Media Ownership Rule Changes Could Spur More Large-Scale M&A For Broadcasters

Outside of the mega deal between Sinclair Broadcast Group Inc. and Tribune Media Co., 2017 has been one of the slowest years on record for U.S. TV station M&A. However, consolidation in the sector could get a jump-start if Federal Communications Commission Chairman Ajit Pai is successful in eliminating and modifying media ownership rules.

For the first three quarters of 2017, U.S. TV station deal volume was $4.48 billion, with an average TV station deal multiple of 7.6x two-year-ahead average seller's cash flow. However, those figures are skewed by the Sinclair and Tribune Media merger, with an estimated $3.76 billion out of the $6.60 billion announced transaction value attributed to Tribune Media's station group. At that time, Kagan, a media research group within S&P Global Market Intelligence, valued the Tribune Media TV station portion of the deal at 7.5x two-year forward cash flow.

That compares to $13.84 billion in U.S. TV station deals from 2014 to 2016 at an 8.3x two-year-ahead average seller's cash flow multiple. That is despite the fact that most of 2016 was a quiet period for deals during the FCC incentive spectrum auction.

It is no surprise that major publicly traded U.S. TV station affiliate group owners Sinclair, Nexstar Media Group Inc., and Gray Television Inc. have been the most active buyers in 2015, 2016, and year-to-date 2017, with nearly $10 billion of deals combined out of $11.06 billion in total TV station deals over the same period.

Pai has proposed to eliminate local newspaper, TV, and radio cross-ownership caps; drop the rule making joint sales agreements attributable to ownership; and remove the restriction against duopolies in markets that would be left with fewer than eight independently owned stations. He also supports allowing for M&A in some cases where a station in the deal is rated among the top four. He is also pushing for the approval of the ATSC 3.0 broadcast standard, which is expected to roll out with the TV station spectrum repack process in mid-2018.

We think the TV deal flow long held back by uncertainty in the regulatory environment will break loose in 2018, with prior active buyers and others lining up to see what is available and what potential mergers make economic sense.

This could begin shortly after the FCC's November 16 meeting, although most station group owners and investors will be looking to see if the Sinclair and Tribune Media merger is approved and what, if any, spinoffs will be announced as a result. Legal challenges to the Sinclair and Tribune Media merger and FCC chairman's proposed media ownership rule changes may also put that timeline on hold until the new year.

Consolidation will still be driven by factors such as stations wanting to maintain leverage in retrans negotiations with multichannel operators and affiliate renewals with networks, building operational and programming synergies, optimizing spectrum, and adapting to technological advances such as the ATSC 3.0 broadcasting standard. Stations will also seek to maximize their position in alternative distribution channels as cord cutting drives subs to virtual service providers and over-the-top services.