LAS VEGAS—From the analysts at Wells Fargo: We liked what we heard at our Wells Fargo Broadcast Investor Forum. We spent several days hosting investors in Vegas, where we engaged in detailed discussions with a variety of senior executives to gauge the state of the broadcast radio and television industries. We were positively surprised by the regulatory commentary, which does not seem to be as dire as we thought a few weeks ago. We also see positive catalysts ahead, as M&A discussions continue, political funding limits have been relaxed, and the pace of business has accelerated.
BOTTOM LINE: We feel the “negatives” are known and are a lot more comfortable recommending the space.
JSA attribution is retroactive--SSAs are not. This was probably the most incrementally positive data point we got out of our discussions. As the FCC confirmed that SSAs are only being scrutinized on a “go-forward” basis. There is no intent to “unwind” current portfolios. Also, transactions that include sharing agreements but do not have financial obligations are likely to be approved. One last thing—with the JSA attribution rules expected to be released imminently within the Quadrennial Ownership Review NPRM, we should be getting a formal response from the broadcasters relatively soon.
Elimination of the exclusivity rule is not that big of a deal, in our view. The FCC’s proposal to eliminate the network non-duplication and syndication exclusivity rules does not seem to be a fundamental issue, given that every broadcast group confirmed that there are exclusivity clauses in both the network affiliation deals and retransmission consent agreements.
A positive update on the retransmission consent NPRM—as we first heard, the prohibition of joint retransmission consent negotiations for two of the top four-rated stations in a market seemed to be a pretty broad ruling – whereby no third party could negotiate on behalf of a non-licensed station. However, it was confirmed to us that this only applies to local markets – so there is no prohibition for networks to negotiate retransmission consent on behalf of its affiliates, not a practice today, but a nice longer term option.
STELA trumps the FCC: Should the House committee version of the STELA bill pass the Senate and ultimately the full congress, the FCC would be prohibited from ruling on JSAs prior to the 2014 Media Ownership Quadrennial Review, which likely won’t wrap until mid-‘16.
M&A discussions continue despite the noise. We asked about M&A and were told it is “business as usual” with $1.2 billion worth of assets currently on the market. It does sound like multiples are likely to creep up given difficulties in creating virtual duopolies and more level retrans rates among the groups.
“How can we participate in the incentive auction when we can’t trust the FCC?” Given all of the changes being proposed by the FCC, the broadcast groups are having a hard time trusting the FCC when it comes to the auction.
Pacings have accelerated for both radio and TV. Although it sounds like radio started the year better relative to TV. Auto, telecom and health insurance remain healthy, while retail is still spotty. One thing we must mention is NextRadio, which we think could be a nice long term positive catalyst for the space.
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