By John M. Pelkey, Garvey Schubert Barer
Buying a broadcast station from a receiver or a trustee in bankruptcy is a little like trying to find a decent shirt at the semi-annual sale at a local department store. There may be some real bargains somewhere on the table, but they are mixed in with shop-worn merchandise, last year’s styles, and color combinations that only the most desperate would wear. So, how does the prospective purchaser of a troubled broadcast station improve its chances of finding a real deal? The prospective purchaser should ask three questions in particular.
I. What Assets Are Being Sold and What Assets Does the Purchaser Really Need?
For the vast majority of prospective purchasers, there is only one asset that is crucial to the deal. That is the FCC license. Without that license, the purchaser cannot operate the station so, unless this is the unusual deal where the station’s real estate holdings are more valuable than the station as a going concern, the only asset that the purchaser really needs is the FCC license (coupled with those relatively few assets that might be required to avoid a claim that the purchaser is purchasing a “bare” or “naked” license).
Once the purchaser has confirmed that the receiver/trustee has a license that it can assign to the purchaser, it can make a realistic determination as to the importance to place on obtaining the remaining assets as part of the transaction. Although the purchaser wishes to get a good deal, its expectations must be realistic.
Hard Assets
What is the condition of the hard assets? Are they needed? How much will it cost to fix or replace them?
A station that is in receivership or bankruptcy probably has gone through several rough years. Maintenance is frequently the first victim of hard times. Looking for fat to cut, the licensee heading toward receivership or bankruptcy usually is tempted to defer maintenance. The antenna may be corroded. The transmission line may be leaking gas. The transmitter may be unable to come close to the output necessary to achieve full licensed power. Although these defects could be deal-killers in a normal transaction, they are not at all unusual in a receivership or bankruptcy situation. Rather than immediately walking from the deal, however, the prospective purchaser needs to first decide whether the defective equipment is really necessary. It makes little sense to forego what could be a real opportunity just because the audio processing equipment isn’t up to standards.
If the neglected equipment is essential to station operations, the purchaser must weigh the cost of repairing or replacing that equipment against the discount at which the receiver/trustee is offering the station. There is a point at which it becomes so expensive to return the station to viability that, even taking into account the discount at which the station is being sold, the transaction is no longer a good deal and the prospective purchaser should simply walk away. Short of that point, however, the purchaser should consider lowering its expectations and, with the full understanding that a significant capital investment will be required to be made, move forward with the deal.
Of course, it is not just the transmission plant that the prospective purchaser must examine. The studios of a station in distress frequently have been subjected to as much neglect as the equipment at the transmitter site. Here, however, the purchaser may have greater leeway in coming up with a scheme for returning the station to viability. Particularly if the purchaser already owns stations in the market, it may be able to take advantage of its existing in-market infrastructure to establish studios for the station. In that case, the capital expenditure required to make the station viable can become low enough that buying the station becomes a sound financial decision.
Leases
Does the purchaser really need the studios or transmitter site that are being leased? As a station approaches receivership or bankruptcy, it is not at all uncommon for rent payments to be skipped. An initial question that the prospective purchaser needs to answer is whether it requires the facilities covered by the lease. If the purchaser already owns stations in the area, the current station studios may not be needed by the purchaser. In making that determination, however, the purchaser must determine whether the studios servicing its other stations can act as the main studios for the station in receivership or bankruptcy consistent with the FCC’s rules, which sets limits on the location within which a station’s main studios must be located.
In deciding whether to assume the studio or transmitter site lease, the purchaser should consider any political factors that might be involved. If the landlord is a significant player in the market’s commercial environment, or if the landlord controls unique property (such as the antenna farm used by most of the stations in the market), the purchaser may wish to tread carefully so as to avoid needlessly antagonizing the landlord.
As the purchaser weighs its options regarding the studio and transmitter site leases, it should not lose sight of the fact that it is likely to be in a strong bargaining position. The landlord may well be willing to bargain inasmuch as there may be a substantial past due amount, little prospect of recouping all of that past due amount, and potentially not much opportunity for entering into a new lease with any tenant other than the purchaser.
