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Pursuing Local Acquisitions

By Marc Hand

Over the past year, a growing number of SRG members have begun to explore ways in which they might acquire control of additional broadcast spectrum. For some the plan is to launch a second service in their "home" community. For others it is to extend an existing service to a new audience elsewhere.

One part of SRG's strategy to increase public radio service is to assist members that are considering such acquisitions. We have redesigned our work in this area, moving from relatively low-key assistancemostly phone consultationsto an approach that is more pro-active and that allows for more extensive support on a fee-for-service basis.

While stations have different levels of experience and resources to pursue acquisitions, there are common steps that need to be taken, and a variety of levels of advice and support that can be offered by SRG. This paper will review a process that, to date, has been relatively rare in noncommercial broadcasting, but which we believe will be increasingly common in the years ahead.

Stations interested in acquisitions need to take both internal and external steps to prepare for this work. The initial process requires planning and a commitment of time and resources by the board and management staff of the licenseenot unlike the level of commitment required for a capital campaign. SRG can assist stations in this early process by helping to lead the planning, outlining reasonable costs and expectations, and in helping the organization to clarify the strategies to pursue based upon the overall expansion goals of the licensee.

KEY STEPS IN THE PROCESS

Identify options.
Once an SRG member makes the decision to expand, an analysis must be done to identify likely options and targets. This analysis often begins with a broad list of possible opportunities (e.g., noncommercial vs. commercial acquisitions, FM vs. AM, outright purchase vs. management agreements) and determines which are viable options given the specific market. For example, a large market station may have only a limited number of noncommercial frequencies that make sense to pursue, while a small market station may want to consider both noncommercial and commercial frequencies.

SRG can provide assistance by working with stations to identify both commercial and noncommercial station options, and then work to develop strategies to pursue the most attractive possibilities.

Court contenders.
Once the potential acquisition or LMA candidates have been identified, the very important initial contact must be made. In the commercial radio world, this initial step is most often made by an intermediary representing the acquiring station. Typically this person is a radio station broker, but it can also be an attorney or other consultant skilled in acquisitions.

A third party is important at this stage because most stations, when initially contacted, will say they are not for sale. This is particularly true when stations are contacted by interested buyers. A third party can often solicit the more subtle selling signals of station licensees that will not publicly admit to being for sale, but who may mention needs they have that could be met through a sale.

Part of the background I bring to SRG is experience both as a commercial radio station broker and in directly acquiring commercial stations. I have also worked on a number of noncommercial acquisitions and can offer the expertise needed by member stations to initiate this critical early contact with stations identified on the target acquisition list. SRG is currently offering this assistance on a fee-for-service basis to member stations (see p. 4). Alternatively, if a member wishes to pursue this step with assistance from another party (say an attorney they have worked with for years), we can help evaluate that option, too.

Negotiate and wait.
If one or more stations emerge that may consider a sale then negotiations begin. Prior to this stage, the acquiring station needs to determine its ability to finance an acquisition, whether the acquisition will be all cash, or cash and notes, and a general price range it is willing to pay. Since very few noncommercial stations have changed hands over the years, there are few standard formulas or comparable sales to use in determining a fair price. As a result this step is more of the classic bargaining process of finding a price at which the seller's and the buyer's needs and expectations converge. The buyer should expect to offer a price range early in the process to help the seller determine their real level of interest.

This stage of the negotiations can move very slowly, taking from a month or two to over a year. This is especially true with noncommercial entities that must consult boards or similar entities that control the licensee but are simply not familiar with radio, or even the operation of the station they own. The buyer's representative may have to take the seller through an education process before they can make even an initial decision on pursuing negotiations. If negotiations are successful then the buyer and seller typically create a letter of intent that highlights the major elements of the proposed sale, such as price, terms, and physical assets sold.

Letter of intent.
The letter of intent, typically three to five pages, provides a framework of the agreed-upon terms of a sale. This letter of intent binds the parties to exclusive final negotiations, is signed by both parties, is typically accompanied by an escrow deposit from the buyer, and has contingencies such as final approval by governing boards, inspection of equipment and other assets by the buyer, or final financing approval from the buyers lending institutions. The letter of intent usually calls for completion of a final purchase agreement within a set period (30-45 days is typical), and for filing of a transfer application with the FCC within a short period after the purchase agreement is completed.

The purchase agreement.
This final step in the negotiation process is a much more extensive legal document that details all of the terms of a sale of a station. Usually a larger escrow deposit is made with the signing of the purchase agreement (such as five to ten percent of the purchase price). The purchase agreement is much more binding, and typically is only contingent upon FCC approval.

Closing.
The purchase is completed after final FCC approval of the sale and the assignment of the station's license to the buyer. This usually takes three to four months after the application is filed.

There are an infinite number of variations to this process, as well as complex and sometimes emotional issues that come up in the process of negotiating with a seller. In addition to a broker, SRG members would work closely with their FCC attorney, accountant, and key board members through the process.

SRG is assisting member stations, on a fee-for-service basis, to pursue local acquisitions. The fees are based upon SRG 's standard member consulting rate of $750 per day.

To assist stations in planning the potential costs associated with acquisitions, we have identified cost ranges based upon the various acquisition stages. These ranges are easier to predict early in the process, and more difficult to estimate during the negotiation and letter of intent stages. A general range of costs are:

By comparison, most commercial station sales involve a broker, who charges a single fee based upon the successful completion of the sale and keyed to the ultimate sale price of the station. These fees range from a minimum of $25,000 to over $1,000,000, but on average are in the range of $150,000 to $300,000.

Noncommercial acquisitions typically involve parties with little experience in the buying and selling of stations and that bring different motivations to the table than their commercial colleagues. For these and other reasons, I believe there will be many more noncommercial deals that will either fail to reach closing or take much longer to complete than a typical commercial transaction.

For these reasons, these transactions will be less attractive to commercial brokers. This is one of SRG's motivations for providing assistance directly, as opposed to finding a crew of brokers to handle this work for us.

For similar reasons, the uncertainty of noncommercial transactions leads us to protect the financial interests of the full SRG membership through recovering costs on a fee-for-service basis rather than "betting" on the success of a brokering role.

January 7, 1998