Register to receive a printed copy(For Lexis Practice Advisor® Subscribers Only)
Lexis Practice Advisor®Free Trial
Learn More AboutLexis Practice Advisor®
By: Meredith Senter and Erin E. Kim, Lerman Senter PLLC
This expert interview provides an overview of current market trends in the media industry and outlines the important aspects of this segment that make mergers and acquisitions in the industry unique.
Mergers and acquisitions in the U.S. media industry have been on the rise. Television M&A is returning after a hiatus due to quiet period restrictions related to the incentive auction held by the Federal Communications Commission (FCC). In the incentive auction that ended in April 2017 the FCC auctioned off television station spectrum for wireless use. Stations that waited out the prohibition on transfers during the incentive auction are now doing deals, as are stations that hoped to sell in the auction, but did not. We are also seeing deals involving the sale of the residual assets of television stations sold in the auction.
On the radio side, the Entercom-CBS Radio merger is the largest transaction in several years and will result in additional activity due to required divestitures. The two largest radio companies are operating on extraordinary debt loads that will need to be addressed at some point. We are also seeing smaller strategic radio transactions, in particular for key single stations and FM translators being acquired to improve a station’s signal.
There is also significant M&A activity involving program networks, cable operators, and other distributors.
Consolidation spree. Four major mergers are currently pending—AT&T-Time Warner, Sinclair-Tribune, DiscoveryScripps, plus the already mentioned Entercom-CBS Radio merger—with speculation about many others. These companies are reacting to an industry transformation marked by changing consumer viewing and listening habits and shifting revenue streams.
Scale as driver. Scale not only serves as a tool for reducing operating costs, but also protects leverage in negotiations over program rights and retransmission rights. There are also technologyoriented reasons for scale. For example, television companies want a nationwide footprint to be positioned to take advantage of technical developments associated with ATSC 3.0, which is a new TV broadcast standard. Other entities are vertically integrating to secure content (e.g., AT&T’s proposed acquisition of Time Warner as a specific play for content) or to secure control of the distribution platform for their content (e.g., NBCUniversal’s acquisition of a low-power television station and lease of spectrum rights to serve as the NBC network affiliate in the Boston market, replacing a longstanding independently owned NBC affiliate).
Regulatory regime change and easing. The regulatory environment is encouraging, given the change in FCC leadership earlier this year. Immediately after Ajit Pai became chairman, the FCC lifted limits imposed by the prior administration on transactions involving services and sales agreements between television stations in the same market. The FCC then rescinded the prior administration’s elimination of the UHF discount, which enables television groups to own more television stations before tripping the national television ownership cap. Currently pending before the FCC are petitions for reconsideration of the prior administration’s 2016 broadcast ownership order. The FCC is expected to address these petitions and may review and potentially rescind longstanding ownership restrictions. The ownership restrictions rumored to be under review include:
There are unique procedural and substantive regulatory issues in the media space that practitioners deal with every day. Because we are in a regulated industry, FCC licenses are very important. Without a license, radio and television stations would not be able to broadcast a signal to listeners and viewers. Other media companies may hold FCC licenses to transmit or receive programming or authorizations to provide telecommunications services. For example, many cable operators use terrestrial microwave frequencies and satellite earth stations to distribute programming, direct-broadcast satellite providers use satellites to deliver programming to subscribers’ individual satellite dishes, and program networks use earth stations and satellites to deliver their programming to distributors. All of these activities require licenses from the FCC. Under the Communications Act of 1934, as amended, 47 U.S.C. § 214(a) and § 310(d), the FCC must consent to the transfer of its licenses in a merger or acquisition, and therefore the FCC must consent to the merger or acquisition before a deal can close.
The need for FCC consent introduces regulatory uncertainty into media company transactions. The FCC is required to give public notice and opportunity to comment as part of its review. Absent any objections or challenges, the FCC review process takes six to eight weeks. However, if there is any challenge, the process can take several months or more, even for a typical transaction, regardless of the merit of the challenge. The process takes significantly longer for transactions that are determined to have a significant impact on the public interest or raise complex issues, which is basically any high-profile transaction. These major transactions are sometimes separately docketed and managed by the FCC’s Transaction Team and often require review by the Department of Justice (DOJ) or the Federal Trade Commission (FTC) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a, (HSR review) as well. Many of these high-profile transactions are opposed by public interest organizations, others in the media industry, and even individual listeners and viewers. The Sinclair-Tribune merger is in the middle of the FCC review process now and has been opposed by individuals and a number of groups—including cable and satellite operators, trade associations, mobile phone companies, independent programmers, and public interest organizations. The recent AT&T-DirecTV, Charter-Time Warner Cable-Bright House and Altice-Cablevision transactions were also all opposed, just to name a few.
Regulatory risk allocation. As mentioned, regulatory uncertainty is a major recurring issue in media transactions. A seller wants certainty and swiftness of closing, and a buyer wants to know that the deal will be approved. Thus, parties regularly negotiate the extent to which FCC and/or DOJ/FTC consent will be pursued and the relative burdens of doing so. The parties also negotiate protections and risk allocation. The provisions that are commonly negotiated include (1) outside dates for the transaction; (2) the conditions or requirements imposed by regulatory agencies that the buyer or seller must accept (including required divestitures); and (3) in some cases, breakup fees where the regulatory approval is not obtained. A well-known example is the breakup fee resulting from the abandoned AT&T/T-Mobile merger. AT&T paid T-Mobile a $4 billion fee of cash and spectrum rights after facing opposition to the transaction from the FCC and the DOJ. There is also a breakup fee of $500 million in the currently pending AT&TTime Warner merger.
