FISHER COMMUNICATIONS INC FSCI
May 25, 2010 - 8:42pm EST by
maggie1002
2010 2011
Price: 15.19 EPS $0.00 $0.00
Shares Out. (in M): 9 P/E 0.0x 0.0x
Market Cap (in $M): 133 P/FCF 0.0x 0.0x
Net Debt (in $M): 63 EBIT 0 0
TEV ($): 196 TEV/EBIT 0.0x 0.0x

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Description

Fisher Communications ("FSCI") is an attractive long investment opportunity with attractive downside protection and substantial upside potential.  Although I do not envision the stock reaching $43-45 that was reportedly offered to buy the Company in mid-2008, there are several scenarios that drive my conviction that a current investment in FSCI could generate a return of more than 70% within two years, based on a $26 price target.  As for downside protection, TBV was recently reported at ~$11.25 per share but I adjust this to ~$13 based on the $10M tax refund received in April plus an expected insurance claim of over $4M.  The confidence projected by three insiders who recently bought over $800,000 of stock is consistent with my bullish thesis.

Seattle-based Fisher Communications traces its roots back to 1910 when the Company began as a flour mill operator.  The Company now owns and operates thirteen full-power television stations (including a 50%-owned television station), seven low-power television stations, eight radio stations in the Western United States, and Fisher Plaza.

The television and radio stations are located in Washington, Oregon, California, Idaho and Montana.   The Company's television stations reach 4.1M households (or ~3.5% of U.S. television households) and Fisher's two largest markets are Seattle (DMA #13) and Portland (DMA #22) and both are duopolies with ABC and Univision affiliates.  The Seattle and Portland television operations accounted for over 60% of Company television revenue in 2009.  As for competition, in Seattle, the CBS affiliate is owned by Cox Enterprieses, the NBC affiliate is owned by Belo, and the FOX affiliate is owned by Tribune.  In Portland, the CBS affiliate is owned by New Vision Television, the NBC affiliate is owned by Belo, and the FOX affiliate is owned by Meredith.

Fisher's other TV stations are a mix of CBS, FOX, and Univision affiliates that are located in Boise, Idaho; Eugene/Coos Bay, Oregon; Bakersfield, CA; Yakima/Pasco/Richland, Washington; and Idaho Falls-Pocatello, Idaho (Designated Market Areas 112/119/125/126/162).  The most recent addition to Fisher's television portfolio is the Bakersfield market, a duopoly of CBS/FOX affiliates, purchased for $55M in January 2008.  For the local news broadcast segment, a critical time period for generating ratings and revenue, all Fisher television stations but one achieved either the first or second market ranking during 2009. 

In Seattle, the 13th largest radio market in the U.S., Fisher owns and operates three radio stations.  The other five stations are operated in Great Falls, Montana.  Given the disproportionate value that exists within the TV segment and Fisher Plaza, I will not allocate much time framing the radio business which historically suffered from a burdensome contract with the Seattle Mariners that has since expired.  Although there are some synergies associated with the radio and television operations in Seattle, the Company's eight stations do not provide the requisite scale to derive the typical broadcast cash flow (BCF) margins, ranging from 25-40%, achieved by other radio broadcast operators.  Two of the three Seattle stations are news radio format (incl FOX News) programmed on AM.  In the past two years, adjusted to exclude the Mariners contract, the Company's radio BCF margin was 18-22%. 

Although I have not yet reconciled why the Company did not divest its Great Falls radio portfolio (it could be low tax base issue), in May 2006, the Company announced the divestiture of twenty-four small market radio stations in Montana and eastern Washington for over $33M.  The radio broadcasting industry is more consolidated than the TV landscape and I anticipate that consolidation will continue.  In fact, the second largest radio broadcaster-Cumulus-recently announced its intention to pursue such consolidation.  On April 7, 2010, Cumulus announced a strategic investment partnership with Crestview Partners, a $4B private equity firm with a strong media focus.  The objective of the partnership is to pursue investments in radio broadcasting companies.  The partnership aims to use equity financing of up to $500M coordinated by Crestview.  As also evidenced by the pending going-private transaction at radio broadcaster Emmis Communications, there is appetite for acquiring radio stations. 

Although I think there is a likely scenario in which all of Fisher Communications is acquired, I think there is a high likelihood that, at the very least, the radio segment is sold.  I estimate the radio segment will generate ~$4M of BCF, on average, in the each of the next three years, similar to that which was generated in 2009 but less than the more than $6M generated in 2008.  I assign a value of $32M (i.e., 8x) for Fisher's radio business.  For context, note that in August 2009, CBS sold four Portland stations (a smaller market than Seattle) for $40M.

The FCC "awards licenses to television and radio to use the airwaves expressly on the condition that licenses serve the public interest and licenses are responsive to the needs of the local community".  It has been said that "owning a television station is a license to print money" but the fortunes of station owners have confronted numerous challenges in the past few years.  Despite the many challenges, including ratings eclipsed by cable network viewership, DVRs that marginalize TV advertising appeal, and the decline in advertising from the critical auto category sector, most TV stations still enjoy attractive free cash flow margins. 

The primary driver of TV stations is local advertising which is typically purchased on a short-term basis and is more skewed to the auto, retail and financial sectors.  This exacerbated the downturn but also provides the opportunity for a stronger cyclical rebound.  Last year was exceptionally challenging for the U.S. advertising industry, as the ~14% decline was the steepest in over sixty years.  The worst economic downturn since World War II is evidenced by advertising revenue consecutively down at TV and radio stations in the past three years.  TV stations recorded a decline of 5% in 2007, a decline of 7% in 2008, and a decline of 19% in 2009.  Radio stations recorded a decline of 3% in 2007, a decline of 8% in 2008, and a decline of 16% in 2009.  Over this period, Fisher's TV and radio stations performed better than the overall industry in 2007, their TV stations outperformed in 2008, and both TV and radio underperformed the overall industry in 2009.        

A key component of the downside protection is the asset value that can be ascribed to Fisher Plaza, a 300,000 square foot building the Company owns that includes a data center and is located near downtown Seattle.  During the Spring of 2008, the Company announced an intention to sell Fisher Plaza but the timing of the intended sale could not have been much worse and during the Spring of 2009, management decided to pull the property off the market.  Although it has been reported that there were six interested buyers of the property, the value was unattractive to the Board and management and they questioned whether financing would ultimately be made available for those buyers expressing interest.  The credit markets have substantially improved from 12-24 months ago and although the Company is not actively engaged in selling the property, it is a highly likely liquidity event at the right price. 

Fisher Plaza was completed in the summer of 2003 and had a net book value of ~$109M at the end of 2009.  It is considered to be one of the "premier technical facilities in the region."  Occupancy, which included Fisher's Seattle broadcasting operations and the Company's corporate offices, was 97% at the end of 2009.  The Company occupies ~40% of the building with its broadcast facilities and corporate offices.  As part of management's efforts to maximize operational efficiencies and Plaza profitability, management recently integrated the corporate offices into the Company's Seattle broadcast operations.  This added ~8,500 rentable square feet now available for lease and therefore occupancy decreased to 95% at the end of Q1 2010.  In 2009, Fisher Plaza reported segment EBITDA of ~$9.6M, up from $8.6M in 2008.  In the absence of a "fire sale", it seems that Fisher Plaza is worth at least 90%, or $98M, of its reported net book.  Speaking of "fire", the Plaza incurred a fire last summer and incurred ~$6.8M in remediation and equipment replacement expense related to the fire.  There is ~$4.3M yet to be reimbursed by insurance and I have not identified any reason all of this will not be paid; I adjust the balance sheet accordingly.

