*Last week was BIA/Kelsey’s Digital Strategies for Broadcasting conference in Jersey City, NJ.   The main focus, as the title suggests, was the changing landscape of the television and radio industries, as new technologies impact the businesses.  Some observations:

*Broadcasters realize that their industries are largely tied to the advertising market, but the more forward-thinking companies are spending great effort to find ways to gain advantage getting out ahead of additional revenue streams that are possible via internet and multiplatform opportunities.   There seems to be recognition that while the bulk of the revenues will be dictated by current advertising trends both locally and nationally, interactive revenues are a part of operation where an individual company can have great impact on its own fate. 

*A common theme in the sessions at the conference was “an internal tolerance for errors in exploring this space”.  This seems to be a recognition of the rapidly evolving arena of internet/multiplatform and differences in the broadcasters’ strategies.  There are many success stories, but the successes seem to vary market-by-market and company-by-company re) which interactive strategies are working best.  To be certain, this experimentation is necessary to ultimately achieve success and grow the relatively small 5-7% this currently contributes to most broadcasters’ income statements. 

*Many broadcasters have been restrained from putting forth necessary expenditures to an extensive strategy due to financial covenant/limitations.  Financially-strapped broadcasters have needed to adhere to investors/lenders ratios (or even financial survival in several cases), so the potential of possible short-term losses from rolling out interactive plans caused these plans to be delayed.  Hopefully, as the broadcasting industry (and companies’ financial ratios) improve, more budgets increase allocations to these important strategies.

*Overall, a well-done conference by my BIA/Kelsey colleagues that provided great depth to the future direction/technologies of the broadcasting industries.

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Report from 2010 National Association of Broadcasters convention in Las Vegas:

*While the television and radio industries have a long way to go to return to normalcy, there was certainly a great optimism reining at the convention that had been lacking for a few years.  Most operators are reporting strong second quarters (several double digit revenue growth vs. 2009).  Many industry analysts are revising TV/radio 2010 industry estimates upward from their original estimates done only a few months ago. 

The broadcasters generally recognize that the 2010 growth that will ultimately be achieved (perhaps 5-8%) still does not make up for the very large drops in 2009 and that present valuations are significantly off 2008 levels.  The broadcasters also know well that any recovery is tied directly to continued improvements in the overall economy and the specific regions they happen to own stations.  However, the broadcasters have every right to feel vindication in their present success and the upward movement of advertising pricing in the present market.   After being left for dead with doomsday predictions and public stock valuations (radio industry bellweather and very well-run company Entercom, now at $14.50, traded under $1.00 less than 18 months ago), many inside and outside the broadcasting industries wondered about future relevancy.  With competitive threats being launched and continuing changes in delivery methods of both audio and video, there was doubt among analysts that the broadcasting industries would ever show gains again, even in improved economic conditions.  General consensus from many conversations at NAB: “Neither television nor radio will ever again be a fast-growing industry, but evidence is mounting that the predicted demise was oversold.   During the economic downturn, which continues in many parts of the country, advertisers simply couldn’t afford to advertise and were off the air.  Now they are coming back, …albeit tentatively.  These media still work to move products and remain very relevant, especially in mass campaigns, as advertising itself becomes more fragmented.”

*A big conversation topic at NAB was the Crestview/Cumulus announcement that Crestview was commiting $500 million to back Cumulus management to purchase $1 billion in radio properties.  Not sure why the need to make announcement (as opposed to just executing plan in more stealth-like manner) but nonetheless this is good news for radio and mounting evidence that large equity sees good entry point at present time.  With 2009 fading into rearview mirror, purchase discussions will be based on projected 2010, giving this venture greater chance of finding willing sellers.

*Conversations with bankers present made me believe this necessary component of the deal equation are having real discussions about providing debt to the broadcasting equation.   I was a banker long enough to recognize the difference between bankers at 2009 NAB (”we”re still open for business”) and 2010 NAB (”we’re still open for business”) because there was no twitch when they said it this year.  Seriously, several banks seem to be considering live transactions; this was not the case last year.

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Last week, I had the honor of being asked to address the Oklahoma Broadcasters convention in Oklahoma City.  I was amazed with the large convention turnout and quality programs/sessions, especially considering tight budgets.  Kudos to OAB President Vance Harrison and his staff for organizing such a fine event.  My observations:

1)  My presentation focused on the capital markets, including BIA/Kelsey industry data and projections for the future for radio and television.  The audience (primarily smaller group owners and managers) were amazed that BIA/Kelsey revenue projections for 2010-2014  DON’T show television/radio continuing to decline, but instead show mild revenue increases in both revenue AND television/radio’s share of local media pie.  I think broadcasters are so used to terrible outlooks/news that they are shocked when they hear anything positive.

