Incentive Auction Not Barrier to M&A for All
It turns out after all that for broadcasters planning to stay in the business, the proximity of the FCC incentive auction isn't a deterring mergers and acquisitions, attorneys and financial analysts told us this week. They referred to a $2-billion-plus deal unveiled last week, Media General/Meredith (see 1509080061), and the $400-million-plus Gray Television/Schurz (see 1509150075) deal unveiled this week. Many incentive auction observers had speculated that broadcast M&A would slow as the auction approached (see 1411280041).
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In reality, that isn't a factor for broadcasters looking to make long-term agreements and stay in the industry, said BIA/Kelsey Chief Economist Mark Fratrik. Increasing scale is a priority for any broadcaster looking to stay in the industry and is seen as the motivation behind both deals, said Elliot Evers, managing director of Media Venture Partners. It's also possible the incentive auction's upcoming anti-collusion quiet period had some influence on the timing of the deal, said broadcast attorneys.
In both the $2.4 billion Media General/Meredith and the $442.5 million Gray/Schurz deals, the acquirers are seen as intending to continue broadcasting after the auction, Fratrik said. Few of the stations involved are believed to be likely prospects to have their spectrum sold at auction, he said. The Schurz stations aren't located in areas likely to be highly valued in the auction, while the stations in the Media General deal that are in likely auction locations are valuable big four network affiliates, unlikely to sell their spectrum, several broadcast attorneys said. One reason the auction is seen as a drag on M&A is that it makes it difficult for buyers and sellers to be sure of the value of a license, but that isn't the case where the auction is less of a factor, Fratrik said. That means more M&A involving groups not planning to participate is possible, but it's less likely where a lot of stations with good auction prospects are involved, he said. For stations with better auction prospects, it's “still hard to value things,” said Fletcher Heald broadcast attorney Dan Kirkpatrick.
One option to get around the problem of value uncertainty created by the auction is for deals to include clauses contingent on the incentive auction, attorneys and analysts told us. Such deals would require the station purchaser to pay out a certain amount of the proceeds to the seller if the sold station subsequently goes for a high figure in the reverse auction, the attorneys said,
Broadcasters with long-term goals to stay in the industry are going to be looking to grow, analysts and attorneys said. “You've got to get bigger, and get a bigger seat at the table across from” multichannel video programming distributors, Evers said. He said scale in retransmission consent negotiation was an obvious motivator behind both deals, with the effect of the auction a secondary concern. It's possible the auction and the possibility of the stations involved being able to sell their spectrum affect the prices paid in the transactions, but that's impossible to know without access to confidential details of the transaction, Fratrik said.
One reason deals were expected to slow down in the lead-up to the auction was FCC anticollusion rules, which mandate a “quiet period” after the auction's short-form application deadline. During that period, broadcasters are prohibited from discussing their auction plans, which many attorneys saw as a barrier to making deals. Though the deadline for the start of the quiet period hasn't been announced, it's expected to occur before the end of the year, and it's possible its approach may be motivating prospective deal makers to file their transactions before it hits, several broadcast attorneys told us. If companies know they want to make a deal, it makes sense to get the filing into the commission ahead of the quiet period to “lock it down,” said a broadcast lawyer not involved in either transaction.
An expected FCC clarification of the anticollusion rules could make them less of a barrier to deals, if the commission says broadcasters are allowed to say during the quiet period that they won't be selling their spectrum, an attorney said. That would make transactions after the quiet period easier to accomplish, though other restrictions of the anticollusion rules would still apply. It's not clear when the FCC clarification of the rules will be issued or what stance it will take, the attorney said. Last week at CTIA, an agency official said that the Incentive Auction Task Force would have more to say in the coming weeks (see 1509100032).