster who paid a high price for your assets and you're at a point where you desperately need to refinance, at the moment at least, those refinancing options are extremely limited.
Banks are either not loaning or they're loaning at much lower multiples than they were just a year or two ago. If you're a seller, the difficulty is that many of the buyers who legitimately would have had a strong interest in your station or stations can't swing the deals these days.
Let's say you want 12 times [cash flow] for your station. In the past, a buyer might say that's OK because I can borrow 7 or 7 ½ times from a bank and do the rest with equity. But now the bank is saying: "Look, if we do it at all, we will only do it 5 times." So, suddenly, you have to put in so much more equity and the deal may not make sense anymore.
Look at it from the seller's side. When the multiples come down on the lending side, it translates into lower multiples for the pricing. So, instead of 12 times today, maybe suddenly you can only get 10 times. If you're in desperate trouble, you take it and run. If you can hang on, you just don't sell. You sit there for a while.
Are there some station groups in trouble because they need to refinance and can't?
That's correct.
How widespread is that problem?
I can think of a half-dozen, at least, who are in that situation where they have a lot of leverage and they're trying to figure out how they can refinance. That's very difficult.
Are we going to see some more bankruptcies like Pappas?
I think you probably will. We've been asked to appraise stations with the idea of selling and the people that are calling are not the broadcasters. They're the banks that are saying: "We're going to move towards foreclosure." That's a very bad thing for the industry when that happens.
On the other hand, where there are losers there are always winners. The station that is taken over by a bank may come back out on the market at a dramatically lower price.
If you're a private company and you have dry powder, you have cash in the bank and you have a good relationship with your lenders and you are not particularly highly leveraged, this may be one of the great shopping times.
You're going to see a handful of stations, maybe more than a handful, that will come on the market that you would have passed by in 13 or 14 [multiples] times, but now they're asking 10 or 11 times. Maybe, you can get yourself a little bit of a bargain.
The trading multiples on all stations are probably drifting down slightly. I was in Texas last week at the request of a bank visiting a station. It's a very nice station and it's a profitable station. It's sitting there doing several million dollars in cash flow and there's nothing wrong with the station.
The problem is that the company borrowed a lot of money to do improvements, to buy out some shareholders and do a number of other things. Then, the bank itself got in trouble. It wound up with a lot of bad loans and was liquidated and sold to another bank.
The new bank walks in and says: "Hang on here, wait a minute, you guys are in violation of our loan documents with us. You're not paying us enough and, to be honest, we'd just as soon sell the station as anything." So that's a bad thing for the owner/operator right now.
But, on the other hand, somebody that looks at that station and looks at that market will say there's nothing wrong with either. That's still a $25 million or $30 million TV station in a nice little town. I wouldn't mind buying that. That would be a very nice little investment.
So, basically, the credit crunch is putting some companies under severe financial pressure, preventing others from selling and creating opportunities for companies with plenty of cash.
Yes. But that's only half the story. The other half is the dramatic slowing in the ad business in the core categories. When you see companies like Ford Motor being off 35 percent [in their ad spending] and others off 25 percent, it affects revenue and cash flow and it may put some companies that have had good relationships with their banks in jeopardy of breaching their covenants. They're not generating quite enough money as they're supposed to.
They still may be able to make your payments, but things are much, much tighter than they used to be. There'll be pressure all the way down the line. There'll be pressure to reduce staff size, there'll be pressure not to re-sign talent at big prices, there'll be pressure not to take gambles.
If you can't get as much revenue, you're not going to want to pay as much for syndicated programming and you are going to fight the networks every step of the way on any sort of reverse compensation.
It's also unfortunate that this is all happening at a time when broadcasters should be looking to exploit their digital spectrum by multicasting and offering mobile services. Broadcasters are suddenly going to say "there're many opportunities out here, but the core business is being hurt by the banking and the advertising slowdown and the corporation just told me that we've got to tighten our belts."
Right at the time of the DTV transition when you're going to suddenly have so much more inventory and more spectrum to do more creative and innovative things, you may find that your hands are tied.
We are in a tsunami of economic problems caused not by broadcasters, but by subprime lending and other things that have really shaken the whole foundation of the American financial system.
What about the publicly traded TV stocks? They are way off their highs and continuing to head south.
Broadcasting is out of favor in the stock market. The analysts and investors do not see it as a growth market. It still produces huge, huge cash flows, but that's not really what they're looking for. So the result is you see some of these companies that used to sell for $20, $30 or $40 at $5 or less. It's got some of the families and some of the controlling shareholders scratching their heads and asking: "How do I get out of this?" It's very tough.
There is no way out right now, is there?
Not now. The reality is broadcasting should not be publicly traded. There's almost no good reason to be a public company at this point. That changes over time, but right now you're better off if you're private.
Why is that?
Because public companies are under scrutiny constantly, quarter after quarter. If the analysts and investors don't see any growth, you're going to get hammered. Why take that?
