Channel Sharing, M&A Expected in Lead-up to Incentive Auction
Though the approaching incentive auction is seen as quieting mergers and acquisitions among TV stations, a flurry of discussions on channel sharing and possibly M&A is expected behind the scenes, said panelists speaking about the 2015 financial landscape at a SNL Kagan conference in New York Thursday. There will be “a very, very active marketplace for channel sharing over the next three to six months,” Titan Broadcasting President Bert Ellis said. Deals are likely among some of the larger, publicly traded broadcasters over the next two years, said RBC Capital Markets Managing Director Marcus Torres, along with consolidation among smaller privately held broadcasters. Earlier Thursday, some broadcasters expressed interest in the incentive auction (see 1506250060).
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Ellis said he's actively involved in channel sharing discussions, and will be sharing after the auction. “There's no downside to throwing your hat in the ring,” Ellis said of the auction. The FCC's recent rule change allowing contingent sharing deals further lowers the risk of at least exploring channel sharing, Ellis said.
After the auction, the values of stations will normalize, Ellis and Torres said. The auction will be “like a bubble that moves through the industry,” Ellis said. It will still be beneficial to the broadcasters that remain, he said. “People who don't exit will be huge beneficiaries,” Ellis said. After the auction, there will be “less mouths to feed” in TV broadcasting, he said. The incentive auction will “weed out the folks nipping off the edges of the business,” he said.
Some of the panelists disagreed about how attractive TV broadcasting is to investors. There's “a lot of private equity trying to figure out how to participate in the spectrum auction,” Ellis said. Those investors are now looking at more marginal spectrum, since the obvious stations most likely to generate a lot of cash in the auction have already been snapped up, he said. Lilly Broadcasting Chief Financial Officer Kevin Lilly said his company’s spectrum isn't highly rated according to the information releases by the FCC, and he hasn't been contacted by spectrum aggregators. Broadcasting can seem unattractive to outside investors because of its adverse regulatory market, threats such as over-the-top viewing, and fears that cash flow won't remain steady, he said.
Broadcasters attempting to keep up with the rise of OTT video shouldn't divide their digital and TV advertising and content streams, Lilly said. Keeping it “all in the same bucket” makes the content more attractive to advertisers, he said. An FCC proposal to redefine some OTT services as multichannel video programming distributors could be a good thing for broadcasters, because it threatens the MVPD bundle and business model, Lilly said. “Anything to reduce their leverage is helpful.” Broadcasters should be collecting retransmission consent fees from digital video entrants, he said.
Terrestrial radio has increasingly less to fear from its OTT competition, Connoisseur Media CEO Jeffrey Warshaw said. Online radio has a low barrier to entry and is becoming increasingly fragmented, Warshaw said. That makes it “less of a viable medium for advertising,” he said. The radio industry could improve by becoming more local, he said. Being “local and free” is a powerful combination, and companies like Pandora aren't a good experience for advertisers, Warshaw said. “We have to go back to being heavily involved in our communities," he said. Higher commercial loads don't scare off listeners, he said.