Some Broadcast, Cable Deals Expected, Despite Tighter Financing

On the broadcast side, more qualified buyers are looking at buying assets, a broker said. In cable, operators and financial institutions continue to see systems as an attractive asset class, said brokers, investors and executives. “The number of potential bidders [for cable assets] has increased even though financing has tightened a bit,” said Executive Vice President Bill Severn of NPG Cable, which recently sold all its systems to Suddenlink. “We're bullish in the space and we'd love to find something to get us back in the space.” Another executive who runs a cable company said M&A in the industry “seems sporadic,” with the sale of Bresnan Communications to Cablevision and Insight Communications reportedly trying to sell itself. “It’s a good business, and if people don’t need to get out, they won’t,” the executive said.

Blockbuster cable system or channel deals are unlikely, industry executives said. They expect more of what recent years have seen: Small and mid-size operators being sold occasionally, often by investors seeking to cash out, and more independently owned cable channels and those part of smaller media companies being bought by larger programmers. Interviews with industry executives indicated that expectations are largely unchanged since the last time Communications Daily asked about views on mergers and acquisition activity (CD Nov 18 p8). The market for broadcast M&A has been heating up, though loans from banks continue to be hard to come by, brokers said now.

Meetings of station brokers in recent years were “almost like going to a funeral,” with business “way, way off” between 2007 and 2010, recalled Minority Media and Telecom Council Executive Director David Honig. “Now it’s starting to come back,” said Honig, whose nonprofit helps broker station sales. “The market is normalizing itself for broadcast properties,” he said. Banks and venture capital firms have been “very conservative” in lending for M&A, he added. For cable, swaps among operators of systems likely will continue, though not at a breakneck pace, said Mark Asset Management President Morris Mark. The largest four or five U.S. cable companies “swap amongst themselves sometimes” but already operate on a “big scale,” the longtime media industry investor noted.

The debt markets are healthy but have tightened some in recent months due to macroeconomic reasons, said partner Jeff Marcus of private equity group Crestview Partners. It has stakes in Charter Communications and Insight and is putting up some equity financing in Cumulus Media’s planned purchase of Citadel. “I wouldn’t call it robust, but it’s active enough to get deals done,” Marcus said. “Just as it has been a rewarding asset class for private equity investors, that has also been true of financial institutions who are leveraged loan lenders and also high-yield lenders.”

Investors are attracted to cable assets because of their perceived dominance in broadband, said cable investors and executives. “When you look at the data usage on our own platforms and how it’s ramped up over a fairly short period of time, you get very enthused about cable’s ability to offer ever increasing speeds for ever increasing usage demands,” Marcus said. The “threat” to cable’s video business from online video providers is more of an opportunity, he said. “Who can provide the bandwidth to be able to download all those video applications … better than the cable operators? No one."

A mix of existing cable operators and financial investors are looking to buy cable assets, Marcus said. That’s true in broadcasting, said Lou McDermott of industry broker Kalil & Co. Some established operators are looking for regionally contiguous assets they can add to their existing station groups, and some new broadcasters or those who used to own stations are looking at assets with the backing of financial institutions, he said. “They think that valuations right now are at a level where they want to get back in the game,” McDermott said. “It’s still a ‘what-if,’ but there are a lot of serious players out there picking our brains, picking owners’ brains and operators’ brains.” TV station assets have been especially “in vogue” in the last few months, McDermott said.

Among those eyeing cable systems, strategic buyers -- would-be buyers that already own some systems -- are typically looking for underperforming cable systems near their own, while financial buyers are hunting for solid management teams that have a track record of success, Severn said. A lack of strong wireline competition is also plus, he said. “Even if you're acquiring an underperforming asset, I'm not worried about that if the competitor is not real strong.” Competition from phone companies or government stimulus-backed broadband providers would make a buyer think twice, he said. A lack of scale could also be a problem, he said. “That’s the difficulty with some of the assets that are out there today,” the broker said. “It’s either a very, very large asset that we can’t play with, or very, very small assets that are not geographically contiguous,” he said. “There’s not enough scale” in those smaller assets “to build the infrastructure and support it all,” he said.

The operational drawbacks to putting systems up for sale has kept some from being sold, a longtime executive said. “It’s a big disruption to your staff when you suddenly have people in suits and ties walking around” as potential acquirers visit properties they are scoping out to invest in or buy, said Massillon Cable President Robert Gessner. “It makes everyone nervous. But it also kind of puts you off your game.” Plans to upgrade equipment for newer products can get put on hold during M&A talks, said Gessner, whose company has about 45,000 video subscribers in Ohio. About 10 years ago, his family decided not to put Massillon up for sale, Gessner recalled: More recently, “no has come knocking here with a big bag of money and we haven’t been shopping” the company around.

Much of the recent cable M&A has focused on smaller systems, but the deals haven’t affected the policy goals of the American Cable Association, which represents smaller operators, said President Matt Polka. “In most cases, you have members of ours that are actually buying systems from larger operators,” he said. The larger operators are looking to shed less-urban systems, he said. “The stuff for them that’s on the end of the line is actually solid gold for our members,” he said. “That’s more subscribers coming our way.”