Why not just go private, stop the expense of being a publicly traded company and so forth. The difficulty is, in order to go private, you need a tremendous amount of cash and you can't get it now. I mean there's nowhere to borrow it and there're no equity people who believe enough in the future of broadcasting to gamble that much money.
Let me give you one example. I have to protect the name of it, but the operator of one of these pretty big public companies whose shares are down to $3 or $4 told me that his problem is that his original investors, the big institutional investors, are in at about $18 to $20 a share and so he can't sell when the stock price is so low. That just doesn't work. But they'd like to get out. I don't know how you get out in that case. I mean one theory is that you start liquidating assets. You just start selling stations.
Because the private market value of stations is higher than the public market value.
Yes, but that was more true six months or a year ago. Today, after this last little meltdown, private market value is still higher than public, but private value is down two or three clicks from where it was. So, there're a couple of groups out there that could have sold their stations six months ago and probably gotten 13 or 14 times because they were very excellent stations with everything going in the right direction. Today, the multiple is 10 or 10 ½.
It sounds as if your advice would be to sit and wait for the credit to loosen up and the revenue to start flowing again before trying to sell.
Yes. Hang in, if you can. Hang in and do the right things. Be very careful about what you're spending and get out there and redouble your efforts to find new ad categories.
I was at the NAB Small Market Television Exchange in Phoenix where there was a lot of focus on health care. That makes sense. You've got an aging population that is going to increasingly need more and more complicated health care delivery.
Every TV station in the country ought to have at least one sales person specializing in health care so you can get more ads not just for Levitra and everything else at the national level, but for your local hospital and your local dental clinic and your local oncology clinic and the pain relief center and the wound care center and all those other things you hear about.
What about Washington? Does broadcasting need some kind of regulatory bailout by the FCC?
Broadcasters always look at Washington and say "use some business common sense here." Some of the paperwork requirements that the commission wants to add on these days seem tremendously burdensome. The FCC is trying to catch the few bad folks in this business, but it ends up punishing that great majority of stations that are in fact doing a very good job in their local communities.
I keep hearing these words: localism, localism. Hey, it is good business to be very local. It is the best business to be focused on your community. You don't need a government with a stick in its hand banging you over the head to do that. If you don't serve the local community, if you don't focus on local issues, if you don't have a strong news operation and so forth, you slowly steadily sink and eventually get out of this business.
What really needs to happen in my view is the roll-up a number of these companies. There are a dozen or more broadcasters out there that are all being battered by the economy and are being battered by Wall Street. The reality is, it would be great to put three or four of these companies together.
I know that goes against the common wisdom in Washington that consolidation is a bad thing, but being big doesn't mean you can't do great broadcasting. NBC is a huge company. CBS is a huge company. They do some really great broadcasting. They have the size to invest in the programming.
Look at some of these companies that are struggling — you know, the Granites, the Youngs — and the companies that are trying to sell — LIN, CCA Nexstar, any number of these companies. They would be better off if you put together a company that suddenly had $600 million to $1 billion worth of revenues and cash flow that's up in the $200 million-$300 million range. You'd have a big enough company that Wall Street would start paying attention.
There are all sorts of pressures against that, obviously. Syndicators don't necessarily like giant companies because there's market power on the side of the broadcasters, and the FCC and Congress are inherently suspicious of bigness, but from a pure financial analysis, that's the way out of the woods.
There is also the problem of who gets to run that show. That's very, very tough.
You mean which company is the surviving company?
Yes. The regulations and financing are difficult, but, in my view, it's never the thing that really stops these deals. What stops these deals is figuring out who winds up running the tribe.
Some of these guys are at the right age where it's like: "Fine, give me enough money and I'll go to the beach," but others say no. They want to stay in and be the boss. But that's always been a problem in any business when you try to merge somewhat equal companies.
Who's the best bet for broadcasters, Obama or McCain?
I don't think either candidate has shown themselves to be a huge friend of broadcasting. Hopefully, whoever is elected will pay attention to this industry and we'll develop a relationship with him. I think we just have to see. I mean it's hard to categorize people. Many people see Bill Clinton as a liberal Democrat, yet the biggest rewrite of telecom law occurred under him. We've had eight years of George Bush and I don't know that we've had a lot of deregulation in the broadcasting industry during his administration. We have, in fact, taken a step or two backwards in terms of where the regulation emphasis has been from the current FCC.
Do you think we are going to see some sort of recovery next year? Or, do you think it's going to stretch into 2010?
I think it's going to stretch. Everybody I talk to in New York says, hey, we're not going to see a real recovery across the country until 2010. In the meantime, what happens is companies blow up, investment firms blow up, people's careers are destroyed and people get blown out. It's just a very, very ugly time.
That's a pretty grim note to end on.
Well, I'm sorry, but that's sort of the way I see the world.
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