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Investors circle TV stations with spectrum to sell

by Chris Nolter | Published July 18, 2012 at 2:39 PM

Federal Communications Commission auctions allowing TV stations to sell their spectrum licenses to the government may not sit well with some broadcasters.

The incentive auctions, in which TV spectrum is repurposed for wireless services, will present a tempting offer for some owners, in particular for independent "orphan" stations without network affiliation that suffered during the recession.

It is difficult to gauge the opportunity. The auction rules are not fully formed and it may take five years before sales would close. Still, the process could mark a significant payday for owners of struggling stations in large markets where wireless carriers are eager to expand their capacity.

Private equity firms have been studying the possibility of buying stations and selling their licenses in the auctions, sources said. In some cases the spectrum auctions may be a Plan B, one source suggested, providing potential upside to augment returns from the stations, which could benefit from being part of larger groups.

Michael Dell's MSD Capital LP and Fortress Investment Group LLC have provided funds to station groups that could be prime candidates for participation in the broadcast incentive auctions, according to regulatory filings and court pleadings. MSD backs OTA Broadcasting LLC, while Fortress has provided loans to NRJ TV LLC.

"Obviously, when you buy stations you want them to make money and you want to serve the public," said Larry Patrick, who is a stakeholder in NRJ and the founder of media brokerage and boutique investment bank Patrick Communications LLC.

NRJ's other investors include CEO Ted Bartley and Titan Broadcast Management LLC executives Dan Sullivan and Bert Ellis. Bartley, who declined to comment, is the administrator. Ellis and Sullivan run the stations. Patrick finds deals.

"A plan to eventually surrender licenses to the FCC as part of spectrum incentive auctions is a viable strategy," Patrick said, adding that the FCC has encouraged parties to aggregate stations to participate in the auction.

"It's an absolutely legitimate business strategy to try to get ahead of the curve to see what some of those stations might be," he said.

Congress granted the FCC the authority to run an incentive auction in February, but the Commission has not yet established exactly how it will run the sales.

In a general sense, broadcasters would set reserve prices at which they would sell to the government. The FCC would pick which licenses it wanted to buy, and would auction the wavelengths in a subsequent sale to wireless holders. The FCC may "repack" some stations' licenses into different spectrum frequencies, to free up more capacity for the auction.

The FCC has never run a reverse auction, which contributes to the lack of certainty over how the process will unfold.

"Everyone is waiting to know what the rules of the game are, such as how the FCC will repack stations and how many stations they will want in each market," Patrick said. "We may find that out in the next six to nine months. It will be much clearer what stations have value."

While the incentive auctions are somewhat opaque, the demand for spectrum among wireless carriers is clear, as reflected by dealmaking by companies from Verizon Wireless and AT&T Inc. to Dish Network Corp.

Many stations, including affiliates of the big networks, will balk at the auction and may see a sale as a betrayal of the industry. For a broadcaster of low-value content, such as infomercials, the economics of iPhones and wireless broadband are a tough comp.

"I do know that a number of PE firms are looking at TV broadcast stations, particularly UHF stations, because of the upcoming incentive auctions," said one industry lawyer. "They believe that that spectrum in certain instances would have over a tenfold increase of valuation if used for 4G wireless as opposed to broadcasting."

NRJ and OTA have built up portfolios of stations in cities such as Los Angeles, New York, Boston and San Francisco, in some cases purchasing stations outside the city but within the larger broadcasting market.

Many of the stations were acquired from small owners or fledgling station groups. OTA purchased one of its properties from Newport Television LLC, which owns more than 50 stations and has backing from Providence Equity Partners LLC.

NRJ, of Coppell, Texas, bought Bridgeport, Conn., station WSAH, which falls within the New York City market, for $12 million in 2011, according to a purchase agreement filed with the FCC.

The group purchased WMFP in Lawrence, Mass., outside of Boston for $5 million in 2010, filings show.

In early 2012 NRJ agreed to buy Los Angeles station KSCI, as well as stations in Honolulu and Poway, Calif., outside of San Diego for $45 million through a credit bid submitted in a bankruptcy auction.

NRJ has also acquired Philadelphia station WTVE for $30.4 million and KCNS of San Francisco for $15 million, according to FCC applications.

A transcript of a bankruptcy court hearing on the Bridgeport purchase shows that Fortress provided NRJ with a $100 million loan and later increased the funding.

Executives from OTA did not return calls.

The Fairfax, Va.-based company was formed in early 2011 to seek out "independent television stations in large markets," which describes an ideal candidate for the incentive auctions.

OTA has purchased KTLN in San Francisco for $8 million; KFFV and KVOS in Seattle for $5 million and $2.9 million, respectively; and WEBR in New York for $6.6 million, FCC filings state.

The company announced a deal with the Untamed Sports network in July, which would give its Seattle stations outdoor sports and lifestyle programming.

Carl Salas of Moody's Investors Service said that flipping stations in the incentive auctions would require an investor to correctly gauge a number of variables, such as the demand for spectrum in the market, the station's financial health and the number of other stations that are willing to sell in a particular city.

A firm would not want to buy stations, subsidize them for three to five years and then make too high an offer to the FCC, which could opt not to buy the licenses.

"I'd want the spectrum to be upside," Salas said. "I'd want to be buying TV stations that could carry me on a cash flow basis over the next three to five years."

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