Divestitures and alternative transactions. In addition, media transactions may need to be structured to comply with applicable FCC media ownership restrictions, as well as any divestiture or conduct remedies imposed by the DOJ. Required divestitures are a common issue for larger transactions. To allow the larger transaction to proceed with the divestitures pending, the FCC has permitted short-term waivers of its rules and the formation of divestiture trusts to hold stations pending sales to third parties. The FCC allows parties to select the stations to be divested, as only the total number of stations is considered for compliance with the FCC’s media ownership rules. The DOJ, however, considers other factors such as the format, target audience, and relative competitiveness of the station in the market and may require specific stations to be divested. If timing is a concern for a deal, parties may utilize a local marketing agreement or time brokerage agreement, allowing the buyer to program the station or stations pending the closing. Stations also engage in many types of arrangements that may not involve an outright transfer or sale, such as joint selling agreements, news sharing agreements, shared services agreements, and others. All of these are options that the parties must consider when structuring transactions.
Limits on FCC review. Those outside the industry may not be aware that the FCC does not have automatic authority to review mergers and acquisitions involving cable and program networks. The FCC’s jurisdiction is limited to FCC licensees, and for many of these companies, their FCC licenses cover operations that are not critical to the core business or can be easily replicated with alternate services. These companies are starting to get around FCC review by surrendering their FCC licenses and pursuing alternatives for the licensed operations. A recent example is the AT&T-Time Warner merger. Time Warner divested its Atlanta television station and surrendered the wireless and earth station licenses used by HBO, CNN, and other networks in order to avoid FCC review of the merger.
Potential delays with multiple agency reviews. There is a substantive aspect of the FCC’s transactional review that those outside the industry may be interested to learn about. The FCC reviews deals under a public interest standard, and its deadlines are aspirational, not binding. Unlike other merger review regimes, such as the DOJ’s and FTC’s HSR review—which aligns to official, published analytical guidelines—the FCC’s review methodology is less proscriptive and typically broader. In addition, because affirmative consent from the FCC is required prior to closing, the FCC almost always acts after the
Post-closing risk of FCC rescission. Many M&A deals include regulatory approvals as conditions to closing. However, practitioners may be surprised to learn that FCC consent might not— technically—be final. Although many transactions proceed to closing upon an initial consent, the FCC has the authority to subsequently rescind its consent. Rescission can occur following a successful petition for reconsideration (which can be filed by any interested person), or even on sua sponte motion by the FCC. This is obviously a concern for buyers who have paid the purchase price only to find their FCC licenses at risk and potentially facing the need to engage in costly long-term litigation following the closing. That said, in large, public company transactions, buyers tend to proceed to closing prior to finality notwithstanding this risk. As a business matter, it is impractical to delay the closing and wait out the long appeals process. In private transactions, buyers take one of three approaches in the acquisition agreement:
With the second and third approaches, buyers may also require a rescission or unwind agreement that spells out what the parties must do to defend the transaction following the closing and what happens if the FCC rescinds the grant. Fortunately, examples of an FCC rescission following an initial grant are rare; however, post-closing litigation should be expected where a transaction is challenged.
Meredith Senter, a member of Lerman Senter PLLC, has specialized in the representation of clients in the broadcast, cable, and telecommunications industries since 1980. He has represented clients, from individuals to CBS Corporation, in the purchase or sale of numerous radio and television stations and has served as the lead attorney on transactions ranging in size from under $1 million to over $1.4 billion. Meredith counsels radio and television groups, wireless telecommunications companies, cable program services, and banks and investment companies that lend to or invest in telecommunications companies. In addition to advising clients on day-to-day regulatory matters, he assists them in structuring acquisitions and investments in compliance with complex FCC ownership and attribution regulations, often working with other law firms and in-house counsel. Erin E. Kim is a member of Lerman Senter PLLC specializing in assisting broadcast and mass media clients with transactional and regulatory matters. Her clients include large, publicly traded mass media companies and small local broadcasters. She has substantial experience handling all aspects of complex broadcast transactions.
To find this article in Lexis Practice Advisor, follow this research path:
RESEARCH PATH: Corporate and M&A > M&A by Industry > Media & Telecom M&A > Practice Notes
For an overview of considerations relevant to M&A transactions in the media industry, see
> MEDIA M&A TRANSACTIONS
For a discussion of due diligence factors to consider in a telecom M&A deal, see
> TELECOM M&A TRANSACTIONS
RESEARCH PATH: Corporate and M&A > M&A by Industry > Media and Telecom M&A > Practice Notes
To learn about the consequences of terminating an M&A deal, see
> CONSEQUENCES OF TERMINATION IN M&A DEALS
RESEARCH PATH: Corporate and M&A > M&A Provisions > Termination > Practice Notes
For a discussion on drafting break-up fee provisions in an M&A agreement, see
> BREAK-UP FEE PROVISIONS
RESEARCH PATH: Corporate and M&A > M&A Provisions > Break-up Fee/ Termination Fee > Practice Notes