Fisher ended Q1 with $122M of debt (specifically 8.625% Senior Notes due 2014).  In April 2010, the Company received ~$10M of cash from a tax refund, thereby adding to the $44.2M of cash on the balance sheet at the end of Q1.  In May 2010, the Company repurchased $7.4M aggregate principal amount of those Senior Notes for ~$7.3M in cash.  Not adjusting for any of the cash that has most likely been generated already this quarter but adjusting for the $4.3M of insurance claim noted above, the Company's current net debt is ~$63M.  Based on Fisher's closing price at $15.19, I estimate that an investor is currently buying Fisher's TV business for just $66M as described below.

Current shares outstanding:       8.78M

Current stock price:                  $15.19

Current equity value:                 $133M

Net debt:                                  $63M

Enterprise value:                       $196M

Adjustments:

Radio (as described)                 $32M

Fisher Plaza (as described)       $98M

Implied TV Enterprise:          $67M   

 

It is fine if you don't agree with my assumptions above since I think even if the radio business were accorded zero value, an investor should find the implied television valuation to be attractive for stations that generated a three-year average (2006-2008) BCF of $30.7M.  Note that 2009 BCF for Fisher's TV segment was just $10.1M, an extremely pathetic outcome.  Although one can ascribe much of this to the economic challenges of 2009, the 10.4% BCF in 2009 is among the worse in the peer group and the 24%-29% generated by Fisher in 2006-2008 is also poor relative to the peer group.  Recent results have improved to 11.9% BCF margin in Q1 2010 from just 1.2% in Q1 2009 but there are some concerns about management applying similar rigors of cost containment and discipline relative to its peers.  There are some scale disadvantages at Fisher since other station groups have a much larger portfolio but there is a lingering concern regarding the quality of management when framed by a relative margin analysis.  Nevertheless, I don't think 2009 BCF is the appropriate metric and estimate that Fisher can generate at least an average of $26.2M of BCF in 2010-2012.  This assumes BCF margin reaches only 25% in 2012 when the political advertising landscape will be quite robust.  I know that most other station groups assert their BCF margin would be over 30% if they were operating Fisher.

Using the $26.2M average BCF, the current Fisher stock price implies ~2.5x BCF for the Company's television operations.  However, I failed to address unallocated overhead to this calculation so arguably I am being aggressive but I wanted to first frame it this way since I think it is highly likely that Fisher will ultimately be acquired (remember that just two years ago, an unsolicited offer was made at $43-45) and acquirers, especially those that are strategic, focus on BCF multiples since the corporate overhead is almost all redundant.  Nevertheless, if one assumes the unallocated overhead, ~$10.4M of corporate overhead, burdens the valuation, I frame the potential sum-of-the-parts valuation of FSCI as follows:

 

Assuming TV BCF of $26.2M at Various BCF Multiples:          7x                    8x                    9x                    10x

Implied Value of Fisher TV Segment:                            $183                $210                $236                $262   

Reduction for Unallocated Corp at 6x:                          (62)                  (62)                  (62)                  (62)

Estimated Value of Fisher Radio Segment:                               32                    32                    32                    32

Estimated Value of Fisher Plaza:                                                 98                    98                    98                    98

Net Debt:                                                                                  (63)                  (63)                  (63)                  (63)

Implied Equity:                                                                        $188                $215                $241                $267

Implied Price per Share:                                                         $21.50             $24.50             $27.50             $30.50

 

If one assumes that management can drive TV BCF back to $30.7M, the implied price per share, at 8.5x TV BCF, would be $30.25.  I prefer being conservative and use the $26.2M and 8.5x to arrive at $26.  As for downside protection, the Company's tangible book value, which is primarily based on Fisher Plaza, is almost $13 (inclusive of the $10M tax refund received in April and the anticipated $4.3M insurance claim).  

Below I highlight some of the bullish arguments as well as risk considerations and selected catalysts.

 

Selected Bullish Arguments

 

Local television remains a viable advertising channel

While one should not argue that "traditional" media, and especially broadcasting, confronts structural, secular, and cyclical challenges, such issues are well-documented.  Moreover, the severity and velocity of the downturn in the economy disguised the fact that in most cases, most forms of traditional media, and especially TV broadcasting, remains a viable advertising channel.  That's among the conclusions of a new STRATA (leading provider of media buying/selling software) quarterly survey of advertising firms, which shows that while more dollars are moving to digital advertising, corporations continue to spend the majority of their ad budgets on television (note this include broadcast/cable networks and TV stations).  TV remained the top advertising choice in Q1, with ~42% of ad agencies saying their corporate clients are more focused on TV than any other medium. 

 

Contrary to the current conventional view, TV viewership is at record levels, at ~8.5 hours per day.  Moreover, most adults are exposed, on average, to over seventy minutes of live TV commercials or promotions on a daily basis.  TV advertising and program promotions reach 85% of adults daily and viewers typically see over 25 advertising or promotional breaks on a daily basis.  The research, based on the findings from the Video Consumer Mapping study sponsored by the Council for Research Excellence, is the largest and most extensive observational study of media usage ever conducted.  The research that asserts 86% of viewers remain with live TV during commercials is also a finding consistent with previously disclosed Nielsen data.  According to Horst Stipp, NBC Universal's Senior Vice President for Strategic Insights & Innovation, "Until now, we did not have any solid data on viewers' behavior during commercials.  This study fills that gap and shows that viewers pay more attention to commercials than most people assumed."

 

Broadcasting business model provides for attractive operating leverage

As noted, Fisher's TV margins are less than desirable but the operating leverage of the business model is among the best of any industry.  In 2008, over 67% of incremental revenue flowed to BCF in the TV segment.  But operating leverage of course works both ways as evidenced recently at Fisher.  In 2009, the Company's TV revenue declined by $26.8M, mostly related to the Presidential political cycle in 2008 which generated $17.4M more of political advertising revenue in 2008 versus 2009.  In 2009, when Fisher's revenue declined by $26.8M, its BCF declined by $25.5M.  This year, most industry analysts expect local TV stations to grow top-line by at least 20% and I have assumed Fisher grows its TV revenue by 20% in 2010.  In Q1, Fisher grew top-line by over 31%.  With this rebound in revenue, the BCF flow-through should be consistently attractive as in past years.  I assume Fisher's BCF margin improves to 20% for the year, which represents 68% margin on incremental revenue in 2010. 

