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The Honolulu Advertiser
Posted on: Sunday, September 13, 2009

Scrutiny grows over Raycom's Hawaii TV station merger


BY Rick Daysog
Advertiser Staff Writer

When Raycom Media Inc. completes the merger of news and business operations at KHNL, K5 and KGMB9 next month, it hopes to avoid a rerun of its recent buyout of a Richmond, Va., television station.

In a rare move, the U.S. Justice Department last year required Raycom to sell one of its two stations in the Richmond area, saying the company's joint ownership of NBC and CBS affiliates in Richmond would "substantially lessen competition" and create barriers to entry.

"There are similarities here," said Chris Conybeare, president of Media Council Hawai'i, which plans to challenge the KHNL-KGMB deal.

"I feel the circumstances here present antitrust concerns and they need to be investigated."

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Paul McTear, Raycom's CEO, said in a telephone interview Friday that the shared-services agreement between the local television stations doesn't violate antitrust laws since the deal, unlike the Richmond purchase, doesn't involve a change of ownership.

McTear said the KHNL-KGMB deal is borne out of economic necessity in an advertising market that has shrunk by about 30 percent, or $20 million a year.

Under the agreement announced last month, KHNL, K5 and KGMB will merge newsrooms, simulcast some news programming and cut about a third of the three stations' staff.

Several of the station's high-profile on-air talent such as anchors Howard Dashefsky and Diane Ako will be laid off in the move.

The combined stations have less than 40 percent of the Honolulu market, the nation's 71st largest television market.

"We're trying to figure out a different business model so we can survive the erosion of the advertising market in Honolulu," McTear said.

For Raycom, such mergers represent the future for the broadcast industry.

Founded in 1996, Alabama-based Raycom is the nation's 14th-largest station group with 46 television stations in 36 metropolitan markets, according to Broadcasting & Cable magazine.

Most of those stations are clustered in the mid-sized markets in southeastern U.S. towns.

Three of Raycom's stations Wilmington, N.C., Columbus, Ga., and Richmond operate under a shared services agreement in which Raycom also operates the news and technical operations for one of its competing stations.

FEDERAL LAWSUIT

In Richmond, Raycom owns the local NBC affiliate, WWBT, and operates the news operations for the local Fox station, WRLH.

Until this year, Raycom also owned and operated Richmond's CBS affiliate, WTVR, but had to sell the station after the Justice Department sued Raycom over its ownership of the CBS and NBC stations.

The lawsuit was just one of about half a dozen Justice Department suits during the past decade challenging a television station or broadcast ownership merger, according to an examination of antitrust lawsuits listed on the department's Web site.

McTear said Raycom had always intended to sell WTVR once it completed its acquisition of its rival station. But the sale of WTVR took much longer than expected due to the downturn in the nation's financial markets, he said.

Earlier this year, Raycom swapped WTVR for an Alabama station owned by Local TV LLC of Kentucky.

"It took a year for us to do that," McTear said.

David Schutz, president of Hoffman Schutz Media Capital, a San Diego-based television and radio consulting firm, said virtual duopolies and tri-opolies provide "natural efficiencies" since costs are much lower.

Sharing news gathering and promotional and production costs allows the companies to operate on a profitable basis, especially in a down economy, he said.

There are about 20 shared-services agreements around the country.

Andrew Schwartzman, CEO of the Media Access Project, a Washington, D.C., public interest law firm, said the cost-savings goals of duopolies and shared-services agreements have been "illusory."

'TROUBLESOME' PACTS

One of the leaders in the practice, Sinclair Broadcasting Group Inc. of Baltimore, recently filed for bankruptcy and another major player, Nextstar Broadcasting Group Inc. of Texas, is struggling, he said.

Such agreements, he added, are "troublesome" for consumers and advertisers because they reduce the diversity of viewpoints for news and programming and lead to higher advertising rates.

"They have not proven to be the economic boon that had been hoped of them," said Schwartzman.

Schutz believes that Raycom is profitable.

Many of Raycom's stations are in state capitals or in large college towns, which tend to weather recession much better than manufacturing regions.

And unlike most large media chains that are publicly traded or financed by private equity firms, Raycom is privately owned. Its stock is owned by company management and the Retirement System of Alabama, which holds more than $550 million of Raycom's preferred shares.

The Alabama pension fund is also the company's biggest lender and owns more than $2 billion in Raycom's corporate bonds.

Schutz believes Raycom's ownership structure shields the company somewhat from the quarterly fluctuations of the nation's financial markets and allows it to focus on its long-term business plan, which is to buy and hold stations.

McTear said Raycom's commitment to the Hawai'i market is for the long haul.

Raycom has owned KHNL and K5 since 1999 when the company purchased the two stations and an Albuquerque, N.M., station from A.H. Belo of Texas for $88 million.

McTear added that the newsroom merger between KHNL and KGMB will create the state's largest television newsroom and will result in more news programming and more in-depth journalism.

"Our bet on the Hawai'i market has paid off real well until 2008 and 2009," said McTear.

"Long-term, we like Hawai'i."