A billion-dollar choice for broadcasters
TV station owners must decide whether to participate in a potentially lucrative spectrum auction.
After years of anticipation and trepidation, TV station owners have just a few months to decide whether they will take part in a landmark Federal Communications Commission auction that would sell to mobile telecoms the wireless spectrum that now carries TV transmissions.
FCC Chairman Tom Wheeler (pictured below) has set the so-called incentive auction, which is the most ambitious sale of wireless spectrum ever, for March 29, 2016. While an application deadline is not set, Wheeler has suggested that the process would start in the fall.
For Wheeler, moving the licenses from the broadcast TV to the wireless broadband market and generating tens of billions of dollars for the U.S. Treasury could be the foundation of a legacy.
Broadcasters may have mixed feelings about diverting spectrum to another industry, but they are in line for a potentially lucrative payday. The FCC's last wireless auction raised more than $41 billion earlier this year, surpassing expectations and underscoring that the spectrum is worth more in the wireless market than in the TV market.
"We know it's higher because we know what the wireless companies have paid for similar spectrum and other types of spectrum," said Mark Fratrick of BIA/Kelsey.
"It was a sea change for broadcasters to stop thinking of their station as being worth 7, 8, 9 times cash flow, and to start thinking of the value of the spectrum to other buyers, such as a wireless company."
The highest concentrations of TV stations and the greatest demand for wireless spectrum, of course, are in big cities. Broadcasters such as CBS Corp. (CBS) and Comcast Corp. (CMCSA) subsidiary NBCUniversal own duopolies, or multiple stations, in cities like New York, Los Angeles, Chicago, Philadelphia, Dallas and San Francisco, and could take part.
The largest broadcast spectrum holders, however, are Spanish-language giant Univision Communications Inc. and ION Media Networks Inc., both private. Startups backed by firms such as Blackstone Group LP (BX), Michael Dell's MSD Capital and Fortress Investment Group LLC (FIG) will likely have an active role in the incentive auction. A struggling station on the fringe of a major market could have outsized value.
AS UNIVISION PREPARES for an IPO, the company occupies an enviable position. The New York media group owns two or more stations in New York, Los Angeles, Miami, Houston, Chicago, Dallas and other top markets. One station broadcasts the namesake Univision network, and the other carries Uni Mas.
Backed by Madison Dearborn Partners LLC, Providence Equity Partners, TPG Capital, Thomas H. Lee Partners and Saban Capital Group, the company acknowledged in its July initial public offering prospectus that it is considering taking part in the incentive auction. "In most of our largest markets, we believe we can contribute a 6 MHz channel to the auction and combine our Univision and UniMás networks on the other 6 MHz channel, creating a self-sufficient solution," the company's IPO prospectus states. The company declined to comment beyond the proxy.
"They have 16 duopoly markets. Some of them are smaller and probably wouldn't be as enticing in terms of the valuations," said Justin Nielson of SNL Kagan. "They have major properties in L.A., Houston, Miami and New York. They may look at auctioning those off if the values are high enough."
ION, based in West Palm Beach, Fla. and controlled by Black Diamond Capital Management, also has properties in New York, Los Angeles, Chicago, Philadelphia and many other markets. The company declined to comment.
And Tribune Media Co. (TRCO) CEO Peter Liguori acknowledged the appeal of the auction during an earnings call earlier this year. "We're really excited about it on many levels," he said. The New York media group has stations in nine of the 10 most valuable markets, according to a report that Greenhill & Co. produced for the FCC earlier. "Our spectrum in those top 10 spectrum markets at a median basis, not the high end, not the low end, is worth about $2 billion," Liguori said. Tribune declined further comment.
A number of small outfits have emerged to buy stations, with an eye to selling them in the incentive auction. Blackstone sponsors LocusPoint Networks LLC, OTA Broadcasting LLC has backing from Michael Dell's MSD Capital, and NRJ TV LLC is a Fortress portfolio company. LocusPoint and NJR declined to discuss their intentions, and representatives of OTA did not respond to queries.