II. Does the Receiver Understand the Role of the FCC in the Licensing Process?
In many instances, receivers or trustees are people with significant experience in the broadcast industry, such as media brokers. Receivers with such experience understand the role that the FCC plays in the process of assigning the FCC license to the purchaser.
It is not uncommon, however, for a local financial institution to treat a broadcast station no differently than it would a dry cleaning establishment on which it has been forced to foreclose. The receiver appointed by the local court at the bank’s suggestion may have ample experience in acting as a receiver for the assets of unlicensed facilities, but may have no experience in dealing with federally-licensed facilities and simply not understand the FCC implications of placing a station in receivership and then spinning the station off to a third-party purchaser.
This lack of appreciation of the FCC implications leads to contracts that include no provision requiring the parties to obtain FCC consent or that establish a closing date that is entirely triggered by the court’s approval of the transaction, with no regard for whether the closing would be occurring prior to the receipt of FCC approval of the assignment. In most cases, the receiver’s failure to understand the need for prior FCC approval can be overcome by a phone call between the purchaser’s FCC counsel and the attorney for the receiver. That phone call must take place, however, and should take place early on – which forcefully argues in favor of bringing the purchaser’s FCC counsel into the picture as soon as possible.
III. What Must the Purchaser Do to Overcome the Ill Will Engendered by the Station?
In most broadcast deals, “good will” is an important part of the transaction. The station will have a steady stable of advertisers. It will have established a sound relationship with the business community, particularly if it has been involved in local civic activities. It will have dedicated listeners. In the case of a station in receivership or bankruptcy, however, just the opposite may be true. The station may be saddled with “ill will.” That is because a station that is approaching receivership or bankruptcy may have tried to cut corners by not fully honoring advertising contracts, by trying to short its sales people or by failing to honor its trade agreements. The prospective purchaser must do something to get the sour taste out of the mouths of advertisers and listeners.
One thing that can be done is to simply create, to the extent possible, a clean break between the station as owned by the former licensee and the station under the stewardship of the purchaser. If the station is not already silent, it may make sense to take it silent for a while. A new call sign can be used. New market materials, particularly a new logo, can be developed. If the receiver/trustee has a list of trade accounts, the purchaser can determine which of those accounts will require stroking. Many of them will not be of any particular use to the purchaser and may simply evidence that the old general manager never paid for his own lunch. There may, however, be accounts that could be useful to the purchaser’s future operation of the station. In that case, a heart-to-heart conversation with the account may be appropriate in that it can be successful in mollifying the account and assure it that the purchaser values the account’s business, while diplomatically letting the account know that the terms of the business relationship may well need to change in the future.
Most importantly, the purchaser must make sure that the station sounds like a new station. In all likelihood, the reason that the station is in receivership or bankruptcy is that it did not have many listeners to begin with. As a result, almost any format change will be for the better. If the purchaser creates what, to the average listener, sounds like a new station, the station may end up being treated as if it in fact is a new station – – attracting both listeners and, in their wake, new advertisers.
Buying a station out of receivership is necessarily a risky affair. But by balancing the need to purchase new assets against the discount at which the station is being sold, by ensuring that the requisite FCC approval is timely obtained, and by taking steps to overcome the ill will fostered by previous management, the prospective purchaser might find that, although it has not purchased a station with a designer label, the station should at least be moderately attractive to both the listener and the purchaser’s bottom line.
During his more than 30 years as a communications attorney, John Pelkey has done nearly everything that there is to do in the communications field. He co-authored the Supreme Court brief that sanctioned competition in long-distance telephone service. He argued both before the FCC and the court the case that led to the issuance of the nation’s first cellular authorization awarded through comparative hearing. He was co-counsel in the successful federal court proceeding that struck down the Fairness Doctrine. He represents both commercial and noncommercial broadcasters and has handled numerous broadcast sales transactions. He can be contacted at [email protected].