 

Fisher's TV market share gaining

Despite the impact of reduced advertiser spending and BCF margin that is underwhelming, Fisher's overall station revenue consistently gained share in most of the recent quarters.  There are only two ways to grow share and that is by growing ratings and/or taking revenue from the competition.  Management says they are doing both.  During the most recent quarter, management said that Fisher's TV stations ranked either first or second in the key Adult 25-54 demographic in early news in six of seven markets in the February 2010 ratings period.  Furthermore, the Company's aggregate TV/radio market share increased 130 basis points versus the prior year first quarter.  Assuming the Company maintains or improves ratings momentum, this should translate into more airtime inventory being sold and at relatively strong CPM rates.

 

Strong current scatter market implies upfront for broadcast network television will likely be strong

While the annual upfront TV ad-selling season should be viewed as only one indicator of the health of the broadcast market, it is an important barometer and is expected to be very strong across inventory and pricing.  Industry analysts currently forecast that the 2010-2011 upfront market will result in advertising revenue for the broadcast networks being up 15-20% higher than 2009.  Although such growth would bring the total back to roughly the 2008 level, before the recession took its toll, the return of growth coupled with increased cost discipline / containment should yield substantial growth in BCF across the broadcast sector.  Among the catalysts that will drive advertisers to secure more commercial airtime at a higher price during this year's upfront is the recent strength of the scatter market which has been running 20-30% higher than the rates networks obtained during last year's upfront, thereby auguring more demand and possibly higher prices.  Although the local TV station does not directly benefit from the broadcast network upfront, its strength has historically been highly correlated to that which ultimately transpires across the local TV affiliate landscape.

 

Retransmission compensation:  100% margin monetary compensation for television broadcast signals 

The largest driver of improved economics for the TV station industry has been the move towards retransmission compensation.  There have been well-documented confrontations between different station groups and the distributors, primarily the cable systems (i.e., MSOs) but also satellite / telco providers, which captures the ongoing battle of content versus distribution. For the time-being, the content providers have tipped the balance of power and station groups have been extracting fees from the distributors to transmit the station's broadcast signal/programming.  Although there are good arguments that some of the current fees being negotiating are still too low, when compared to cable network carriage fees, the fact that any fee is being received is a relatively new revenue stream and comes to the station group at 100% margin.  There is of course much G&A expense/time that goes into the negotiations but I don't think there's any incremental cost to the fixed infrastructure.  Fisher recorded $2.6M of retransmission consent revenue in the latest quarter, up over 40% relative to the prior year's first quarter.

 

The underpinnings of must-carry remain firm.  The Supreme Court recently declined to hear the MSO-coordinated attack, let by Cablevision, against broadcast must-carry obligations, thereby leaving the 1992 rule intact.  Unlike larger station ownership groups, Fisher is small versus the cable MSOs it negotiates against and hence the Company lacks the credible "power" to threaten its market distributors in pulling its signal for an extended period of time.  That being said, Fisher did engage in a dispute with DISH Network and pulled its signal from December 2008 through June 2009 until the retrans consent issue was resolved between the two parties. 

 

Some might deem it a risk that the broadcast networks have taken a hard public stance about the need to obtain "reverse retrans" dollars from their affiliates.  The network executives argue that affiliates are accruing retrans dollars by virtue of the broadcaster's investment in high profile content.  Whereas the notion of reverse retrans might be deemed a dislocation for some larger station groups, Fisher could reap a net benefit, for example, if it were to allow ABC to negotiate on its behalf in Seattle and Portland.  It makes sense for smaller station groups to allow the parent broadcast network owner to take advantage of pooling affiliate markets, with the top DMAs owned by networks, to enhance the balance of power versus distributors that comes with greater scale and scope.  The other critical variable for dimensioning the impact of reverse retrans is how the fee is split between the affiliate station and the broadcast network.  The networks have and will continue to take the position that it is their primetime and sports content (and not the station's local news and syndicated content) that creates the value from retrans fees.  I think the more relevant negotiating issue will ultimately be the number of affiliate stations being included in the pooled negotiation and for this reason I think Fisher could receive a smaller percentage relative to a larger station group but ultimately benefit with an incrementally larger fee than negotiating on its own.    

 

The broadcasting industry is a big beneficiary of increased auto spending

"As GM goes, so goes the nation" was an observation made many decades ago but it is more of a stark reality for the local broadcasters.  Among the risks to the local TV and radio broadcasters is the substantial influence of auto advertising to results.  Exposures to auto advertising varies widely across media and is the highest category for TV stations, despite its decline from 28% of the total TV station advertising in 2007 to less than 19% in 2009, and also substantial for radio stations, at 14%.  In 2008, auto advertising declined by 17%, with TV stations incurring the bulk of the decline (33%), and in 2009, auto advertising declined by over 20% from 2008.  However, that bad news is already more than reflected in Fisher's stock price which has declined by 55% since the end of 2007 versus the S&P 500's 26% decline.  I do not think the market is adequately discounting the recent and anticipated rebound from the automotive category spending at Fisher. 

 

The automotive advertising category on local television largely tracks the trend in U.S. auto sales.  Over the past seven years, auto advertising per car sold has been relatively stable, averaging ~$1,200 with a standard deviation below 5%.  Advertising, and especially visual campaigns on television, is a critical driver in building brand and driving dealership traffic.  While auto sales have returned to positive territory, the recovery still appears to be in early stages which could provide the basis for renewed auto advertising over the next several years.  Auto sales in 2009 were 38% below 2005.  At 10.4M annual units, auto sales were at their lowest level since the 1982 recession.  On May 20th, J.D. Power raised its forecast for total U.S. light-vehicle sales in 2010 to 11.8M.  Total sales for May 2010 will be 11.3M units on a seasonally adjusted annualized rate (SAAR), up from 9.8M in May 2009.  After light-vehicle sales of more than 16M units from 1999-2008, the J.D. Power sales forecast for 2010 is consistent with industry consensus for a slow, steady recovery from the recession.

 

In the near-term, advertising across the automotive category is expected to be robust, largely rebounding from the abysmal spending by the auto category in the prior two years, and Fisher and its broadcasting peers will benefit.  The rebound in auto advertising following the last two recessions was 31% in 1993 and 16% in 2002.  In fact, as evidence of its strong year-over-year advertising growth in the automotive category, Fisher recently reported its automotive category grew 55% in Q1 and 14% in Q4 (Fisher's Q4 automotive category was better than the overall local TV industry which was down 10%).  Since the Company will anniversary easy automotive comps in Q2 and Q3 (at down 58% in Q2 and down 31% in Q3) and more importantly the highly-correlated SAAR estimate continues to rise, one can expect continued strength from the automotive category this year. 

 

Political advertising will surge in 2010

Political spending can be volatile but given the rising intensity of political issues and the drive for political change, this year's mid-term election should be very strong.  The strength in political advertising will be fueled by almost 40 senatorial races, over 30 gubernatorial races, the House of Representatives election cycle, and issue advertising.  The Republican National Committee is looking at ~130 House seats as potentially competitive, almost entirely all with Democratic incumbents.  Top Republicans, including House Minority Leader John Boehner of Ohio, have said that as many as 100 seats are in play. 

 

The factors impacting the 2010 forecast are similar to those that made the 2006 a record year for political advertising.  This included a large number of gubernatorial races and congressional elections confronting declining Presidential and congressional approval ratings as well as numerous contentious issues.  Both the TV and radio broadcasting industries are beneficiaries of political advertising.  According to management at Belo, over 70% of all political advertising dollars were captured by local TV stations in 2008.   

