TV Networks Still Darlings of Wall Street : Industry Stocks Soar on Takeover Talks and Acquisitions

Until recently, the conventional wisdom was that the television networks faced a grim future due to the steady erosion of their audience by cable TV and programming on videocassettes.

It is true that the networks have suffered a decline of 15 percentage points in their share of the prime-time audience since 1977, when they controlled 91% of viewing. But that doesn’t seem to cut much ice on Wall Street, where stocks of the major networks have been rising on merger and takeover rumors every bit as unremitting as the slide in audience share.

For American Broadcasting Cos., months of rumors became reality Monday when ABC and Capital Cities Communications Inc. announced a merger valued at $3.5 billion. ABC’s stock had been trading at about $75 per share before the announcement. Its price reached $107.25 Tuesday, up $1.375 for the day.

Surge of Popularity

Not only networks but group broadcasters--companies that own television stations in several cities--and cable companies also have seen a surge of popularity in the stock markets.

On Tuesday, a group of investors in Storer Communications, a group liquidation; Wall Street analysts have placed Storer’s liquidation value at between $96 and $117 per share, significantly more than its trading range of $60 to $70 per share.

Analysts say the principal catalyst for the strengthening prices of broadcast stocks is the decision of the Federal Communications Commission last year to abolish its so-called rule of seven, which restricted a single owner to no more than seven television stations (as well as seven AM and seven FM radio stations).

Starting April 1, a single company can own up to 12 TV stations, as long as its share of the national viewing audience does not exceed 25%. The change “has sparked a lot of opportunistic trading,” said Mario Gabelli, a securities analyst who owns Mario Gabelli & Co., New York.

ABC’s five existing stations (in New York, Los Angeles, Chicago, Detroit and San Francisco) now control 20.8% of the national viewing audience, Gabelli said. That means Capital Cities may have to divest some of its seven stations, but many of those are in smaller cities, including Fresno, Durham, N.C., and Buffalo, N.Y., so Capital Cities in effect will be trading up to larger broadcast markets.

The FCC may be inspiring some merger and takeover speculation by signaling a looser regulatory environment for changes of broadcasting control, a process that had always appeared expensively tortuous in the past. Although a change of control would still get close enough scrutiny from the FCC, Justice Department and Congress to daunt a hostile bidder, clearly friendly deals will be easier to execute, analysts say.

Some also say that the effect of the networks’ eroding market share has been overstated, particularly in relation to advertising expenditures. While network shares have declined to 76% of total prime-time viewers in 1984 from 91% in 1977, according to Richard Kostyna, senior vice president and media director at the J. Walter Thompson advertising agency, “there is no other national audience vehicle that can even come close” to broadcast television in reaching consumers.

Advertising expenditures on network time have grown steadily since at least 1974, according to a study released last week by CBS Inc. and McCann-Erickson Inc., reaching $8.4 billion in 1984, a 20% increase over the year before. The Olympics and presidential elections provided part of that boost last year, but the survey suggests that spending by advertisers will increase another 5% this year, to $8.8 billion.

For its part, CBS argues that it can adjust to the erosion of viewing on the network level. CBS Chairman Thomas H. Wyman told Wall Street analysts last week that the company sees a slowdown looming in the growth of basic cable and pay-channel market penetration. The company treats the boom in videocassette recorders--which some analysts say may be in 55% of all households by 1990--as a marketing opportunity.

Of the growth of independent television stations not affiliated with the networks, Wyman acknowledged that their number has tripled in the last five years, but he argued that independent stations face rising costs in programming and tougher competition for rating points. “We believe the phenomenon is cresting,” he said.

Many analysts warn that enthusiasm over the fundamental values of television companies may itself be excessive. That the FCC ruling on multiple station ownership has not produced a great wave of station purchases is not surprising, says Mark Riely, a broadcasting analyst for F. Eberstadt & Co., a New York investment firm.

“There should be wariness about station pricing because growth will be lower than in the past, and advertising dollars will follow the audience,” he says. And Wyman told his Wall Street audience last week that the prices asked for broadcast properties had soured CBS on making an acquisition. “You can’t work through most of the asking prices and hope to recover your costs in your lifetime,” he said.

Wyman may have been referring to Gulf Broadcast Co., a Dallas-based owner of five TV stations and seven radio stations that had been expected to get about $850 million when it put itself up for sale last December. The stations were finally bought in February by Cincinnati-based Taft Broadcasting Co. for $755 million--and many analysts believe that the price, which comes to 11 times Gulf’s cash flow, is a little high.

The Taft-Gulf deal is the only significant such transaction to have taken place since the FCC ruling, although Golden West Television Inc. has put KTLA-Channel 5 in Los Angeles up for sale for about $500 million. If it goes for that much, KTLA, reputed to be one of the three most profitable non-network stations in the country, would be the highest-priced television station ever.