2)  A general disbelief among audience (those that make their living selling the media) that direct mail/newspapers still controlled over 50% of local media advertising in 2009.   Obviously, BIA/Kelsey (and every other analyst making these projections) shows this dropping annually in coming years.  Broadcasters in the room agreed that as bad as it has been….at least they aren’t newspaper owners.   (amazing that I haven’t been invited to present at any state newspaper conventions – haha) 

3)  David Oxenford FCC counsel of Davis, Wright, Tremaine in D.C. gave a very impressive, very thorough, very depressing update on all FCC matters broadcasting related.   My general impression of new FCC is that broadcasting not a big priority to this group of commissioners and broadcasters will have several tough fights ahead.  Most depressing in the presentation is that even though there are stations failing/losing money/going dark, there is no momentum to loosen ownership rules to help keep stations on air and improve on-air product (let them fail oversight). 

Thanks again to Vance for the invite – a great convention.  Also enjoyed the Hall of Fame Dinner – statistically, I will never again have chance to attend a single dinner that honors BOTH a television preacher (Oral Roberts) and a television clown (Ho-Ho the Clown)!

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In a 180 degree turn from last post topic (more pleasant topic than bankruptcy)…..positive signs are mounting for ad-based business – why do these seem so quiet when all the bad news regarding revenue drops and competitive threats seemed like front page news forever??

*Most obvious: the public media companies’ discussion of year-end results show improving trend and most of these companies cautiously forecasting quarterly increases to occur in q1 with the trend continuing into q2.  The remaining Media public equity analysts have projected increased revenues/EBITDA for 2010 for the companies they follow (and in some cases have recently revised upward based on Q4 2009 quarterly call comments).

*Less obvious wins recently:

-Supreme Court ruling removing limit to corporate campaign spending.  A huge (but surprisingly quiet) victory to ad-based businesses, with television as big winner.  Look for this effect  (in addition to already saturated schedule from candidates) later in 2010 and beyond.

-Average Miles Driven increased again in q4 2009 after several quarters of drops during worst part of economic crisis.  Obviously biggest benefit to radio/out-of-home. 

-Potential reinstatement of 661 GM auto dealerships that were slated for closing.  While requirements need to be met for reinstatement, if majority indeed do reopen, great news for local ad-based business, as these dealerships need to advertise that they will in fact not be closing.

While the operators must continue to drive these increases, as most seem to be doing in q1 and q2 2010, the stage now seems truly set for success (vs. the modest bar set in 2009).   Smart equity starting to focus on ad-based businesses to catch properties at bottom of cycle.  Debt still hard to come by and pricing high, but history tells us this part of equation will follow….

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Yesterday’s pre-packaged bankruptcy filing by radio broadcaster Regent Communications, adding to a growing list of broadcasters who have taken this route in the past several quarters, prompts today’s blog:

*First, regarding Regent: this is especially unfortunate, as this is not a bankruptcy caused by private equity trying to put as much debt as possible on a company while squeezing out every last dividend.  It is a company that does good job of operating small/medium-sized markets with history of keeping a conservative balance sheet, up until its 2007 Buffalo acquisition.  Bad timing, but this has been company commited to operations and hopefully will emerge from bankruptcy successfully. 

*Do the broadcasting bankruptcies bring opportunities for underleveraged or startup broadcasters to purchase the bankrupt companies’ stations at discount price?  Possibly down the road, but not necessarily near-term.  In many cases, the bankruptcy is partially the result of an inability to sell properties in a deleveraging transaction prior to the filing (certainly most companies that filed bankruptcy tried at some point along the way to sell assets).  Generally, offers were received at lower EBITDA multiples than the troubled companies’ existing leverage, which didn’t help.  Notice that while there has been little transaction activity, the deals that have happened have been “stick” deals (little or no EBITDA), so the seller was able to reduce leverage. 

The companies that have filed bankruptcy now have reduced debt loads and presumably are capable of servicing the new level.  The new owners are the prior debt holders, who are certainly not long-term broadcast owners, but are generally seeking a better time to exit than present.   Assuming the advertising rebound continues through 2010 and growth continues in following year, look for these “creditor turned owner” companies to sell entire companies (as opposed to individual assets) upon this market upturn.

This is likely a good time for underleveraged companies and startups to buy properties at attractive prices, but not necessarily from the companies that have filed bankruptcy.

