Speculators betting big on FCC TV spectrum auctions

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For the last few years, three well-funded buyout firms have been quietly picking up licenses to commercial and noncommercial TV stations in a gamble on big payouts from next year’s FCC incentive auction of television spectrum.

Current’s research of FCC license applications filed since 2010 found at least 25 separate deals involving three firms: OTA Broadcasting, NRJ TV and LocusPoint Networks. The stations they’ve acquired to date are on the peripheries of major markets, primarily ranging from Boston to Washington, D.C., in the eastern U.S. and from Seattle down to Los Angeles along the West Coast. The three firms are all owned or funded by private equity firms that command billions in assets.

Due to vagaries in the FCC’s reporting requirements, it’s likely that the commission’s records provide an incomplete picture of the companies’ purchases. In the 25 transactions turned up by Current, the firms have spent almost $230 million since December 2010, according to asset purchase agreements provided to the FCC.

Apart from their locations near major markets, most of the stations that have been purchased share one other characteristic: They were underperforming commercial stations or outlets whose owners were in bankruptcy. But several experts who have been watching the run-up to the auction expect that the speculators’ next big push for spectrum will focus on public TV stations.

Spectrum sale map_opt

Circle size indicates the amounts that speculators have invested in each market.  Note- In Los Angeles, the sale of KSCI was part of a multi-license transaction that included stations in Hawaii. Data compiled by Current from FCC asset purchase agreements. Click to open interactive map.

“The commercial stations are more attractive, and that’s what they targeted first: stations in bankruptcy or insolvent, or hadn’t been sold in a while — the low-hanging fruit,” said Larry Miller, a Washington-based media attorney with Schwartz, Woods & Miller who represents many pubcasting clients. “And now they’re looking at noncommercials, and they’d be attractive if they’re owned by people anxious to sell.”

“There are a number of hooks in the water from auction speculators,” Miller added.

The FCC’s first action in the spectrum auction is the so-called “incentive,” or reverse, auction in which stations can offer up some or all of their spectrum for sale. The FCC will act as a middleman, trying to match interested sellers with buyers. Presumably wireless companies such as Sprint, AT&T and Verizon will be among those looking to bid.

“There are arguably markets out there where TV stations are finding it not easy to reach an audience,” said Ernest Sanchez of the Sanchez Law Firm, which also represents pubcasters before the FCC. “So it does beg the question if they should sell the spectrum and find a way to get their programming out to the audience, such as the Internet.”

W. Lawrence Patrick, founder of Elkridge, Md.–based Patrick Communications, has helped broker a number of the deals, including LocusPoint’s purchases of WUDT in Detroit from Daystar Television Network, the Texas-based religious broadcaster, and KSKJ near Los Angeles, which was sold by Capital Broadcasting Corp. Patrick is also an investor in NRJ and anticipates a marked increase in pubTV deals this year.

“The original idea was to look at the commercial stations, but more recently, they’ve started taking a look at noncommercials — religious broadcasters, or third or fourth public stations in a larger market,” Patrick said.

“It affects the ones on the margins,” Patrick said. Financially stable stations in big markets won’t sell, but those that are struggling on the peripheries of major cities will have a strong incentive. Now “they find they have beachfront property that’s worth a lot of money.”

High-rolling players

The Blackstone Group LP, which recorded a $2 billion profit in 2012, owns 99 percent of LocusPoint through its “Blackstone Tactical Opportunities” division, according to FCC filings. The remaining 1 percent is split by Ravi Potharlanka and William deKay, veteran telecom executives who find and handle the transactions. In 2012, Blackstone recorded a $2 billion profit for the year on $4 billion in revenue.

When reached by phone last week, deKay refused to answer questions about the firm’s plans for future acquisitions.

NRJ TV LLC is a media holding company funded through loans from Fortress Investment Group LLC., a money manager with more than $50 billion in assets under management as of Sept. 30, 2012, according to a recent U.S. Securities and Exchange Commission filing. Calls to NRJ and Fortress were not returned.

NRJ’s deals include the $22.7 million purchase of WZME in New York in August 2011, the $30.4 million purchase of WTVE in Philadelphia and last month’s deal for KNET in Los Angeles for $4.4 million.

The third major player is OTA Broadcasting, a division of MSD Capital, L.P., which was formed to exclusively manage the capital of Dell Computer founder Michael Dell and his family. Calls to MSD were not returned. OTA’s deals include purchases of KAXT in San Francisco for $10.1 million in January and WEBR in New York for $6.6 million in March 2012.

With no guarantees of participation or interest from buyers, the incentive auction is not a sure bet for investors. The speculators could be out the initial purchase price, usually more than $1 million. If there are no willing buyers, they could be left with a cash-strapped broadcast station. The companies are speculating that the demand for wireless spectrum will keep increasing in major urban markets and drive prices up over time.

“The companies want to buy the stations and flip them down the road for a profit, but they are taking a huge risk,” Patrick said. “There is a lot of money being spent, and they might get stuck down the road if the auction doesn’t turn out as planned.”

Gold in noncom airwaves?

The first transaction involving a noncommercial TV station was filed with the FCC in December when LocusPoint signed a contract to buy student-run low-power WMJF in Towson, Md., from Towson University. Under the terms of the deal, Towson will get $1.8 million and payments to cover operating costs for two years after the sale closes. WMJF had been on the market for almost nine years after the university decided the analog equipment and license were “no longer needed to deliver academic programs and courses.”

In the FCC filing seeking approval of the license transfer, Towson officials said the university doesn’t plan to fund the station’s conversion to digital. Dr. John MacKerron, the Towson professor who serves as WMJF’s faculty advisor, said the purchase price of $1.8 million was the low end of WMJF’s appraised value.

“It works out for the university, since we were ready to take this turn away from analog anyway,” MacKerron said. “And this money from the sale will help create an endowment to keep the studio going as a multimedia platform.”

WMJF may have been the first noncom to go to speculators, but Patrick expects an unspecified number of deals to close later this year.

Late last week, bidding closed on purchase offers for KCSM-TV, licensed to the San Mateo Community College District in California. Blackstone’s LocusPoint was among the potential buyers announced Feb. 22.

This is LocusPoint’s second attempt to buy the station. College trustees rejected finalists in an earlier bidding process last November and issued a new request for proposals a month later. The college gave bidders two options for their purchase proposals:  Buy the assets outright or subsidize the station’s day-to-day operations and participate “in some capacity” in the incentive auction.

shaded graph_optThe option allowing for a subsidy in return for a cut of KCSM auction proceeds could play out in other markets with multiple noncommercial stations, according to Patrick.

He expects that universities or other educational institutions operating stations in the top 10 to 15 markets will be increasingly open to considering sales as the licensees consider the market value of their broadcast spectrum.  In big markets that could command the highest prices, administrators are weighing the pros and cons of keeping the stations versus selling and using the money, possibly starting an endowment with it.

If public stations and their governing licensees decide to roll these dice, it will be hard to determine how many pubcasters have placed their bets with the speculators.

Under Section 73.3613 of the FCC’s regulations, a transaction that involves a license change can be filed up to a month later. And the application can be entered on paper rather than electronically, making it that much more difficult to track.

Questions, comments, tips? mook@current.org
  • Edward (Ted) Coltman

    Nice work. But you may have dropped a paragraph or two inadvertently. Who is “Miller” in the fifth paragraph? I don’t see an earlier reference to anyone named Miller.

    • Benjamin Mook

      Thank you Mr. Miller. There was something missing and the post has been updated.