Broadcasters Face Prospect of Takeovers

Facing federal policy changes, higher costs and falling ad revenue, smaller TV broadcasters are scrambling to shore up their finances or face selling out to TV networks or other big media companies.

Paving the way for television’s new era is Federal Communications Commission Chairman Michael K. Powell.

An ardent champion of free markets over regulated ones, Powell and his colleagues voted unanimously last month to reexamine the FCC’s 26-year-old rule barring any single company from owning a newspaper and a radio or TV station in the same market. Some analysts predict that as early as next fall the agency will relax another rule that bars broadcasters from owning stations that collectively reach more than 35% of U.S. television households.

In addition, federal lawmakers have mandated a costly transition to digital television that has left many of the nation’s 1,348 TV station owners in debt. As a result, some experts predict that as many as 100 TV stations will be snapped up by the networks and other big media firms over the next three or four years.

“It is very likely that ... the television market will resemble the auto industry, where there are only three or four major players,” said Scott Cleland, an analyst for the Precursor Group, a Washington-based research group.

Seattle broadcaster Barry Ackerly already has dealt himself out of the game.

This month the chairman of the Ackerly Group agreed to sell his 18 TV stations, five radio outlets and billboard advertising holdings for $483 million to San Antonio-based broadcast giant Clear Channel Communications. Ackerly decided his firm was too small to compete effectively with bigger rivals.

“We were faced with a choice of buying more or selling what we had.... We’re not a big company,” Ackerly told analysts during an Oct. 9 conference call. “And I think we’ve chosen well and wisely.”

This month, Granite Broadcasting Corp.--a New York-based firm with nine stations in markets from San Francisco to Syracuse, N.Y.--put its Detroit TV station up for sale, hoping to stave off creditors. But Granite still risks losing TV stations to NBC if it fails to make a $61-million payment to the network by the end of next year. Under a 10-year affiliate agreement, NBC has first rights to buy Granite’s KNTV-TV in San Jose as well as get a $34-million lien on Granite’s flagship San Francisco station, KBWB-TV, if the broadcaster defaults on its affiliate payment.

Likewise, Benedek Broadcasting, a Chicago-based company that owns 23 small market TV stations, is scrambling. Benedek has been in talks with Deutsche Bank and other financiers to raise capital after watching company revenue fall 5% to $69.9 million for the six months ended June 30, compared with the same period a year earlier.

“It’s been a [tough] year ... which was terribly exacerbated by the events of Sept. 11,” Benedek President James Yager said. And converting to digital TV--which promises sharper video and higher-quality sound--has become so expensive that Benedek can afford to convert only 14 of its 23 stations before the May 2002 deadline set by Congress, he said. So Benedek must “find some financial alternatives” in order to survive, Yager said.

If Benedek, Granite and other struggling broadcasters follow Ackerly’s footsteps, it would mark a major new wave of consolidation.

Threat to DiversityAlarms Policymakers

That prospect has alarmed many local television owners and enraged some policymakers who say broadcast consolidation will end media diversity and shrink the variety of news, information and entertainment available to consumers.

“It’s hard already for someone not associated with the TV networks to get their shows on television,” said Larry Irving, a former assistant secretary of Commerce in the Clinton administration. “Chairman Powell has indicated little concern about diversity.... Small production companies are all but gone in Hollywood and now smaller broadcasters may follow suit.”

But some analysts say the changes, though disruptive, may produce a healthier industry.

“Those that fret over the value to a democracy of keeping media ownership fragmented should take a moment to reflect on how much higher the quality of news coverage can be when sizable financial resources are devoted to it,” said Leeland Westerfield, an analyst at New York-based UBS Warburg, who cited the coverage of the terrorist attacks as an example.

In this new era, he added, “the overall theme is that TV station ownership will be optimized.”

Analysts have begun eyeing a host of small and medium-size broadcast firms and major media companies. Besides Granite and Benedek, experts are watching Paxson Communications Corp. (already 32% owned by NBC), Hearst-Argyle Television Inc., Lin Television Corp. and Sinclair Broadcasting.

Experts said General Electric’s NBC and Walt Disney’s ABC are likely to be the most aggressive buyers, since they are well under federal ownership caps.

On Oct. 11, NBC announced a $2-billion bid to purchase No.2 Spanish-language broadcaster Telemundo Communications Group Inc. and its 10 television stations. If consummated, the deal would give NBC 23 TV stations that collectively reach about 30% of the nation’s TV audience.

Fueling the prospects of a TV network buying spree are the slumping stock prices of local TV station groups, which have fallen dramatically over the last year.

Granite’s stock closed Friday at $1.09, down 75% from its $4.44 high last November. Hearst-Argyle closed Friday at $16.70, down 33% from its high of $24.75 at the beginning of this year. And Paxson saw its shares close at $8.48 Friday, a 39% drop from its 52-week high of $14 in June.

The big networks, meanwhile, have been able to weather the advertising slump because their parent companies have other holdings to fall back on. Viacom, which owns CBS, also owns Blockbuster Video, the Paramount movie studio and several cable TV channels and derives half of its revenue from non-broadcast sources.

Relaxed Ownership Rules Expected

The networks’ comparatively healthy balance sheets, coupled with the eroding financial fortunes of local station partners, has some industry executives speculating about takeover scenarios.

Mel Karmazin, president of Viacom, recently said at a Goldman Sachs investment conference that he is betting regulators will be more open to relaxing ownership restrictions and that rivals will become vulnerable to takeovers in the wake of the Sept. 11 attacks.

“We believe that there will be acquisition opportunities that will present itself as a result of this” terrorist attack, Karmazin said. “There are some very leveraged companies out there.”

“We also think that Washington is going to be a whole lot more receptive to a new round of deregulation as a result of ... [what] occurred on Sept. 11,” Karmazin added. He compared the current regulatory climate to the aftermath of the Gulf War, when Congress deregulated the radio industry.

The takeover talk, however, has many local television owners appealing to regulators for protection.

Last spring, 600 local stations urged the FCC to adopt rules preventing the networks from leveraging their affiliate agreements to try to determine who the buyer would be. They also asked the agency to stop the networks from imposing financial penalties on local affiliates when they preempt network shows such as “Survivor” with their own news specials or dramas. The requests are pending.

“Many [smaller broadcasters] are not ready to jump ship and cash in” on the consolidation trend, said Mark R. Fratrik, an analyst with the Chantilly, Va., research firm BIA Financial.

“But it’s a real difficult time for them. The question of what to do in the coming era of media consolidation is becoming much more poignant.”