909 Lake Carolyn Parkway, Suite 1450
Irving, Texas 75039
Telephone: (972) 373-8800
Fax: (972) 373-8888
Web site: http://www.nexstar.tv
Sales: $245.7 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: NXST
NAIC: 515120 Television Broadcasting
Nexstar Broadcasting Group, Inc. owns, operates, or provides services to 46 television stations in medium-sized markets in 11 U.S. states, which broadcast NBC, CBS, ABC, Fox, and UPN network programming to more than 7 percent of households in the country. The firm owns about two-thirds of the stations itself, and provides services to the rest under "duopoly" agreements in which many services are performed for two stations in the same market by a single Nexstar-owned one. The publicly traded company is run by its founder, broadcast industry veteran Perry Sook.
Nexstar was founded in the summer of 1996 by Perry Sook, to purchase television stations in mid-size markets around the United States. Sook, 38, had worked since high school in both on-air and sales jobs in the broadcasting industry, and in 1991 had founded Superior Communications Group, which acquired television stations in Kentucky and Oklahoma before selling them to Sinclair Broadcast Group for $63 million. Nexstar was backed by ABRY Broadcast Partners II, a Boston-based private equity fund, which would hold a 78 percent stake in the firm. Sook, who took the title of company president, would own most of the remainder.
Deregulation of the U.S. broadcast industry was taking place in the wake of the Communications Act of 1996, which struck down the existing limit of 12 television stations one company could own, and many firms soon began to buy clusters of them. Sook's approach was to target smaller markets where there was less competition for advertisers, audiences, and syndicated programs, and where purchase prices and operating costs were lower.
Shortly after its formation, the company bought WYOU-TV of Scranton, Pennsylvania, for approximately $23 million. Its new parent would be headquartered in the nearby town of Clark's Summit. Over the following year, Nexstar made deals to purchase additional stations in Terre Haute, Indiana; St. Joseph, Missouri; Joplin, Missouri; Wichita Falls, Texas; the Beaumont-Port Arthur, Texas area; Erie, Pennsylvania; and Wilkes-Barre, Pennsylvania. To comply with Federal Communications Commission (FCC) regulations limiting a company's ownership of several stations in a single market, after buying the last-named the company decided to sell its lower-rated Scranton operation.
Nexstar partner ABRY recommended that David Smith, who had once managed a station ABRY owned in Cincinnati, buy the Scranton operation and then let Nexstar run it as a "duopoly," in which many of the functions of the Scranton and Wilkes-Barre stations would be combined. Smith, who had quit the television business several years earlier to become a Lutheran pastor, would serve as nominal figurehead of a new firm called Mission Broadcasting which would own WYOU-TV, while Nexstar would perform the vast majority of duties and keep almost all of the revenues. Though Mission was considered a separate company under FCC rules, its funding came from Nexstar, and all of its stations would be operated by Sook's firm.
Acquisitions continued in early 1999 with the purchase of WROC-TV, a CBS network affiliate serving Rochester, New York, for $46 million, and three CBS affiliates in Peoria, Springfield, and Champaign, Illinois, which were sold by Mid-West Television, Inc. for $110.7 million. Nexstar operated a total of 15 stations, including several which Mission Broadcasting had acquired.
Once a station had been purchased by the company, Sook sought the greatest possible operating efficiencies, typically dismissing unneeded employees, boosting advertising sales staff, and increasing the amount of advertiser-friendly local news programming by an average of five hours per week. In the case of WCIA-TV in Champaign, Illinois, Nexstar replaced the station's general manager with one of its own choosing and let a half-dozen of the station's other 115 employees go. The company also put money into its physical plant, gutting and remodeling offices, building a new set for the local news program, and buying a new remote broadcast truck. Several on-air staffers were also let go, and the station's longtime husband-and-wife news anchors were told to begin working full-time hours instead of part-time, which led them to walk off the job. Nexstar noted that their existing contracts did not specify how many hours they had to work per week, and sued them for breach of contract. They were later fired, and their attempts to win compensation in court proved unsuccessful.
In 2000 the firm purchased KMID of Midland/Odessa, Texas, for $10 million and KTAL of Shreveport, Louisiana, for $35 million. The year also saw Nexstar join the Broadcasters' Digital Cooperative, which was a consortium of 12 station groups that had banded together to find ways to use extra portions of the broadcast spectrum they had been given for digital television. The cooperative hoped to eventually send content including weather and news information to home computers or cellular telephones.
In early 2001 Nexstar received $225 million in additional financing from a group led by Banc of America. The year also saw a duopoly agreement signed between Nexstar's WMBD in Peoria and WXZZ in Bloomington, Illinois. The latter station, owned by Sinclair Broadcast Group, would broadcast news reports created by the Nexstar station, and most of its employees would begin working for Nexstar. For 2001 the firm had revenues of $110.7 million and a loss of $39.5 million. With the U.S. economy having recently hit rough waters, the firm's ad revenues had dropped by 10 percent, at the same time that its interest payments had increased.
In April 2002 Nexstar filed for an initial public offering of stock on the NASDAQ, hoping to raise more than $130 million. By this time the company owned and operated 14 stations, and provided management, sales, or other services to six others. In June the firm announced it would spend $9 million to install new digital transmitters at all of its stations, and replace analog transmitters with a newer generation of equipment.
Early 2003 saw Nexstar, which had recently moved its headquarters to Irving, Texas, acquire stations in Little Rock, Arkansas, and Dothan, Alabama, from Morris Multimedia, Inc. for $90 million. The firm also set up duopoly arrangements with stations in Abilene and San Angelo, Texas, and Terre Haute, Indiana, that were owned by Mission Broadcasting.