 

With a number of key races in play across the states Fisher serves, management expects political spending to be strong.  Furthermore, with the U.S. Supreme Court's decision in the case of Citizens United v. Federal Election Commission on January 21, 2010, restrictions on corporate spending for Federal candidate elections were lifted, thereby enabling unrestricted corporate and labor union political advertising during election seasons.  The strength in political advertising should drive CPM pricing higher, which is 100% throughput-margin.  

 

Some specific political races in Fisher's most important broadcasting markets-Washington and Oregon:

  • Former Washington Redskins player Clint Didier is representing the Tea Party and hopes to win Washington's Republican primary and challenge Senator Patty Murray for her seat in November's general election
  • Both the 3rd (includes some of suburban Olympia and Vancouver) and 8th (includes some of suburban Seattle) Congressional Districts are being contested for the House
  • The gubernatorial race in Oregon could become more profitable for FSCI, as third party/independent candidates are considering running for office after the recent primary wins by former Governor John Kitzhaber in the Democratic primary and by political newcomer and former Portland Trail Blazer Chris Dudley won the Republican primary
  • All five of Oregon's congressmen are running for re-election this year, and the emotional politics of 2010 have generated an array of challengers

 

Governance has been very poor historically but is improving

Over a year ago, Mario Gabelli (whose fund GAMCO owns ~26% of FSCI) pursued Board representation to confront what he said was "poor corporate governance" by both the Board and management for not quickly disclosing an unsolicited bid for the Company.  He also criticized Fisher's use of cash in acquiring two TV stations in Bakersfield (CA) in 2008 for $55M.  TowerView (~9% ownership), which is run by Daniel Tisch, was also a vocal proponent for change.  In the absence of these Board representatives, I would be reluctant to own Fisher's stock given questionable historical governance.

 

In the summer of 2008, after Fisher spurned its undisclosed suitor, Lorber fired off a letter of protest to Fisher executives, complaining about the Company's leadership and performance.  Lorber complained about Fisher spending $100M on acquisitions "that have added limited to no value" and about "archaic governance policies, which promote entrenchment."       

 

Without going into too much detail, governance has substantially improved.  In 2008, the Company paid a $3.50 special dividend.  Management has improved transparency in its financial releases through more relevant insights and segment data.  Management's compensation is 53-60% variable, for the top four executives, based on achieving incentive targets that are primarily weighted to an EBITDA target.  In 2009, the target was $26M and was not achieved.  Although I would like to see more ownership by management (total officers/directors totaled 3% in the last proxy), options outstanding, at an average strike of ~$27, represent less than 5% of total outstanding shares. 

 

Recent insider buying by three Company Directors

Although there is are a variety of good reasons that insiders might sell a stock, there is only one reason why insiders buy stock in the absence of a company having ownership guideline/requirements.  Fisher Communications does not have any ownership requirements.  During the month of May, three Directors purchased stock totaling ~$809,000 for prices ranging from $14-17.  Director David Lorber's stock purchase comprised over 95% of the recent stock purchased.  Lorber is a co-founder and Portfolio Manager of FrontFour Capital Group, an event-driven hedge fund.  Stock was also purchased by Directors Michael Wortsman (non-executive Chairman) and Paul Bible.  Both Lorber and Bible were nominated by GAMCO Asset Management (FSCI"s largest shareholder) and appointed as directors in April 2009.

 

 

Well-positioned to address market evolution as consumers increasingly turn to emerging channels such as mobile devices and online delivery for more personalized news and entertainment

Since August 2009, the Company has launched over 100 hyperlocal websites, each focused on news, information and entertainment specific to an individual geographic neighborhood within the Seattle-Tacoma, Portland, Eugene, Bakersfield and Boise market areas.  The sites provide local communities with added coverage of locally-focused news and stories that would not otherwise appeal to the broader audiences reached by Fisher's television and radio stations.  Fisher's hyperlocal initiative is a critical component of management's broadcast-to-broadband efforts.  Although it's currently just a small part of the Company's business, the revenue being generated is an entirely new revenue source at Fisher.  Initial traction is very strong as evidenced by over 1,000 paying "neighborhood" advertisers in less than one year.

 

Fisher is perceived among the broadcasting industry's leaders for integrating "new media" into its business model.  Given the Seattle headquarter location, it should come as little surprise that there is much talent in the surrounding area to develop and implement the new media strategy.  Furthermore, the Company's Board includes Brian McAndrews who led Microsoft's Advertiser and Publisher Solutions Group after serving as the CEO of aQuantive, a global digital marketing company acquired by Microsoft.  For almost a decade prior to leading aQuantive, McAndrews held senior leadership positions at ABC Network.

 

Selected Risk Considerations

 

For decades, owning television stations was "a license to print money" but the growth of alternatives, including cable and broadband, has lured away TV viewers and made stations less profitable

There has been a long-term erosion of viewership from broadcast to cable networks but it appears to have stabilized at ~30% for broadcast networks. 

 

FCC plan for broadcasters to give up some of their rights to the public airwaves

The FCC has said it needs 120 megahertz of spectrum currently allocated to TV stations to enable faster mobile devices and better broadband service.  The FCC wants TV stations to voluntarily hand-over the rights to some of their airwaves, which the FCC would then auction to telecommunications firms, sharing the proceeds with the broadcasters.  Depending on the amount of proceeds, this could be a positive catalyst but the absence of much control, despite the current efforts of the broadcasting industry coalition, makes this a risk of losing ownership of spectrum that could be more attractive than the "value" the government assigns to it.

 

Employment trends remain in doubt

Advertising growth is significantly influenced by trends in non-farm payrolls and retail sales, two areas of macro and fundamental concern and also therefore where my portfolio is positioned net short.  As for unemployment in Fisher's two key markets, the rate has improved sequentially in Seattle to 9.0% (below the national 9.9%) but is up year-over-year from 8.6%; the rate has improved year-over-year in Portland to 10.6% from 11.5% and has been at the same rate for the past six months.

 

Broadcasting business is primarily based on advertising

Although there are improvements to the mix of revenue towards retransmission compensation and some diversification from traditional broadcasting advertising to internet advertising, the business model is still primarily advertising-driven which is cyclical and skewed to short lead times in the local broadcast business.

 

Reverse retrans considerations

As described above in the bullish arguments, this issue might be a positive from the perspective of how much more the network could likely extract for the benefit of its station affiliates if the network were to form a coalition of its affiliates.  However, there is also a risk regarding the network extracting a disproportionate amount of the fee based on its balance of power and the arguments it increasingly makes regarding affiliates paying for network programming.

