Entertainment Upheaval : STATIONS : Lure of Big Profits Has Buyers Paying Top Dollar for TV and Radio Outlets

Even before this week’s back-to-back deals to purchase ABC and CBS, 1995 was a banner year for broadcast properties.

Television and radio stations from the big cities to the sticks have been getting snapped up at record prices.

Driving the frenzy are two main factors: the telecommunications reform legislation now before Congress, which could remove many of the barriers to multiple-station ownership, and the current advertising climate in which broadcasters are commanding historically high prices for commercial time.

Another force that may be pushing values upward is technology. Not long ago, the expected explosion in the number of cable TV channels was thought to be a prime threat to the stodgy world of broadcasting.

But now, with the 500-channel cable universe still a dot on the horizon, buyers are realizing that broadcast stations remain the only medium capable of delivering a big slice of a market at once.

Moreover, digital technology may soon permit the slicing of broadcast signals so that one channel becomes five or six. By grabbing a TV station today, buyers may be betting that they’ll own half a dozen in a few years.

On the radio side, there is a perception that efficient managers with sharp programming ideas can achieve economies of scale as they grow larger.

That’s why, for example, a radio operator like Evergreen Media Corp. of Irving, Tex., can go on a half-billion-dollar buying rampage this year that vaults its debt to scarifying heights--and still see its stock price jump to more than twice its late-winter low point.

Stock prices of virtually all major TV and radio station owners are surging, many showing gains of more than 50% in the last six months, far outpacing the heady performance of the broad stock indexes in this year’s bull market.

Analysts caution that station prices can’t expand indefinitely. They acknowledge that the advertising outlook is bright through next year, but wonder what happens if it darkens after that. Also, there is the possibility that Congress will disappoint the industry by relaxing the ownership rules too little.

But for the moment, the conditions are right for high value in broadcast stations.

Many broadcasters are expected to show double-digit growth in advertising revenue this year, building on a not-too-shabby 1994. And next year promises to be even better for two reasons: the presidential election and the Atlanta Olympics.

Given a decent field of candidates, spending on campaign ads should be robust. (Personal politics aside, what self-interested broadcaster wouldn’t root for a renegade Democrat to challenge President Clinton in the primaries?)

Staging the Olympics in the Eastern time zone so that the most popular events are shown live during prime time is a recipe for record ad rates. Even for non-affiliates of Olympics host NBC, the Games bring spillover benefits. Other broadcasters run news programming on the events and carry increased image advertising from Olympic sponsors.

When advertising is healthy, TV stations can produce amazing profits. ABC’s big-city stations--the industry’s most admired--show operating profit margins of as high as 60% of revenues, analysts say.

“A station with margins of 25% would be considered pretty weak,” notes media analyst John Reidy of Smith Barney.

Broadcasters calculate station value in terms of multiples of annual cash flow--defined as operating earnings before interest, taxes and depreciation.

Major-market radio and TV stations historically have sold at about 10 times cash flow, while small-market stations sold for multiples of 8 or 9, analysts say.

This year, according to Harry J. DeMott of CS First Boston, “stations have come up about three multiple points,” meaning that it isn’t unusual to see a larger-market property command 13 times cash flow. That’s about the multiple he assigns to NBC’s $321-million bid Monday for Outlet Communications Co., a Cranston, R.I.-based operator of stations in Columbus, Ohio; Providence, R.I., and Raleigh-Durham, N.C.

Analysts say buyers should be careful, however, about paying a high multiple for a station that’s cranking out a 50% operating margin, because there’s little room for improvement.

In the case of a radio station, says DeMott, “you look for an under-performer with a great signal, and they’re not all that easy to find.”

More typical of what’s happening this year than the ABC or CBS mega-deals may be a sale announced Tuesday in which Young Broadcasting Inc. of New York agreed to buy KWQC-TV, the NBC affiliate in Davenport, Iowa, for $55 million.

Analyst Mark McFadden of BT Securities says the price is about 10 times year-to-date cash flow--a healthy amount to pay for a small-market station. On the other hand, Young’s TV stations have average operating margins in the high 40% range, while the Iowa station’s margins are closer to 30%, McFadden says.

If Young can bring KWQC up to the profitability level of the rest of its group, the price will look like a fairly conservative eight times cash flow, he notes.

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Turbocharged Broadcasters

Propelled by a booming advertising market and the prospect of relaxed U.S. rules on station ownership, the stock of television and radio broadcasters has been “turbocharged” this year, in the words of one analyst. Some examples:

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Wednesday YTD Company Stock price Gain New World Communications Group $21.66 81% Evergreen Media 31.50 80 Lin Television 38.25 70 Infinity Broadcasting 35.00 70 Young Broadcasting 29.50 66 Westwood One 15.81 59 Renaissance Communications 39.63 45

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Source: Bloomberg Financial Markets