Has This TV Broadcaster Found a Merger Partner?

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In January, Fisher Communications (NASDAQ: FSCI) announced that it was seeking strategic alternatives, after receiving pressure from its institutional investor base.  The company has spent the last few years shedding its non-core investments, including real estate and securities holdings, with the proceeds distributed to its investors through special dividends.  However, profits in its core television and radio businesses have come under attack from satellite radio and internet video networks, among others.  So, should this company be on your radar?

Keeping it local

Fisher is an owner of television stations, primarily local affiliates of the ABC network in the western region of the U.S.  The industry has always enjoyed a profitable, highly-leveraged business model, due to the high cost of licenses, loyal viewers, and stable, recurring profit streams.  While this structure worked well when the networks were the predominant outlet for local advertising, the internet has brought thousands of new competitors to the advertising business and lowered the profit margins for the station owners.

In FY2012, Fisher reported weak overall financial results, with slightly lower revenues and a 25.2% decrease in its operating income.  However, its core television segment reported solid growth in revenues and operating income, as television remained a vital part of political advertising plans.  The segment also benefited from the resurgence of the auto sector and its perennially large marketing budgets, with Fisher's advertising revenue from the auto category rising 11% during the period.

Given competitive threats from online news and advertising organizations, television station owners have built interactive websites to maintain engagement with their viewers.  Fisher’s online segment has news websites for each of their television affiliates, as well as 120 hyper-local websites that cater to a community’s demographic profile and interests.  While the company wasn’t successful at generating growth in online revenues during 2012, with a 4.0% decline, the segment is important as Fisher tries to maintain viewership during the migration to online news reporting.

Playing catch-up

While Fisher struggles to find revenue growth online, other television affiliate owners have been making aggressive moves to add online services to their business mix.  Local television affiliates have decades of experience in targeting advertising messages to their local communities, and they are well positioned to provide the service to third party companies.  Fellow television affiliate owner Lin TV (NYSE: LIN) purchased Nami Media recently, which allowed the company to pursue growth in the online media management business.

In FY2012, Lin reported strong results for its portfolio of 43 stations, with increases in revenues and operating income of 23.9% and 68.3%, respectively, versus the prior-year period.  The company benefited from a sharp increase in political advertising spending related to the U.S. election cycle, as well as a 51% increase in its online revenues.  In addition, Lin used its strong operating cash flow, with $87.9 million in FY2012, to expand its network with the October 2012 purchase of eight television stations in complementary markets.  While the deal adds debt to the company’s balance sheet, it diversifies Lin’s viewership to 23 markets covering roughly 10% of the U.S. population.

Meanwhile, Gray Television (NYSE: GTN) reported similarly strong results for its network of 36 stations, with increases in revenues and operating income of 31.8% and 103.6%, respectively, compared to the prior year.  Its total revenues reached a record level for the company, with substantial increases in the political and auto advertising categories.  The company also benefited from its 10 stations that are affiliated with the NBC network, as the Olympics broadcasts provided a one-time bump to its financial results.

Gray has also been successfully transitioning its viewership to the web, with a 40% year-over-year increase in total page views of its various web properties.  The company’s online push led to a positive financial impact, with a 24% increase in online advertising revenues versus the prior year.  The net result was strong operating cash flow during FY2012, which allowed the company to reduce debt and further invest in its future online capabilities.

The bottom line

The companies that own television station affiliates were left for dead until recently, as their debt loads seemed unmanageable in the current competitive environment.  However, proactive operators have built engaging websites for viewers who want online access to local news and information.  While Lin TV and Grey Television have a diverse geographic base of properties, Fisher’s focus on a limited number of markets likely creates a need to reduce business risk through a business combination.  Since mergers are inherently uncertain, investors should pass on Fisher and put Lin TV and Gray Television on their watchlists.

rghanley owns shares of Fisher Communications and Lin TV. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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