 


Catalyst

Selected Catalysts

  • Strong pricing in scatter/spot market compounded by strength of political advertising in 2010, and especially 2012
  • Margin improvements from current below-average margin performance
  • Continued strength in ratings which typically translates to higher inventory sell-out/pricing
  • Sale of parts (real estate, radio, TV stations) that elevate visibility of valuation discount, or of whole Company (unsolicited offer made in summer of 2008 for $43-45; in 2002, the Board retained Goldman Sachs to seek buyers but rejected two offers as inadequate)
  • Increased advocacy for change, likely led by GAMCO and TowerView, if margins don't improve
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    Description

    Fisher Communications ("FSCI") is an attractive long investment opportunity with attractive downside protection and substantial upside potential.  Although I do not envision the stock reaching $43-45 that was reportedly offered to buy the Company in mid-2008, there are several scenarios that drive my conviction that a current investment in FSCI could generate a return of more than 70% within two years, based on a $26 price target.  As for downside protection, TBV was recently reported at ~$11.25 per share but I adjust this to ~$13 based on the $10M tax refund received in April plus an expected insurance claim of over $4M.  The confidence projected by three insiders who recently bought over $800,000 of stock is consistent with my bullish thesis.

    Seattle-based Fisher Communications traces its roots back to 1910 when the Company began as a flour mill operator.  The Company now owns and operates thirteen full-power television stations (including a 50%-owned television station), seven low-power television stations, eight radio stations in the Western United States, and Fisher Plaza.

    The television and radio stations are located in Washington, Oregon, California, Idaho and Montana.   The Company's television stations reach 4.1M households (or ~3.5% of U.S. television households) and Fisher's two largest markets are Seattle (DMA #13) and Portland (DMA #22) and both are duopolies with ABC and Univision affiliates.  The Seattle and Portland television operations accounted for over 60% of Company television revenue in 2009.  As for competition, in Seattle, the CBS affiliate is owned by Cox Enterprieses, the NBC affiliate is owned by Belo, and the FOX affiliate is owned by Tribune.  In Portland, the CBS affiliate is owned by New Vision Television, the NBC affiliate is owned by Belo, and the FOX affiliate is owned by Meredith.

    Fisher's other TV stations are a mix of CBS, FOX, and Univision affiliates that are located in Boise, Idaho; Eugene/Coos Bay, Oregon; Bakersfield, CA; Yakima/Pasco/Richland, Washington; and Idaho Falls-Pocatello, Idaho (Designated Market Areas 112/119/125/126/162).  The most recent addition to Fisher's television portfolio is the Bakersfield market, a duopoly of CBS/FOX affiliates, purchased for $55M in January 2008.  For the local news broadcast segment, a critical time period for generating ratings and revenue, all Fisher television stations but one achieved either the first or second market ranking during 2009. 

    In Seattle, the 13th largest radio market in the U.S., Fisher owns and operates three radio stations.  The other five stations are operated in Great Falls, Montana.  Given the disproportionate value that exists within the TV segment and Fisher Plaza, I will not allocate much time framing the radio business which historically suffered from a burdensome contract with the Seattle Mariners that has since expired.  Although there are some synergies associated with the radio and television operations in Seattle, the Company's eight stations do not provide the requisite scale to derive the typical broadcast cash flow (BCF) margins, ranging from 25-40%, achieved by other radio broadcast operators.  Two of the three Seattle stations are news radio format (incl FOX News) programmed on AM.  In the past two years, adjusted to exclude the Mariners contract, the Company's radio BCF margin was 18-22%. 

    Although I have not yet reconciled why the Company did not divest its Great Falls radio portfolio (it could be low tax base issue), in May 2006, the Company announced the divestiture of twenty-four small market radio stations in Montana and eastern Washington for over $33M.  The radio broadcasting industry is more consolidated than the TV landscape and I anticipate that consolidation will continue.  In fact, the second largest radio broadcaster-Cumulus-recently announced its intention to pursue such consolidation.  On April 7, 2010, Cumulus announced a strategic investment partnership with Crestview Partners, a $4B private equity firm with a strong media focus.  The objective of the partnership is to pursue investments in radio broadcasting companies.  The partnership aims to use equity financing of up to $500M coordinated by Crestview.  As also evidenced by the pending going-private transaction at radio broadcaster Emmis Communications, there is appetite for acquiring radio stations. 

    Although I think there is a likely scenario in which all of Fisher Communications is acquired, I think there is a high likelihood that, at the very least, the radio segment is sold.  I estimate the radio segment will generate ~$4M of BCF, on average, in the each of the next three years, similar to that which was generated in 2009 but less than the more than $6M generated in 2008.  I assign a value of $32M (i.e., 8x) for Fisher's radio business.  For context, note that in August 2009, CBS sold four Portland stations (a smaller market than Seattle) for $40M.

    The FCC "awards licenses to television and radio to use the airwaves expressly on the condition that licenses serve the public interest and licenses are responsive to the needs of the local community".  It has been said that "owning a television station is a license to print money" but the fortunes of station owners have confronted numerous challenges in the past few years.  Despite the many challenges, including ratings eclipsed by cable network viewership, DVRs that marginalize TV advertising appeal, and the decline in advertising from the critical auto category sector, most TV stations still enjoy attractive free cash flow margins. 

    The primary driver of TV stations is local advertising which is typically purchased on a short-term basis and is more skewed to the auto, retail and financial sectors.  This exacerbated the downturn but also provides the opportunity for a stronger cyclical rebound.  Last year was exceptionally challenging for the U.S. advertising industry, as the ~14% decline was the steepest in over sixty years.  The worst economic downturn since World War II is evidenced by advertising revenue consecutively down at TV and radio stations in the past three years.  TV stations recorded a decline of 5% in 2007, a decline of 7% in 2008, and a decline of 19% in 2009.  Radio stations recorded a decline of 3% in 2007, a decline of 8% in 2008, and a decline of 16% in 2009.  Over this period, Fisher's TV and radio stations performed better than the overall industry in 2007, their TV stations outperformed in 2008, and both TV and radio underperformed the overall industry in 2009.        

    A key component of the downside protection is the asset value that can be ascribed to Fisher Plaza, a 300,000 square foot building the Company owns that includes a data center and is located near downtown Seattle.  During the Spring of 2008, the Company announced an intention to sell Fisher Plaza but the timing of the intended sale could not have been much worse and during the Spring of 2009, management decided to pull the property off the market.  Although it has been reported that there were six interested buyers of the property, the value was unattractive to the Board and management and they questioned whether financing would ultimately be made available for those buyers expressing interest.  The credit markets have substantially improved from 12-24 months ago and although the Company is not actively engaged in selling the property, it is a highly likely liquidity event at the right price. 

    Fisher Plaza was completed in the summer of 2003 and had a net book value of ~$109M at the end of 2009.  It is considered to be one of the "premier technical facilities in the region."  Occupancy, which included Fisher's Seattle broadcasting operations and the Company's corporate offices, was 97% at the end of 2009.  The Company occupies ~40% of the building with its broadcast facilities and corporate offices.  As part of management's efforts to maximize operational efficiencies and Plaza profitability, management recently integrated the corporate offices into the Company's Seattle broadcast operations.  This added ~8,500 rentable square feet now available for lease and therefore occupancy decreased to 95% at the end of Q1 2010.  In 2009, Fisher Plaza reported segment EBITDA of ~$9.6M, up from $8.6M in 2008.  In the absence of a "fire sale", it seems that Fisher Plaza is worth at least 90%, or $98M, of its reported net book.  Speaking of "fire", the Plaza incurred a fire last summer and incurred ~$6.8M in remediation and equipment replacement expense related to the fire.  There is ~$4.3M yet to be reimbursed by insurance and I have not identified any reason all of this will not be paid; I adjust the balance sheet accordingly.

