Changes for the Media Market: Will Deregulation Lead to M&A?

Weekly Corporate Growth Report, Nov 19, 2007 by Dolbeck, Andrew

Kevin J. Martin, the chairman of the Federal Communications Commission, has announced a plan that would relax regulations that prevent companies from owning multiple media outlets in a single city. The restrictions, intended to preserve a diversity of news reporting, prevent a single company from owning both a newspaper and radio or television station serving the same community. If deregulation occurs, it would allow media conglomerates to acquire new properties. It may, however, also lead to divestitures.

The new plan would allow a media company to own both a newspaper and either a radio station or smaller television station in the 20 largest US markets. If the media company is to own a television station, there must be at least eight independent TV stations and newspapers serving the same market. This would give large media companies the freedom to acquire and operate a greater range of media outlets in a single market, thus encouraging merger and acquisition activity in the sector.

If Mr. Martin's plan is enacted, it may also lead to divestitures in the media sector. When the current media ownership regulations were enacted in 1975, the FCC allowed companies already operating multiple media outlets to continue under a grandfather clause. Since then, other companies have been granted waivers, which would be reviewed if new regulations are adopted. Many media companies currently operate under grandfather clauses, exemptions, or both. If the adoption of the new rules invalidates these provisions, media companies may be forced to sell off assets.

Under the new rules, before allowing exemptions the FCC would be required to examine the media concentration in a market, whether the companies involved would increase the amount of local news reporting, and whether the owner would need to invest significant capital into its newspaper operations. Martin stated that the commission would consider exemptions in cases where multiple media ownership was in the public interest, but the presumption would be against them. Martin further stated that he did not anticipate granting any new long-term waivers.

If approved, the new media ownership regulations would impact Chicago real estate investor Sam Zell's proposed S8.2 billion buyout of the Tribune Company. The Tribune currently operates both newspapers and televisions stations in Los Angeles, New York, Chicago, Hartford, and South Florida under waivers from the FCC. Since the new ownership rules only allow combined operations in the top 20 markets, the Tribune would likely have to lose either two television stations or the Hartford Courant newspaper to remain active in the Hartford, Connecticut market. On the positive side, the new media regulations would preserve Tribune's right to operate multiple media in major markets such as Los Angles.

Mr. Martin appears to have the necessary votes at the FCC to have the new rules adopted. It is still possible that Congress could intervene, however. Senators Bryon Dorgan and Trent Lott stated in October that if Martin forces a vote on new media ownership rules, they would attempt to block it with a resolution of disapproval, a rare procedural move that hasn't been used since the last time the FCC tried to deregulate media ownership.

If the new media plan proceeds, M&A activity in the media sector will likely receive a short-term boost as media owners seek to expand in the country's top 20 markets. Asset sales will also likely occur do to divestitures required by the new regulations.

Sources: Boston Globe, New York Times, Reuters

By Andrew Dolbeck

Editor