*Many in broadcasting industries express surprise (disbelief?) that many of the management teams that made the decisions that set up their companies for bankruptcy are still the management team post-bankruptcy.   This is reflective of the advertising downturn being generally viewed by investors as systemic, not necessarily attributable to the individual operators themselves.  The companies that filed were often the ones that had misfortune of being too leveraged when music stopped.  While I have heard of some operators being up in 2009 in certain markets, nobody I am aware of had a group multiple markets up in radio/tv.  So, the debtholders/new owners decide to take path of lesser resistance by keeping existing team.  However, I wouldn’t expect much continued patience if industry is up and bankrupt companies’ performance doesn’t rebound in line.

*How many more broadcasting bankruptcies will be announced?  Assuming continued upward path of revenues, possibly a couple more, but we are now near the end of the list I believe.  Now that q1 2o10 looks to be positive (year over year) for most broadcasters, and q2 seems to also be pacing up, the debt holders are more able to restructure amendments with reasonable terms.  During 2010, there seemed no end in sight to declines, so the banks holding debt of broadcasters that were very underwater determined that zero chance of recovery existed and refused to offer amendments, essentially forcing companies to file.  At this point, there are couple broadcasters that still fit this description, but most should either avoid amendments or have ability to cut reasonable deal with debtholders to avoid bankruptcy. 

*Obviously, it is not good news for the broadcasting industry that these debt holders are now controlling several significant television and radio companies.  Investment in operations of these companies will be minimal, as the financial players will maintain/hold properties until better time to sell, as opposed to taking action and associated expense needed to stay competitive with evolving broadcasting business models (online/internet).    Winners in broadcasting in coming years will be those companies that have talent and financial flexibility to invest in on-air product and new technology to take advantage of “frozen” status of many of their broadcasting peers.

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The BIA Capital blog, Capital Markets, will give insight to the current financial markets for the media/communications industries, especially as it relates to the state of the transaction market, as well as the equity-raising and debt-raising markets.

Within our investment banking division, comprised of Chuck Wiebe, Gregg Johnson, Mike Andres and myself, we are in constant contact with the management teams, private equity investors and subordinated and senior debt lenders. Our Capital Markets blog provides us the perfect forum to deliver updates about the changing dynamics affecting these players and the current state of the financing markets.

Topics we intend to cover include availability of private equity for the media/communications industries, senior/subordinated debt lending availability/multiples, transaction multiples, analysis of key transactions and other financial topics.

Our first posting from Mike Andres discusses the most asked question we get at BIA Capital Strategies: When will the deal market start to return to normalcy and what will it take for media/communications tranasactions to begin heating up again?

Mike Andres, Managing Director of BIA Capital, addresses these questions in his first post, entitled: Return to Debt Liquidity Coming for Media Communications.

To read the entire blog post please visit: http://blog.biacapital.com/financial/2009/02/return-debt-liquidity-coming-for-media-communications/

On behalf of all of us at Capital Strategies, we hope you find this information useful and certainly encourage you to send any comments/suggestions on how we can make this blog a better resource for you and your business.

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Nearly all current conversations with our clients, most of whom are based in the media/communications sector, focus on a return to liquidity in the transaction market. This will be the time when an active market between buyers/sellers exists and sufficient senior and subordinated debt is available to finance a significant portion (50-60%) of purchase price. In my opinion, it is the lack of available debt, more so than lack of interested equity or interested and motivated sellers (we are having conversations with both potential equity investors and potential sellers), that has been stalling media/communications transaction flow the past several quarters.

But it is hard to blame the banks/finance companies for this, as through q4 2009, there hasn’t been evidence that the long-awaited operations turnaround in advertising-driven businesses has taken shape. My prediction: as soon as companies can present a quarter that is positive revenue/EBITDA, and have pacing showing a second positive quarter, then banks/finance companies will begin to again make debt available. My second prediction: these two quarters will be Q1 and Q2 2010, not necessarily driven by dramatic turnaround, but by a pretty low bar being set from 2009 results.  We are seeing continuing evidence that advertising trends are improving through Q1 and expect the majority of media operators to report mildly positive results this quarter.  Yes, the banks/finance companies still are holding many troubled credits in these industries, but they are also under pressure to begin making new fees again. Subordinated debt remains scarce in the media industries, although my colleagues at BIA Digital Partners, BIA’s mezzanine debt fund, are still seeking to put out this type of funding to the media/communications industries.

What happens in 2010 in media/communications sector?

My prediction (with pressure of creating a written record!): as debt again becomes available, smart new equity players enter the market and buy properties at very attractive prices (not necessarily low EBITDA multiples, but low prices, off of low EBITDA base). These equity players, generally not encumbered by existing media assets purchased at higher levels, correctly recognize that while a correction has taken place and that the media industries will likely not return to rapid growth, there remain underlying industries with strong consumer reach and free EBITDA generation capability. Debt providers who initially provide capital to these industries make attractive fees/spreads before other banks inevitably rejoin.

Periodic updates to follow.

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