    Fisher ended Q1 with $122M of debt (specifically 8.625% Senior Notes due 2014).  In April 2010, the Company received ~$10M of cash from a tax refund, thereby adding to the $44.2M of cash on the balance sheet at the end of Q1.  In May 2010, the Company repurchased $7.4M aggregate principal amount of those Senior Notes for ~$7.3M in cash.  Not adjusting for any of the cash that has most likely been generated already this quarter but adjusting for the $4.3M of insurance claim noted above, the Company's current net debt is ~$63M.  Based on Fisher's closing price at $15.19, I estimate that an investor is currently buying Fisher's TV business for just $66M as described below.

    Current shares outstanding:       8.78M

    Current stock price:                  $15.19

    Current equity value:                 $133M

    Net debt:                                  $63M

    Enterprise value:                       $196M

    Adjustments:

    Radio (as described)                 $32M

    Fisher Plaza (as described)       $98M

    Implied TV Enterprise:          $67M   

     

    It is fine if you don't agree with my assumptions above since I think even if the radio business were accorded zero value, an investor should find the implied television valuation to be attractive for stations that generated a three-year average (2006-2008) BCF of $30.7M.  Note that 2009 BCF for Fisher's TV segment was just $10.1M, an extremely pathetic outcome.  Although one can ascribe much of this to the economic challenges of 2009, the 10.4% BCF in 2009 is among the worse in the peer group and the 24%-29% generated by Fisher in 2006-2008 is also poor relative to the peer group.  Recent results have improved to 11.9% BCF margin in Q1 2010 from just 1.2% in Q1 2009 but there are some concerns about management applying similar rigors of cost containment and discipline relative to its peers.  There are some scale disadvantages at Fisher since other station groups have a much larger portfolio but there is a lingering concern regarding the quality of management when framed by a relative margin analysis.  Nevertheless, I don't think 2009 BCF is the appropriate metric and estimate that Fisher can generate at least an average of $26.2M of BCF in 2010-2012.  This assumes BCF margin reaches only 25% in 2012 when the political advertising landscape will be quite robust.  I know that most other station groups assert their BCF margin would be over 30% if they were operating Fisher.

    Using the $26.2M average BCF, the current Fisher stock price implies ~2.5x BCF for the Company's television operations.  However, I failed to address unallocated overhead to this calculation so arguably I am being aggressive but I wanted to first frame it this way since I think it is highly likely that Fisher will ultimately be acquired (remember that just two years ago, an unsolicited offer was made at $43-45) and acquirers, especially those that are strategic, focus on BCF multiples since the corporate overhead is almost all redundant.  Nevertheless, if one assumes the unallocated overhead, ~$10.4M of corporate overhead, burdens the valuation, I frame the potential sum-of-the-parts valuation of FSCI as follows:

     

    Assuming TV BCF of $26.2M at Various BCF Multiples:          7x                    8x                    9x                    10x

    Implied Value of Fisher TV Segment:                            $183                $210                $236                $262   

    Reduction for Unallocated Corp at 6x:                          (62)                  (62)                  (62)                  (62)

    Estimated Value of Fisher Radio Segment:                               32                    32                    32                    32

    Estimated Value of Fisher Plaza:                                                 98                    98                    98                    98

    Net Debt:                                                                                  (63)                  (63)                  (63)                  (63)

    Implied Equity:                                                                        $188                $215                $241                $267

    Implied Price per Share:                                                         $21.50             $24.50             $27.50             $30.50

     

    If one assumes that management can drive TV BCF back to $30.7M, the implied price per share, at 8.5x TV BCF, would be $30.25.  I prefer being conservative and use the $26.2M and 8.5x to arrive at $26.  As for downside protection, the Company's tangible book value, which is primarily based on Fisher Plaza, is almost $13 (inclusive of the $10M tax refund received in April and the anticipated $4.3M insurance claim).  

    Below I highlight some of the bullish arguments as well as risk considerations and selected catalysts.

     

    Selected Bullish Arguments

     

    Local television remains a viable advertising channel

    While one should not argue that "traditional" media, and especially broadcasting, confronts structural, secular, and cyclical challenges, such issues are well-documented.  Moreover, the severity and velocity of the downturn in the economy disguised the fact that in most cases, most forms of traditional media, and especially TV broadcasting, remains a viable advertising channel.  That's among the conclusions of a new STRATA (leading provider of media buying/selling software) quarterly survey of advertising firms, which shows that while more dollars are moving to digital advertising, corporations continue to spend the majority of their ad budgets on television (note this include broadcast/cable networks and TV stations).  TV remained the top advertising choice in Q1, with ~42% of ad agencies saying their corporate clients are more focused on TV than any other medium. 

     

    Contrary to the current conventional view, TV viewership is at record levels, at ~8.5 hours per day.  Moreover, most adults are exposed, on average, to over seventy minutes of live TV commercials or promotions on a daily basis.  TV advertising and program promotions reach 85% of adults daily and viewers typically see over 25 advertising or promotional breaks on a daily basis.  The research, based on the findings from the Video Consumer Mapping study sponsored by the Council for Research Excellence, is the largest and most extensive observational study of media usage ever conducted.  The research that asserts 86% of viewers remain with live TV during commercials is also a finding consistent with previously disclosed Nielsen data.  According to Horst Stipp, NBC Universal's Senior Vice President for Strategic Insights & Innovation, "Until now, we did not have any solid data on viewers' behavior during commercials.  This study fills that gap and shows that viewers pay more attention to commercials than most people assumed."

     

    Broadcasting business model provides for attractive operating leverage

    As noted, Fisher's TV margins are less than desirable but the operating leverage of the business model is among the best of any industry.  In 2008, over 67% of incremental revenue flowed to BCF in the TV segment.  But operating leverage of course works both ways as evidenced recently at Fisher.  In 2009, the Company's TV revenue declined by $26.8M, mostly related to the Presidential political cycle in 2008 which generated $17.4M more of political advertising revenue in 2008 versus 2009.  In 2009, when Fisher's revenue declined by $26.8M, its BCF declined by $25.5M.  This year, most industry analysts expect local TV stations to grow top-line by at least 20% and I have assumed Fisher grows its TV revenue by 20% in 2010.  In Q1, Fisher grew top-line by over 31%.  With this rebound in revenue, the BCF flow-through should be consistently attractive as in past years.  I assume Fisher's BCF margin improves to 20% for the year, which represents 68% margin on incremental revenue in 2010. 

     

    Fisher's TV market share gaining

    Despite the impact of reduced advertiser spending and BCF margin that is underwhelming, Fisher's overall station revenue consistently gained share in most of the recent quarters.  There are only two ways to grow share and that is by growing ratings and/or taking revenue from the competition.  Management says they are doing both.  During the most recent quarter, management said that Fisher's TV stations ranked either first or second in the key Adult 25-54 demographic in early news in six of seven markets in the February 2010 ratings period.  Furthermore, the Company's aggregate TV/radio market share increased 130 basis points versus the prior year first quarter.  Assuming the Company maintains or improves ratings momentum, this should translate into more airtime inventory being sold and at relatively strong CPM rates.