Though the incentive auction originated under former FCC Chairman Julius Genachowski, Wheeler has championed the project and brought a venture capitalist's approach to the undertaking.
The FCC retained Greenhill to draw up a pitch book explaining the auction to broadcasters. Former Greenhill banker Lawrence Chu, who joined Moelis & Co. LLC (MC) on Tuesday, served as a special adviser to the FCC for the incentive auction.
The FCC will purchase spectrum from broadcasters in a reverse auction. The Commission will use a "descending clock" format, in which it offers broadcasters a high bid. In subsequent rounds, the government will reduce its offer, so that it arrives at the lowest amount that bidders will accept.
National Association of Broadcasters is not a fan of the descending clock.
"The FCC has gone through a lot of trouble to structure the rules to minimize payments to broadcasters," said NAB Vice President of Spectrum Policy Patrick McFadden. The government could have asked broadcasters to name their selling price or have set up an ascending auction. "That's a fundamental decision the FCC made that is quite possibly going to effect participation."
The payments to broadcasters still could be substantial. "In the largest markets its going to be hundreds of millions of dollars [for a station]," Fratrick said.
IN A MARKET LIKE NEW YORK, the opening bid could be as high as $870 million, according to projections in the Greenhill report, and a median first offer would be $660 million. The opening bids in Los Angeles and Chicago could be as high as $630 million and $620 million, respectively. Those sums are projected opening bids, however, and broadcasters would likely collect less.
"Station X in New York may get offered $820 million in the first round," Fratrick said. "It doesn't mean they are going to end up with $820 million. I suspect it's going to be less than that. It's a reverse auction. The offers go down."
A broadcaster can sell its license and go off the air, share spectrum with another station operator or move from UHF to VFH.
The FCC will market the spectrum to wireless carriers in a more traditional auction, in which bids go from low to high.
While large markets such as New York, L.A., San Francisco, Chicago, Dallas, and Houston will be active, Carl Salas of Moody's Investors Service Inc. suggested that bidding in the corridors between major cities will also be lively.
"Between Boston and New York there are certain corridors. Between New York and Philadelphia there are certain corridors," he said. "To the extent you had a signal there and it was creating interference, you could be an attractive candidate. Your spectrum would have value."
Some markets are more congested than others because of their locations, Fratrick said. "You get the Eastern seaboard," he said. The New York stations affect "Philadelphia affects Baltimore and Washington, which affects Richmond. We call it the daisy chain effect." The West Coast and the Midwest have similar patterns. "There are a lot of television markets right next to each other and the stations ... bleed into the adjacent market," he said.
Wilkes-Barre, Pa., and Albany, N.Y., affect the New York market, he said. Providence, R.I., affects Boston.
Harrisburg, Pa., reflects the daisy chain effect. The capital of Pennsylvania abuts Philadelphia, which abuts New York. The maximum projected opening bid for Harrisburg, is $420 million, exceeding Dallas' $350 million and Houston's $290 million.
The FCC is also sensitive to markets on the Mexican and Canadian borders, such as Buffalo, N.Y., where LocusPoint owns WBNF-CD,
CBS chief executive Les Moonves and other executives discussed the potential to participate in the incentive auction in February. COO Joe Ianniello described the spectrum as "a hidden asset within our portfolio," and noted that the company has duopolies in New York, Los Angeles, Dallas and Boston. "If I just looked at those median values, not the maximum value in that Greenhill report ... [it] totals $2 billion for those four markets," he said.
For a broadcaster like CBS or NBCUniversal, combining stations in a duopoly market could be an easy score. Outright sales of major network outlets in big markets may be less common. At a major network affiliate in, say, New York, the station's enterprise value could be roughly comparable to the FCC's offer.
Univision has clearly examined the possibility of combining its duopoly stations. Operators such as ION, Tribune or Twenty-First Century Fox Inc. (FOXA) could partner among themselves.
