The Deal Flow: Deregulation, or Else?

Many believe loosening — or eliminating — the local ownership caps for radio will be a boon for radio deals. Others, including iHeartMedia, say no. What’s the take from D.C., and two big communications law firms?

If you’ve been an astute reader of the Radio + Television Business Report, you might notice that there aren’t so many radio industry deals these days. Or if there are any deals of significance, they may involve a broadcast ministry.

If you never read RBR+TVBR’s daily news updates, you still may notice a dearth of deals in the radio broadcasting industry.

Are there deals in the works? Where is the deal-making market going … or is it not going anywhere?

For Greg Guy, Managing Partner of Patrick Communications, everything is “normal” — barring any regulatory changes. “It’s not what we’re used to,” he says, “but the overarching theme is ‘I’m not surprised.’ It is not much different than it has been in the last five years.”

At Patrick, the transaction flow is slow, but that’s relative to historical trends. In Guy’s view, it’s the “new normal.”

The why behind radio’s glacial dealmaking environment, highlighted by collapsing station valuations triggered by bargain-basement sales of Cumulus Media stations in Los Angeles and New York, is not so cut and dried.

Given Patrick Communications’ proximity to the nation’s capital, what are Guy and his associates hearing and discussing with respect to what could trigger the next wave of radio industry deals?

“We have a good finger on the pulse of the brokerage community,” Guy says. “And there’s a lot of uncertainty. There will likely be no dramatic regulatory changes ahead of the 2020 presidential election. At the same time, the FCC is looking at its local ownership rules and we are in the midst of the comment cycle.”

Could a dramatic shift be coming soon? As noted above, Guy isn’t optimistic that any change will occur ahead of November 2020. However, he says, “Eventually they will come to fruition. The rules will eventually change. It’s just a matter of politics and where that fits into election cycles.”

What rules change will spark the deal-making? The AM rule change proposed by the Commission? “It will not have a dramatic effect on brokers,” Guy believes. “There is no groundswell of transactional flow.”

For FM station deals, how the rules change — a big question for many — will determine what happens.

“Will there be companies swapping clusters?” Guy asks, suggesting outright sales may not result from the Commission’s possible local ownership rule rewrite. “The transactional impact on larger markets will be minimal. The smaller-market transactional flow will be based on capitalization out there as an industry.”

This is perhaps the No. 1 reason why stations such as WABC-AM in New York and KXOS-FM in Los Angeles were sold by Cumulus for dollar amounts that would have seemed unfathomable even a decade ago.

“What happens is that the buyer pool in radio is shallower than it used to be,” Guy says. “If you move past the first two or three aggressive, strategic buyers, the rest of the buyers are opportunistic. We’re seeing that in the deals we are representing.”

Some of the individual transactions Patrick Communications has been involved with in the last several months have made headlines, including the purchase by Fletcher Ford’s Virden Broadcasting of three Illinois stations owned by Withers Broadcasting Co.

But, Guy laments, “It’s a pretty thin market in terms of the depth of buyers. In Los Angeles and New York, it is a matter of available capital, rather than stick value. The issue is the number of potential buyers with the available capital to make a deal.”

Meanwhile, the future of AM radio is now largely dependent on whether a station has an FM translator attached to it, with the exception of big News/ Talk and Sports Talk properties with an abundance of listeners. “We don’t see a tremendous amount of optimism in AM values,” Guy says.

Also chiming in on deregulation, and what it could bring for attorneys, is Scott Flick, a partner at Pillsbury Winthrop Shaw Pittman LLP.

Flick looks to Hubbard Broadcasting and its test of all-digital HD Radio on WWFD-AM in Frederick, Md., as a “chicken and egg” problem that depends on auto manufacturers to act in unison for any true benefit to occur.

“HD Radio on AM is about delivering a better audio signal, but the problem is that we already have 300 million-plus radios out there today,” Flick says. “It will take a long time for old radios to filter out and new radios to filter in. We saw that years ago with expanded-band AM.”

But if new cars come with digital AM radio available, there’s a path to a more positive future for radio, Flick says.

Otherwise, Flick — like Guy — is looking ahead to the 2020 presidential election. If there is no movement on local ownership rule changes as the election approaches, it won’t likely happen until after the election. And, should Democrats take back the White House, any prospect of deregulation could be scrubbed for the foreseeable future.

“We are at an interesting point in time because the prospect of radio deregulation will drop over time as we get closer to the election,” Flick says. “But enough talk about it means owners are hanging tight a little bit.

“Unfortunately, we could be in a period of reduced deal-making even if the message is, ‘No, we are not changing our rules.’ People on the fence will know what the environment will be for the next several years, with uncertainty depressing the deal market.”