     

    Strong current scatter market implies upfront for broadcast network television will likely be strong

    While the annual upfront TV ad-selling season should be viewed as only one indicator of the health of the broadcast market, it is an important barometer and is expected to be very strong across inventory and pricing.  Industry analysts currently forecast that the 2010-2011 upfront market will result in advertising revenue for the broadcast networks being up 15-20% higher than 2009.  Although such growth would bring the total back to roughly the 2008 level, before the recession took its toll, the return of growth coupled with increased cost discipline / containment should yield substantial growth in BCF across the broadcast sector.  Among the catalysts that will drive advertisers to secure more commercial airtime at a higher price during this year's upfront is the recent strength of the scatter market which has been running 20-30% higher than the rates networks obtained during last year's upfront, thereby auguring more demand and possibly higher prices.  Although the local TV station does not directly benefit from the broadcast network upfront, its strength has historically been highly correlated to that which ultimately transpires across the local TV affiliate landscape.

     

    Retransmission compensation:  100% margin monetary compensation for television broadcast signals 

    The largest driver of improved economics for the TV station industry has been the move towards retransmission compensation.  There have been well-documented confrontations between different station groups and the distributors, primarily the cable systems (i.e., MSOs) but also satellite / telco providers, which captures the ongoing battle of content versus distribution. For the time-being, the content providers have tipped the balance of power and station groups have been extracting fees from the distributors to transmit the station's broadcast signal/programming.  Although there are good arguments that some of the current fees being negotiating are still too low, when compared to cable network carriage fees, the fact that any fee is being received is a relatively new revenue stream and comes to the station group at 100% margin.  There is of course much G&A expense/time that goes into the negotiations but I don't think there's any incremental cost to the fixed infrastructure.  Fisher recorded $2.6M of retransmission consent revenue in the latest quarter, up over 40% relative to the prior year's first quarter.

     

    The underpinnings of must-carry remain firm.  The Supreme Court recently declined to hear the MSO-coordinated attack, let by Cablevision, against broadcast must-carry obligations, thereby leaving the 1992 rule intact.  Unlike larger station ownership groups, Fisher is small versus the cable MSOs it negotiates against and hence the Company lacks the credible "power" to threaten its market distributors in pulling its signal for an extended period of time.  That being said, Fisher did engage in a dispute with DISH Network and pulled its signal from December 2008 through June 2009 until the retrans consent issue was resolved between the two parties. 

     

    Some might deem it a risk that the broadcast networks have taken a hard public stance about the need to obtain "reverse retrans" dollars from their affiliates.  The network executives argue that affiliates are accruing retrans dollars by virtue of the broadcaster's investment in high profile content.  Whereas the notion of reverse retrans might be deemed a dislocation for some larger station groups, Fisher could reap a net benefit, for example, if it were to allow ABC to negotiate on its behalf in Seattle and Portland.  It makes sense for smaller station groups to allow the parent broadcast network owner to take advantage of pooling affiliate markets, with the top DMAs owned by networks, to enhance the balance of power versus distributors that comes with greater scale and scope.  The other critical variable for dimensioning the impact of reverse retrans is how the fee is split between the affiliate station and the broadcast network.  The networks have and will continue to take the position that it is their primetime and sports content (and not the station's local news and syndicated content) that creates the value from retrans fees.  I think the more relevant negotiating issue will ultimately be the number of affiliate stations being included in the pooled negotiation and for this reason I think Fisher could receive a smaller percentage relative to a larger station group but ultimately benefit with an incrementally larger fee than negotiating on its own.    

     

    The broadcasting industry is a big beneficiary of increased auto spending

    "As GM goes, so goes the nation" was an observation made many decades ago but it is more of a stark reality for the local broadcasters.  Among the risks to the local TV and radio broadcasters is the substantial influence of auto advertising to results.  Exposures to auto advertising varies widely across media and is the highest category for TV stations, despite its decline from 28% of the total TV station advertising in 2007 to less than 19% in 2009, and also substantial for radio stations, at 14%.  In 2008, auto advertising declined by 17%, with TV stations incurring the bulk of the decline (33%), and in 2009, auto advertising declined by over 20% from 2008.  However, that bad news is already more than reflected in Fisher's stock price which has declined by 55% since the end of 2007 versus the S&P 500's 26% decline.  I do not think the market is adequately discounting the recent and anticipated rebound from the automotive category spending at Fisher. 

     

    The automotive advertising category on local television largely tracks the trend in U.S. auto sales.  Over the past seven years, auto advertising per car sold has been relatively stable, averaging ~$1,200 with a standard deviation below 5%.  Advertising, and especially visual campaigns on television, is a critical driver in building brand and driving dealership traffic.  While auto sales have returned to positive territory, the recovery still appears to be in early stages which could provide the basis for renewed auto advertising over the next several years.  Auto sales in 2009 were 38% below 2005.  At 10.4M annual units, auto sales were at their lowest level since the 1982 recession.  On May 20th, J.D. Power raised its forecast for total U.S. light-vehicle sales in 2010 to 11.8M.  Total sales for May 2010 will be 11.3M units on a seasonally adjusted annualized rate (SAAR), up from 9.8M in May 2009.  After light-vehicle sales of more than 16M units from 1999-2008, the J.D. Power sales forecast for 2010 is consistent with industry consensus for a slow, steady recovery from the recession.

     

    In the near-term, advertising across the automotive category is expected to be robust, largely rebounding from the abysmal spending by the auto category in the prior two years, and Fisher and its broadcasting peers will benefit.  The rebound in auto advertising following the last two recessions was 31% in 1993 and 16% in 2002.  In fact, as evidence of its strong year-over-year advertising growth in the automotive category, Fisher recently reported its automotive category grew 55% in Q1 and 14% in Q4 (Fisher's Q4 automotive category was better than the overall local TV industry which was down 10%).  Since the Company will anniversary easy automotive comps in Q2 and Q3 (at down 58% in Q2 and down 31% in Q3) and more importantly the highly-correlated SAAR estimate continues to rise, one can expect continued strength from the automotive category this year. 

     

    Political advertising will surge in 2010

    Political spending can be volatile but given the rising intensity of political issues and the drive for political change, this year's mid-term election should be very strong.  The strength in political advertising will be fueled by almost 40 senatorial races, over 30 gubernatorial races, the House of Representatives election cycle, and issue advertising.  The Republican National Committee is looking at ~130 House seats as potentially competitive, almost entirely all with Democratic incumbents.  Top Republicans, including House Minority Leader John Boehner of Ohio, have said that as many as 100 seats are in play. 

     

    The factors impacting the 2010 forecast are similar to those that made the 2006 a record year for political advertising.  This included a large number of gubernatorial races and congressional elections confronting declining Presidential and congressional approval ratings as well as numerous contentious issues.  Both the TV and radio broadcasting industries are beneficiaries of political advertising.  According to management at Belo, over 70% of all political advertising dollars were captured by local TV stations in 2008.   

