Rush for TV, Radio Stations Losing Steam : Media: Stations are no longer such hot properties due to an ad slump, disarray in the junk bond market and competition from cable.

Two years ago, during the height of investor interest in acquiring television and radio licenses, Florida businessman Malcolm Glazer put three of his TV stations up for sale for a reported $82 million. This year he finally sold them. The price? Just $52 million.

Owning a television or radio station license, the oft-stated observation goes, used to be like owning “a license to print money.” But in the wake of a nationwide advertising slump, disarray in the junk bond market and competition from the rapidly growing cable television industry, the clamor for television and radio stations has suddenly lost some of its steam.

“The bloom is beginning to fade,” says media analyst Paul Kagan, who estimates that the $4.37 billion in proposed television and radio station transactions in 1989 was the lowest dollar amount since 1984. And with new media ventures on the horizon that may eventually siphon off even more advertising dollars--such as the $1-billion satellite-to-home Sky Cable video service announced in February by Hughes Communications and three other companies-- broadcast stations could become even less attractive investments, experts say.

“There’s been a definite softening in sales prices; I’m seeing deals today that I would have killed for two years ago,” said Frank D. Osborn, president of Osborn Communications, a New York-based company that operates 18 radio stations and five television stations. A broadcast license, Osborn added, is “no longer a license to print money; you can screw up and lose a lot of money.”

Glazer would not comment on his sale of three stations to a group of investors headed by former ABC television executive I. Martin Pompadur. But many analysts say that, like Glazer, other station owners are lowering asking prices or canceling deals altogether as they find that their broadcast licenses aren’t fetching as many eager buyers as they once were.

“The bidding frenzy for stations has disappeared,” said Pompadur, who is chief executive of privately held RP Cos., which brought WRBL in Columbus, Ga.; WTWO in Terre Haute, Ind., and KQTV in St. Joseph, Mo., from Glazer. “People are basically disappointed in station properties due to (their poor) cash flow” and sluggish advertising revenue.

Although some experts estimate that as many as 30% of the nation’s more than 9,000 radio stations and 1,169 television stations lose money each year, commercial broadcast stations have been viewed as lucrative investments because of their relative scarcity. Much like vacant real estate in rapidly appreciating neighborhoods, radio and TV stations can rise greatly in value despite not having huge or rising profits or income.

What’s more, unlike a manufacturing concern whose material costs jump along with increased production, broadcasters’ costs are largely fixed. It’s no more expensive to air $1 million in commercials than it is to broadcast $100 million worth; thus, a station’s pretax profit margin can run as high as 40%. And despite the increased competition for advertising dollars from cable and other media, broadcasting is one of the few enterprises that can reach a broad audience efficiently. Meanwhile, radio touts its unique ability to reach listeners while they commute to work.

For those reasons, Pompadur said he believes that broadcast ownership “remains a very good business. There are very high profit margins. It’s not labor-intensive, and there’s no foreign competition.” He also noted that TV seller Glazer “still is making a very nice capital gain” on his three TV stations despite getting $30 million less than his asking price.

Analysts say Glazer might have gotten more had TV revenue continued rising at its previous double-digit rates. But TV revenue, nearly all of it advertising, has slowed.

While total revenue for all media has risen in the past decade, it has risen fastest for cable system operators, according to a study by Bortz & Co., a Denver-based media consultant. Between 1980 and 1988, cable revenue jumped 21.4% to $13.7 billion. Meanwhile, total network TV revenue grew just 7.9% to $9.4 billion and radio revenue rose 9.6% to $7.7 billion during the same period.

As a result, brokers say that TV station owners who once asked buyers to pay as much as 16 times cash flow for a network affiliate have recently scaled back their asking prices by as much as half.

In the 1980s, station trading expanded dramatically as changes in federal tax laws, broadcast regulation and the emergence of more creative financing motivated buyers and sellers to make deals on broadcast properties, especially television stations.

The Federal Communications Commission set the stage for increased activity in 1984 when it liberalized rules that had restricted station ownership to seven FM radio stations, seven AM radio stations and seven television stations. The agency, which regulates the communications industry, voted to allow most companies to own as many as 12 stations in each category.

But the market did not take off until 1985, when a proposed increase in capital gains taxes touched off an explosion in station trading. Total station transactions jumped 448% to $14.8 billion in 1985, according to Kagan, as sellers rushed to complete deals before the tax increase took effect.