Fox executive vice chairman Chase Carey said in an earnings call earlier this year that the incentive auction "could be interesting," but the company declined further comment. In a network-sharing scenario, Fox could take a higher allocation of the bit stream on Sunday night when it is broadcasting an NFL game in high definition and ION has programmed a re-run.
Public TV stations or university stations have a mission to maintain, and might balk at selling their spectrum. However, they could host a commercial station on their spectrum.
The spectrum aggregators such as LocusPoint, OTA and NRJ are likely sellers, and niche broadcasters may see the allure of the FCC's offers. Moody's analyst Salas said that some small, private broadcasters are exploring the possibility of putting more than two stations on a single six megahertz band of spectrum, one source said.
While the large public broadcasting groups may play a significant role, the success of the incentive auction will likely require activity by a range of private groups.
Below are the key markets and outlying areas likely to play a role in the FCC's upcoming spectrum auction. They do not reflect the entire broadcasting base in a given city.
The set the curve for valuations in the incentive auction.
BIA Kelsey's Fratrick said that NBCUniversal's WNJU Telemundo station would generate an $870 million opening bid, using the calculation that the FCC used to determine offers.
CBS also has a duopoly in the market, with WCBS-TV and WLNY-TV.
Univision operates WXTV, WFUT and satellite station WFTY.
ION owns WPXN, and Tribune owns WPIX.
Among the smaller private operators, OTA owns New York station WEBR. NRJ's portfolio includes local stations WLIG and WBLS but also has WZME of Bridgeport, Conn., which falls within the New York designated market area.
Looking in the surrounding areas, Nexstar Broadcasting Corp. (NXST), which has backing from Abry Partners, owns two stations in Wilkes-Barre, Pa.
The Greenhill report projects a maximum $490 million initial offer for a full-power station in the capital, with a $410 million median bid.
Univision has a single station, WFDC, in the district.
ION owns WPXW and satellite station WWP. Fox also has a duopoly, with WITG and WDCA.
Blackstone-backed LocusPoint has WMJF-CD in Towson, Md., which is in the Baltimore market.
In the third-largest Hispanic market, Greenhill projected a maximum opening bid of $300 million and a median of $280 million for a full-power station.
NBC operates WTVJ and Telemundo staton WSCV. Univision has a duopoly of WLTV and WAMI; as does CBS, with WFOR-TV and WBFS-TV.
Tribune and Ion have solo stations WSEL and WPXM, respectively.
Blackstone's LocusPoint operates WLPH.
In the top U.S. Hispanic market, Greenhill projected a $630 million maximum opening bid for a full-power station, with a median of $560 million.
NBCUniversal has the KNBC and Telemundo affiliate KVEA; Univision has KMEX and KFTR; Fox operates both KTTV and KCOP; and CBS owns KCAL-TV and KCBS-TV.
ION and Tribune own single stations KPXN and KTLA, respectively.
NRJ owns KNET-CD and KSCI in Long Beach. The group also has KUAN-LP, a low-power station in San Diego County.
Fellow spectrum aggregator OTA has KMIR-TV in Los Angeles.
The top projected opening bid in San Fracisco is $540 million, with a $410 million median offer for a full-power station.
Univision operates KDTV, KFSF and KDTV in the market, while CBS has KPIX-TV and CW affiliate KBCW-TV.
In addition to San Francisco station KCNS, NRJ has KVTO in Berkeley and KVVN in Santa Clara
LocusPoint owns KFTL-CD. OTA's portfolio includes KACT-CD and KTLN-TV in Novato, Calif.
Greenhill projected a $210 million top opening bid for a Seattle full-power station, and a $190 million median offer.
Tribune operates the local duopoly of KCPQ and KZJO.
CBS has CW network affiliate KSTW-TV, while ION has KWPX.
OTA operates KFFV in Seattle, and KVOS-TV in Bellingham, Wa., on the Candian border.