     

    With a number of key races in play across the states Fisher serves, management expects political spending to be strong.  Furthermore, with the U.S. Supreme Court's decision in the case of Citizens United v. Federal Election Commission on January 21, 2010, restrictions on corporate spending for Federal candidate elections were lifted, thereby enabling unrestricted corporate and labor union political advertising during election seasons.  The strength in political advertising should drive CPM pricing higher, which is 100% throughput-margin.  

     

    Some specific political races in Fisher's most important broadcasting markets-Washington and Oregon:

    • Former Washington Redskins player Clint Didier is representing the Tea Party and hopes to win Washington's Republican primary and challenge Senator Patty Murray for her seat in November's general election
    • Both the 3rd (includes some of suburban Olympia and Vancouver) and 8th (includes some of suburban Seattle) Congressional Districts are being contested for the House
    • The gubernatorial race in Oregon could become more profitable for FSCI, as third party/independent candidates are considering running for office after the recent primary wins by former Governor John Kitzhaber in the Democratic primary and by political newcomer and former Portland Trail Blazer Chris Dudley won the Republican primary
    • All five of Oregon's congressmen are running for re-election this year, and the emotional politics of 2010 have generated an array of challengers

     

    Governance has been very poor historically but is improving

    Over a year ago, Mario Gabelli (whose fund GAMCO owns ~26% of FSCI) pursued Board representation to confront what he said was "poor corporate governance" by both the Board and management for not quickly disclosing an unsolicited bid for the Company.  He also criticized Fisher's use of cash in acquiring two TV stations in Bakersfield (CA) in 2008 for $55M.  TowerView (~9% ownership), which is run by Daniel Tisch, was also a vocal proponent for change.  In the absence of these Board representatives, I would be reluctant to own Fisher's stock given questionable historical governance.

     

    In the summer of 2008, after Fisher spurned its undisclosed suitor, Lorber fired off a letter of protest to Fisher executives, complaining about the Company's leadership and performance.  Lorber complained about Fisher spending $100M on acquisitions "that have added limited to no value" and about "archaic governance policies, which promote entrenchment."       

     

    Without going into too much detail, governance has substantially improved.  In 2008, the Company paid a $3.50 special dividend.  Management has improved transparency in its financial releases through more relevant insights and segment data.  Management's compensation is 53-60% variable, for the top four executives, based on achieving incentive targets that are primarily weighted to an EBITDA target.  In 2009, the target was $26M and was not achieved.  Although I would like to see more ownership by management (total officers/directors totaled 3% in the last proxy), options outstanding, at an average strike of ~$27, represent less than 5% of total outstanding shares. 

     

    Recent insider buying by three Company Directors

    Although there is are a variety of good reasons that insiders might sell a stock, there is only one reason why insiders buy stock in the absence of a company having ownership guideline/requirements.  Fisher Communications does not have any ownership requirements.  During the month of May, three Directors purchased stock totaling ~$809,000 for prices ranging from $14-17.  Director David Lorber's stock purchase comprised over 95% of the recent stock purchased.  Lorber is a co-founder and Portfolio Manager of FrontFour Capital Group, an event-driven hedge fund.  Stock was also purchased by Directors Michael Wortsman (non-executive Chairman) and Paul Bible.  Both Lorber and Bible were nominated by GAMCO Asset Management (FSCI"s largest shareholder) and appointed as directors in April 2009.

     

     

    Well-positioned to address market evolution as consumers increasingly turn to emerging channels such as mobile devices and online delivery for more personalized news and entertainment

    Since August 2009, the Company has launched over 100 hyperlocal websites, each focused on news, information and entertainment specific to an individual geographic neighborhood within the Seattle-Tacoma, Portland, Eugene, Bakersfield and Boise market areas.  The sites provide local communities with added coverage of locally-focused news and stories that would not otherwise appeal to the broader audiences reached by Fisher's television and radio stations.  Fisher's hyperlocal initiative is a critical component of management's broadcast-to-broadband efforts.  Although it's currently just a small part of the Company's business, the revenue being generated is an entirely new revenue source at Fisher.  Initial traction is very strong as evidenced by over 1,000 paying "neighborhood" advertisers in less than one year.

     

    Fisher is perceived among the broadcasting industry's leaders for integrating "new media" into its business model.  Given the Seattle headquarter location, it should come as little surprise that there is much talent in the surrounding area to develop and implement the new media strategy.  Furthermore, the Company's Board includes Brian McAndrews who led Microsoft's Advertiser and Publisher Solutions Group after serving as the CEO of aQuantive, a global digital marketing company acquired by Microsoft.  For almost a decade prior to leading aQuantive, McAndrews held senior leadership positions at ABC Network.

     

    Selected Risk Considerations

     

    For decades, owning television stations was "a license to print money" but the growth of alternatives, including cable and broadband, has lured away TV viewers and made stations less profitable

    There has been a long-term erosion of viewership from broadcast to cable networks but it appears to have stabilized at ~30% for broadcast networks. 

     

    FCC plan for broadcasters to give up some of their rights to the public airwaves

    The FCC has said it needs 120 megahertz of spectrum currently allocated to TV stations to enable faster mobile devices and better broadband service.  The FCC wants TV stations to voluntarily hand-over the rights to some of their airwaves, which the FCC would then auction to telecommunications firms, sharing the proceeds with the broadcasters.  Depending on the amount of proceeds, this could be a positive catalyst but the absence of much control, despite the current efforts of the broadcasting industry coalition, makes this a risk of losing ownership of spectrum that could be more attractive than the "value" the government assigns to it.

     

    Employment trends remain in doubt

    Advertising growth is significantly influenced by trends in non-farm payrolls and retail sales, two areas of macro and fundamental concern and also therefore where my portfolio is positioned net short.  As for unemployment in Fisher's two key markets, the rate has improved sequentially in Seattle to 9.0% (below the national 9.9%) but is up year-over-year from 8.6%; the rate has improved year-over-year in Portland to 10.6% from 11.5% and has been at the same rate for the past six months.

     

    Broadcasting business is primarily based on advertising

    Although there are improvements to the mix of revenue towards retransmission compensation and some diversification from traditional broadcasting advertising to internet advertising, the business model is still primarily advertising-driven which is cyclical and skewed to short lead times in the local broadcast business.

     

    Reverse retrans considerations

    As described above in the bullish arguments, this issue might be a positive from the perspective of how much more the network could likely extract for the benefit of its station affiliates if the network were to form a coalition of its affiliates.  However, there is also a risk regarding the network extracting a disproportionate amount of the fee based on its balance of power and the arguments it increasingly makes regarding affiliates paying for network programming.

     


    Catalyst

    Selected Catalysts

    • Strong pricing in scatter/spot market compounded by strength of political advertising in 2010, and especially 2012
    • Margin improvements from current below-average margin performance
    • Continued strength in ratings which typically translates to higher inventory sell-out/pricing
    • Sale of parts (real estate, radio, TV stations) that elevate visibility of valuation discount, or of whole Company (unsolicited offer made in summer of 2008 for $43-45; in 2002, the Board retained Goldman Sachs to seek buyers but rejected two offers as inadequate)
    • Increased advocacy for change, likely led by GAMCO and TowerView, if margins don't improve
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