Toward the end of the 1980s, station trading received an additional boost as a nascent junk bond market spurred bigger and bigger media deals.

The second-largest radio station leveraged buyout in history occured in 1989, for instance, when the Group W broadcast division of Westinghouse Electric Co. paid $368 million to acquire 10 radio stations from two broadcast companies controlled by New York investor Robert F. X. Sillerman. As a condition of the sale, Sillerman brought back $144 million of junk bonds from one of his companies, Metropolitan Broadcasting, before the deal was consummated.

But with the collapse of the junk bond market and the national advertising slump, the heady days of feverish station buying and selling appear to be over.

Total station transactions in 1989 fell to $4.1 billion from $5.6 billion the previous year, or less than one-third the total of the peak year of 1985. Television sales, which had soared as high as $12.2 billion, have been especially hard hit, declining last year to just $1.8 billion in transactions.

Many investors peddling stations in the current depressed station market lament the good old days.

“We have four television stations for sale; each one is profitable with multimillion-dollar cash flow, but the market just isn’t what it was four years ago,” mused Ray Timothy, senior managing director at Furman Selz Mager Dietz & Birney, a New York investment banking firm that is trying to sell the four TV stations on behalf of Beam Communications. Although Timothy says he’s asking only $50 million for all four stations, he’s found “a jittery financial climate. There’s a lot of pent-up money on the sidelines waiting for the situation to clarify.”

A less-pronounced slump has occurred in radio, although Southern California has remained strong, with sellers still managing to get top dollar for their radio stations because of the robust advertising climate here, experts say.

In car-crazed Southern California, said Walter R. Sabo Jr., a New York-based consultant who was once general manager of the ABC Radio Network, “one of best ways for advertisers to reach most people between 9 and 5 is through radio. That’s why the radio business in Los Angeles has been so strong.”

Yet some Southern California broadcasters have nevertheless had to spend heavily to remain competitive.

Two months ago, Westwood One reported losses of $22.7 million on revenue of $130.6 million for the fiscal year ended Nov. 30, 1989. Norman Pattiz, chairman of the Culver City-based radio network, said the company’s losses stemmed mainly from start-up costs associated with the purchase of a Los Angeles radio station as well as the $39-million purchase of WYNY-FM in New York.

Pattiz was criticized by some experts for paying too much, $56 million, to acquire his Los Angeles radio station early last year. But Pattiz said the station, relaunched last March as KQLZ-FM “Pirate Radio,” was “a bargain.”

“The last radio station to sell in L.A. was KJOI-FM, and that went for $87 million,” Pattiz said.

In November, Viacom International Inc. paid $101.5 million to purchase KJOI-FM and two Denver stations from Command Communications. It was the third sale of KJOI in five years and solidified that station’s reputation as the priciest FM station in the United States.

The station’s repeated change of hands was made possible by the FCC dropping its so-called anti-trafficking rule, which used to require owners to hold on to stations for three years before selling them. The rule change was one factor that contributed to the spurt in station sales between 1985 and 1988.

But deals the size of the Viacom purchase are usually highly leveraged. And in recent years some broadcasters that have gone deep into debt to acquire stations have later found themselves in financial straits.

SCI Television Inc., a Denver-based owner of six network-affiliated TV stations, narrowly escaped bankruptcy proceedings in late January. It entered into a new debt structuring agreement Feb. 4 after defaulting on its junk bond debt when revenue did not meet projections.

The nation’s largest Spanish television network, Univision, is facing similar prospects after missing interest payments on $270 million of junk bonds. A year ago, Univision, which owns eight U.S. television stations, including KMEX in Los Angeles, had projected 1989 cash flow at $62 million. In September, the figure was lowered to $52 million. The actual year-end figure was just $40 million, according to a repurchase offer for Univision’s bonds.

Broadcaster Osborn thinks that things may get worse before they get better.

“Station sale prices haven’t reached fire-sale levels yet, but I think they will in the next six to 12 months,” Osborn said. When they drop to that level, however, Osborn said his company will be among those in line to buy.

REDUCING THE VOLUME ON STATION SALES

Pirate Radio’s owner called it “a bargain.”

The chart shows the history of proposed station sales filed with the Federal Communications Commission. A small percentage of these deals are either never closed or change terms before closing.

Source: Paul Kagan Associates Inc.