For Media M&A, Christmas Comes Early
Paul Hastings partner, Eric Greenberg, delves into the FCC, the uptick in media M&A and how the 2012 election is to TV what Christmas is to retail.
Eric Greenberg, a partner of Paul Hastings Janofsky & Walker LLP, regularly represents broadcasters in the buying and selling of television stations. Starting this fall, he expects to be a whole lot busier.
First, private equity firms count so many of these media companies and their respective TV stations among their portfolio holdings. And with political mudslinging expected to grow every day, so is advertising revenue from candidates on the campaign trail. Middle market sponsors flush with cash are expected to take notice. Why? Because the 2012 election season, Greenberg says, is expected to bring in record-breaking cash flow for broadcasters thanks to all those political advertisements that flood primetime.
And he’s not alone. Moody's Investment Services, for example, predicts political ad revenues will grow 9% to 18% above the record-breaking 2010 election levels, according to a report released Tuesday, June 21.
Meredith Corp., which Greenberg has counseled in the past, exemplifies this. In fiscal 2009, the Des Moines, Iowa-based broadcaster generated $24 million in political ad revenue, up from $5 million in 2008. Even though Meredith generated just $9 million in this particular niche during 2010, it expects political ad revenue at its television stations to total at least $25 million and possibly $30 million this year. The majority of these ads had already been booked by the second quarter of 2011, according to the company's financial report last July. (Fiscal 2011 numbers are not yet available.)
“Political revenue tends to be cyclical,” a Meredith spokeswoman said. “But the obvious revenue is an advantage.”
Indeed, it could help shape the way some of the larger strategics and their PE counterparts view potential targets in the television space.
Greenberg, who joined Paul Hastings from Covington & Burling in March, has a 20-year career centering on media. In addition to advising major television station groups and other telecom operators, he counsels clients on regulatory matters involving the Federal Communications Commission.
Mergers & Acquisitions spoke with Eric Greenberg on what he believes is a stellar time to be a strategic or financial buyer on the hunt for broadcasting stations and groups that are fertile for dealmaking. The following is an edited version of the conversation.
Mergers & Acquisitions: You’ve said media M&A, particularly in broadcast, is poised for a pickup in the near term. Why?
Greenberg: I think there are a couple of things. The economy is starting to recover and advertising is coming back strong. Also, an improved credit market means broadcasters are more willing to reach in their pocket to buy something they want. The other key element is political advertising, which is a huge element.
Mergers & Acquisitions: How are the two connected?
Greenberg: Political advertising and elections are to TV what Christmas is to retail. You’ve got a very significant election cycle coming up and a number of contested elections. If 2008 was the largest political advertising season on record, 2012 is going to trump that. So put those pieces together, you’re increasing access to capital and the industry is on the cusp of a robust reprise. Those add up to a big emphasis on M&A. But at the same time it cuts both ways. There will be some people who say “I don’t know if I want to sell until after the election because there’s money to be made.” Then you have others who want to capture the opportunity of the upcoming season. Both analyses are right. Let's talk about private equity for a moment. If you’re a fund with a portfolio, invested in some startup that’s reinventing gaming or telephony -- betting on the guys in the garage hitting it big -- or a pharmaceutical company hoping its new drug is a blockbuster, add into that portfolio good ol’ television. Day in and day out, it proves to be a steady hand on the lever that generates cash.
Mergers & Acquisitions: What part of broadcasting are we talking about here? Local, international… online?
Greenberg: I’m talking about domestic TV broadcasters. People that own channel 2 in hometown USA affiliated with a major network. Anyone that owns a TV station is involved in this uptick. From very significant companies that own affiliated stations to smaller companies that own one or a handful of stations, the current economy is putting pressure on small operators who don’t have scale. That also leads to M&A opportunity.
Mergers & Acquisitions: Do you anticipate the cash generated from political advertising being used for dealmaking? Or just to update the station, boost salary, or to simply increase profit?
The cash flow is relevant in two respects. First, those increased revenues boost profits in the near term. Second, it improves the profile and potential valuation of the station, or the station group, if it is being positioned for a sale post-2012. That said, experienced investors and strategic acquirers would not extrapolate political advertising revenues into 2013 which is a non-election year.
Mergers & Acquisitions: There’s an uncertainty over valuations that has had a chilling effect on the broadcast M&A market. What are the valuations now before the economic downturn?
Greenberg: Gosh, before the downturn you had multiples in the double digits, the tens and teens. That was not uncommon. I hope we find our way back to that. But one of the biggest challenges is for there to be comparables. Dealmakers don’t have a clear sense of what the real valuation is for broadcasting assets because there are no vibrant comparables for establishing a price. That is truly the $64 million question. Observers in the market have their own intrinsic sense of what a proper valuation is, but just what constitutes as a competitive valuation remains “an x factor” right now.
Mergers & Acquisitions: What’s different about counseling broadcasters in M&A compared to mandates in other industries?
Greenberg: That’s a great question. The real challenge for M&A in broadcasting is you need to integrate a key understanding of the FCC rules with the transaction structure itself. That comes up in two ways. One, you need a good transactional lawyer to be mindful of the constraints that the FCC rules impose. For example, if you’re a private equity fund that owns a radio company and you want to acquire a television company outright, you have to make sure your radio and TV interests are compatible under FCC guidelines. That’s something that’s very relevant to deal making in this arena. The other element is an affirmative one. We look at the rules with an eye for opportunities that might not be obvious. That’s the practice that I’ve tried to develop. One that straddles the FCC arena with the transaction arena. You can help a client execute on an opportunity that, at fist glance, seems unavailable.
Mergers & Acquisitions: For example?
Greenberg: I represented a major daily newspaper in a venture with a leading radio station operator to create an all-news station branded with the newspaper's name. The FCC's cross-ownership rules prevent a major daily paper from having an interest in a broadcast station in its market and would have ostensibly prevented the proposed transaction as a traditional joint venture. We structured the deal in a way – as a trademark license and production co-development agreement – that approximated the deal outcome the parties wanted while adhering to the requirements of the FCC's rules.
Then there’s "shared services" or "joint sales" agreements among television stations in the same market. The FCC's rules limit the merger of stations within a single market. These agreements adhere to the FCC's requirements while creating permitted synergies across stations by sharing certain operating resources. The agreements preserve independent ownership and operations while allowing economies of scale that permit the operators to manage costs and, in many cases, provide additional news and other programming services in a challenging economic climate.
Mergers & Acquisitions: What conflicts do you see turning up?
Greenberg: The FCC is petitioning strategics to voluntarily relinquish their spectrum and put it up for a government sponsored auction where the company would share part of the proceeds. That looms in the background because it could affect the valuations of a TV station and you have a consensus among strategics that they don’t want to give away their spectrum. The National Association of Broadcasters is working hard to help them retain what they own. But there’s others in the industry, private equity funds, who view spectrums as investments and are open to scenarios in which they are monetized. Their vision comes from a different angle. In broadcasting, you have different communities of interest.
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