Titan Broadcast ManagementHot Trend: Outsourcing Station Management

By Price Colman

TVNewsCheck, August 25, 2010 6:45 AM EDT

Sweet spot in a sour economy? A handful of broadcast veterans have found it managing stations they don't own.

Faced with businesses needing intensive care to survive, much less fetch a reasonable price on the trading block, some station owners are outsourcing management to the broadcasting equivalent of ER docs.

The companies winning bids to manage operations other than their own have time-tested executive teams and formidable scale economics. Those in the game so far: LIN Media, Gray Television, Nexstar Broadcasting Group and Titan Broadcast Management.

"All these companies have one thing in common: managers well thought of in the TV industry," says Steve Passwaiter, VP/business development at BIA/Kelsey.

Broadcasters have been managing stations belonging to others for nearly 20 years, but up until recently such arrangements have usually involved "duopolies" -- one station managing another in the same market through FCC-approved agreements that go by a variety of names -- local marketing, shared services, joint service and timed brokerage.

A key difference with this new breed of managing companies is that they are seeking to manage stations, sometimes whole groups, regardless of whether they already have stations in the markets.

It's a trend driven by economic necessity, says Vincent Sadusky, CEO of LIN Media, which in the spring agreed to take control of four of the struggling Acme stations with an option to buy.

"It makes perfect sense. It's really a sign of the times," he says. "I would think you may see more. Owners of these stations that recognize they don't have scale … ultimately would like to sell."

Other owners -- private equity firms and lenders who ended up with equity through bankruptcies -- just want out. But when credit markets froze in 2007, a big no-exit sign was hung over TV broadcasting. The gap between bid and ask is more like a gulf. Would-be sellers are asking about 12 times station cash flow, while possible buyers are offering only eight times, or less, if they're offering anything.

Outsourcing management is "just kind of a holding pattern" until the station market picks up again, says BIA/Kelsey's Passwaiter.

For Titan, it was the bankruptcy of Pappas Telecasting that created the opportunity. The senior creditors that ended up with 10 of the 12 stations -- Fortress, Cerberus, Angelo Gordon & Co. -- needed someone to manage them. They found Titan, a partnership founded by veteran broadcasters Dan Sullivan and Bert Ellis for the purpose of managing stations.

"Bankruptcies created a catalyst," says Ellis. In addition to the Pappas stations, Titan now manages a couple of the financially troubled Multicultural TV Broadcasting stations and KDOC, an independent in Los Angeles owned by Ellis, Henry Samueli and Kelso & Co., a private equity firm.

Ellis declines to discuss terms of his management contracts.

After the publicly traded Young Broadcasting landed in bankruptcy in 2009, Gray Television outbid several other broadcasters to win the contract to manage seven of its 10 stations.

Even though Gray has yet to start on-site management of the stations because of continued disputes in bankruptcy court, it began collecting the first installments of its annual $2.4 million fee earlier this year.

In March 2009, Nexstar stepped in to run seven stations in four markets for Four Points Media, a group acquired from CBS a year earlier by Cerberus Capital Management, a private equity fund. For managing the stations, Nexstar gets $2 million a year plus bonuses for boosting the cash flow.

Nexstar CEO Perry Sook notes that, as bad as 2009 was, Nexstar earned "a couple hundred thousand" from the deal for hitting certain milestones in the nine months the stations were under Nexstar management.

"Cerberus is very happy with the performance of the stations under our management," he says. "We will be earning a substantial incentive if the current trends continue through the end of the year."

Managing stations for others offers multiple potential benefits, says Sook. "From our perspective, it allows us to leverage our management team and its intellectual capital across a broader portfolio of assets. While we don't negotiate buy-sell [going in], we're doing due diligence on the properties every day and we hope it sets us up as a logical buyer for the properties."

Gray COO Robert Prather says he, too, hopes to eventually own the stations he now has under management. But, he cautions, an inside track isn't the same thing as a done deal.

"In this case, the company is owned by a bank group and they've stated that ideally after three years they'll probably put the company up for auction, get the best price they can," he says.

"We hope we would be a player. We're interested in buying them. If the stations are as good as we think they can be … we have as good a shot as anybody."

Probably better, says Larry Patrick of Patrick Communications, an investment banker. "Once you turn over management," he says, "whether or not there's an option to buy with the new manager, if the new manager can achieve certain economies of scale, he becomes the de facto buyer of the station."

It's very much a manage-to-own scenario, Patrick says.

"They're building equity value," he says. "Say a station is worth $20 million and you increase that over five years to $35 million, maybe you get $5 million of that upside. The station might be $35 million to another purchaser, but you have at least $5 million in credit toward a purchase."

Unlike Nexstar and Gray, Titan is not focused on owning.

"Our intent is to be third-party management," says Ellis. "We're not trying to buy stations. The owners want a totally neutral party to manage so they can get the highest price for the stations when they sell. It's not set up for us to be a buyer and have an inside look."

In tough times and with new management, it's inevitable that people will lose jobs. Payrolls are the first and simplest place, at least on paper, to cut costs. But Ellis said Titan doesn't go in with an itchy trigger finger.

"Everybody at the station has a crack at bat," he says. "We don't want to replace anyone we don't have to replace. If we can work with them, we do. But they have to work at our pace and style. We don't go in with the notion that the old management is bad."

At the same time, Ellis acknowledges, "It's a very aggressive pace. Our offices are our Blackberries. We're always traveling."

Invariably, there are regulatory concerns. Cable operators have complained about the same scale economics station group owners pursue. The argument: It gives broadcasters an unfair advantage in negotiating retrans deals with cable and satellite operators, particularly where they manage two network affiliated stations in a market.

So far, the FCC is doing the right thing by not acting on cable's complaints, LIN's Sadusky contends.

"I believe that this FCC is very, very smart, very pragmatic," he says. "Certainly there's been a precedent set over the years for this type of arrangement, which you can argue is more aggressive than a simple management arrangement. The economics of our business have gotten only more challenging. I don't know ultimately what the regulatory solution going to be."

Is outsourced station group management just a passing fancy or truly a trend?

Broadcasters are rebounding nicely from 2009's economic pit. Some of that is a gradual resurgence of auto advertising. Political spending i s also providing a boost.

But what happens when political drops off next year?

"There are probably still half a dozen groups hanging on by a thread," says Titan's Ellis. "They may make it through 2010, but they may not make it through 2011."

If that happens, Titan, Nexstar, Gray, LIN and, no doubt, others will look to step in. Ellis said Titan is discussing management possibilities with potential clients, and Sook, in a recent earnings conference call, said Nexstar is similarly interested.

In a kind of less than lethal economic Darwinism, outsourcing station management may be an early evolutionary step aiding broadcast survival.

"Does the industry need to consolidate?" Sadusky asks. "Yes, I think the industry absolutely needs to consolidate. Historically, the margins have been very high regardless of the size of a group or the individual performance of stations.

"Now it's much more difficult to have a high-margin station group. As industries mature, consolidation is a natural progression, whereby operators realize [that with] declining margins, the industry is getting more challenging [and it may be] better for their group to be part of a larger group."