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Spectrum Reallocation Deemed ‘Pure Headline Risk’
4/14/2010

NAB2010Floor2 LAS VEGAS: Much has been made of the “voluntary” spectrum relinquishment proffered by the FCC in the National Broadband Plan.

“FCC Chairman Julius Genachowski made it very clear that there is no Plan B to the ‘voluntary spectrum auction,’ which leads us--and most operators--to truly question the
‘voluntary’ part,” said Wells Fargo analysts Marci Ryvicker and Timothy Schlock. “That being said, it is going to take years before there is any real risk to the broadcasters given both the historical pace of government action and the technical issues involved in reallocating spectrum. From an investment standpoint, we view the spectrum issue as pure headline risk given that the market has ascribed no discrete value to such digital spectrum to begin with.”

In talking to broadcasters at the NAB Show, the two determined that revenue pacings were “on fire,” up 20 percent and more in TV primarily on the recovery of the automobile sector, on political revenues and easy comps. National advertising is leading the recovery, especially in large markets, they said.

Retransmission could still cause some bumps in the road for broadcasters if the FCC gets involved, though market forces are expected to take their course. All stations groups are “at peace with paying ‘reverse retrans’ to networks with the expectation of better programming, “which remains to be seen,” the analysts wrote.

Operating expenses are expected to post some growth after more than 18 months of severe paring, they said, “given that there is only so long you can starve your people and your product--therefore, we would expect wages to increase, 401ks to be matched and money to be spent on promotions and advertising--maybe not all in 2010 but over time.”

What does not appear to be on the rise is capital expenditures, the pair said. “A positive for free-cash-flow generation.” The top priority for free cash flow is debt pay down, they said. No. 2: Acquisitions, though moreso in radio.

“There was very little talk about dividends or share repurchases--probably due to the fact that these companies received no credit for either over the past 5-plus years. We would expect mergers and acquisitions to pick up once balance sheets are restructured to encompass more permanent capital structures and the bid-ask spread narrows. One operator told us, ‘we are itching to do deals but there are no sellers at these levels.’” -- Deborah D. McAdams

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