Looming FCC Vote on JSA Attribution Order Causes Broadcaster Stock Slump Monday

Wells Fargo’s Marci Ryvicker -- in an email to investors with the subject line “Can’t Fight City Hall” -- cited the coming FCC order and last week’s Media Bureau guidance (http://fcc.us/1gaJJwk) that broadcaster sharing agreements will raise bureau scrutiny (CD March 14 p9). They cause her to think mergers and acquisitions involving JSAs will be nil. The “regulatory environment [is] worsening in the near term,” wrote the stock analyst, who a broadcast executive said is usually positive on the sector. Ryvicker wrote that she was frustrated by what she heard on a trip to Washington Friday to meet with agency officials. There’s an effective “hold” on the FCC approving mergers and acquisitions of TV stations when station-sharing agreements are included, wrote the analyst. An FCC spokesman declined to comment.

Stocks of companies that mainly own TV stations closed down Monday: Gray Television fell 11 percent to $9.40, LIN Media lost 4.7 percent to $20.28, Nexstar declined 9.1 percent to $33.38 and Sinclair shed 8.1 percent to $24.42. Those four companies, which had no comment for this story, were cut to “market perform” and the sector to “market weight” by Ryvicker. “We can’t get over our fear that the regulatory environment is more than likely to remain an overhang for quite some time,” she wrote. “There seems to be tremendous focus on tightening the rules around JSAs,” shared services agreements (SSA) and retransmission consent, she wrote. “Given the recent Processing Guidelines (from 3/12), we heard that NO pending deals with any sort of ’shared’ arrangements will close until/unless they are restructured to exclude such stations and related loan guarantees.” Also March 31, FCC members, in what observers have said they expect will be a 3-2 vote, will decide on a draft order barring some separately owned Big Four affiliate stations within a market from jointly negotiating retrans deals with pay-TV companies.

Ryvicker found what she called a “survival of the fittest” attitude in Washington when she met with FCC officials. “It was mentioned several times that there is no need for all 1,800-plus television stations, and therefore it was our sense that the FCC is more than willing to let various stations go dark (this is where reclamation of spectrum for the incentive auction comes in),” she said. Industry lawyers have also drawn that linkage, with some wondering to us if the draft order isn’t a way to get stations more interested in exiting the business, perhaps by participating in the incentive auction of broadcast-TV spectrum. “It’s not too hard to trace a line from the Commission’s actions to the upcoming incentive auctions,” wrote Information Technology & Innovation Foundation telecom policy analyst Doug Brake in an email to us. “If we are going to try for a one-off hit with a pricing mechanism to this spectrum, I think it makes a lot of sense for loopholes to be closed off."

Waivers from the FCC are possible so JSA and other sharing deals can proceed, according to Ryvicker and interviews with analysts at Moody’s and Standard & Poor’s who rate the debt of TV station owners. “There is bipartisan support for the waiver process,” wrote Ryvicker. Some commissioners backed leeway only for failed stations, while others “believe the situation shouldn’t be as dire,” she wrote. “M&A has been a significant catalyst for the broadcast sector.” Those stocks rose 376 percent in 2013, versus a 30 percent gain for the S&P 500 index, she said. “Regulatory hurdles have become MUCH higher for both pending and future M&A."

Monday’s stock slump and the underlying regulatory concerns won’t likely impact for now how debt ratings agencies rate the liabilities of pure-play TV broadcasters, said Moody’s and S&P analysts. They said the companies may lose revenue if they have to unwind JSAs after the two-year grandfather period for the deals said to be in the draft order. That impact could be 3-5 percent of annual revenue, which won’t hurt broadcasters’ ability to repay liabilities, said Carl Salas of Moody’s. “The broadcasters in my view will look at the JSA or SSA structures to, if [they don’t] meet the FCC’s guidelines, they will try to rework their agreements so it’s more in line with what the FCC wants.” If the FCC doesn’t grant case-by-case waivers to a particular arrangement, many of which Salas thinks will be given, he said the two-year period gives companies time to sell stations in an “orderly fashion.” It likely would be at a higher multiple of sale price to cash flow than the company’s overall multiple of debt to cash flow, he said.

"Debt investors do not have to worry,” said Salas. “I don’t see much downward pressure on the debt.” Nexstar, with about $1.1 billion in debt on Dec. 31, has an overall Moody’s rating of B2, or five notches below investment grade, said Salas. He said Sinclair, with about $3 billion in year-end debt, has a Ba3 rating, three notches below investment grade. Those two companies have the most JSAs among all U.S. broadcasters, said S&P’s Naveen Sarma. He said Nexstar has about 18 JSAs, while Sinclair has 24 and has said it had $36 million in 2013 sales from the arrangements, about 3 percent of total revenue.

Nexstar and Sinclair “have built their strategy around JSAs and SSAs” and “need to have them” to make more acquisitions in smaller markets where they already operate, said Sarma. “Without the ability to do JSAs and SSAs, the efficiencies they get by buying stations in smaller markets, you just can’t do it.” That could impact profit margins, and there may be long-term debt ratings implications, he said. March 31 “is probably the most impactful meeting regarding broadcasting in a very, very long time,” said Sarma, who has followed the sector or helped others cover it for almost two decades. “Part of this could be an overreaction, because the FCC may decide to do something, and it could end up in the courts.” -- Jonathan Make (jmake@warren-news.com)