In the fall the company reached an agreement to acquire Quorum Broadcast Holdings LLC for $230 million in cash, assumption of debt, and shares of stock. Quorum owned 11 stations, one of which was about to be sold for $43 million, and operated or provided services to five others. With two other stations in Arkansas in the pipeline, Nexstar would own or operate 41 stations in nine states when the dust had settled.
In late November the company sold ten million shares of stock on the NASDAQ in an initial public offering (IPO) for $14 each, taking in $140 million. CEO Sook was paid a $4 million "success fee" when the IPO was completed, which he used in part to pay back a $3 million loan he had taken out in the company's behalf in 1998.
After the IPO the firm's Nexstar Finance, Inc. subsidiary issued $125 million in senior notes to help pay off the Quorum acquisition, and opened a new $275 million line of credit that refinanced some of its older debt at a more favorable rate. For 2003 the company reported revenues of $214.3 million, and a loss of $87.1 million.
In January 2004 the pending sale of an additional Quorum station fell through, and it was added to the Nexstar acquisition. The year 2004 also saw the firm take on new duopoly agreements for Mission-owned stations in Utica, New York, and Rockford, Illinois, as well as closing deals on new acquisitions in the Ft. Smith/Fayetteville, Arkansas market and in San Angelo, Texas.
In part because of Nexstar's higher profile in the wake of its IPO, the firm's duopoly strategy was drawing scrutiny, and in 2004 the FCC announced that it would begin looking into making new rules for such agreements. The company prepared for a lobbying battle to defend its turf before the FCC, and began drawing up contingency plans if changes were made.
For 2004, Nexstar posted revenues of $245.7 million and a loss of just $20.5 million. The firm's earnings were up due to the presidential election year and its attendant political advertising spending spree, as well as the Olympics, whose coverage on the company's NBC affiliates in August brought a spike in viewer-ship in the otherwise repeat-plagued summer schedule. To boost revenues and ad sales, the firm was now using new promotional tactics including adding online viewers' clubs and informational phone lines, as well as selling sponsorships of news and sports tickers that scrolled on-screen.
We believe that the stations we operate or provide services to are better managed than many of our competitors' stations. By providing equity incentives, we have been able to attract and retain station general managers with experience in larger markets who employ marketing and sales techniques that are not typically utilized in our markets.
Despite all these measures, the company was continuing to run in the red, and its management began looking at new ways to increase revenues. One potential source was cable system operators, who retransmitted broadcast television channels to their subscribers along with the signals of cable networks including Animal Planet, CNN, and HBO. Though the latter charged fees of as much as several dollars per month per subscriber, over-the-air broadcasters were typically compensated only through ad purchases on their stations. The issue was impacted by a 1992 federal law giving broadcasters the right to require cable systems to carry their signals in a local area, which allowed for negotiations about terms. While cable companies had almost always refused to pay broadcasters cash, they had compensated most of the major networks by offering them a channel on their systems for a new cable network, while local station owners had typically been assuaged with ad buys. Each broadcaster signed a retransmission agreement with cable providers that lasted an average of three years, however, and several of Nexstar's were about to come up for renewal.
On January 1, 2005, Nexstar pulled five of its Texas and Missouri stations off of cable networks owned by Cable One, Inc. and Cox Communications, Inc. when those firms refused the company's demands for a 30-cent per month subscriber fee per station, which would increase to 35 cents in 2006 and 40 cents in 2007. Nexstar noted that the increasingly popular satellite dish networks were all paying for retransmission of broadcast signals, and insisted that it was time wired cable providers did the same.
The move left close to 170,000 cable subscribers without Nexstar channels in Texas, Missouri, and Louisiana, where a station had also been pulled a few weeks later. The affected Nexstar stations, which were affiliated with all three of the major networks, lost as much a third of their viewers, while the cable operators lost some subscribers who changed to satellite networks that carried the channels. Both sides offered different assessments of the impact on their operations, and the cable operators released Nielsen ratings showing significant viewership drops for Nexstar's affected stations that were disputed by the company. Nexstar had recently discontinued most of its use of the Nielsen audience-counting service to determine advertising rates, after chafing at charges which totaled as much as 1 or 2 percent of a station's gross income. The firm, which had turned to alternate ratings sources such as Simmons Research and Media Audit, claimed that its advertising income was only minimally affected by the loss of cable retransmission in those markets.
Nexstar's bold move was considered the first salvo in a battle that was about more than just basic cable. Broadcasters were beginning to send high-definition digital signals, and the cost of the equipment needed to support such broadcasts totaled $1 million or more per station. Owners were loathe to give away their digital signal for free, and the fight over retransmission was expected to lay the groundwork for agreements in this realm, which was still in an embryonic stage of development. Soon, rumblings were being heard in Washington as the American Cable Association lobbied the FCC to give cable operators more options by rewriting the retransmission rule.
Nexstar had chosen small markets where it felt it had a reasonable chance of winning concessions, but as the year wore on neither side gave an inch, though Nexstar signed a subscriber-fee deal with a separate cable operator in the spring. When the company offered to consider accepting just one cent per subscriber the cable providers still refused to budge, fearing that paying even that small amount would give broadcasters the impetus to seek higher charges down the line. Nexstar was preparing a strategy for future battles, as many of its remaining retransmission deals expired in late 2005 and early 2006. The intransigence of the two sides was evident in such comments as one made by Nexstar's COO Duane Lammers to the Baltimore Sun: "If they think we're going to give them our channels for free and then they can charge $10 or $15 a month for digital cable," said Lammers, "then they can drop dead."
In a decade's time Nexstar Broadcasting Group had assembled one of the largest groups of television stations in mid-size markets in the United States. The firm was struggling to turn the corner to profitability, and was seeking to develop a new revenue stream by facing off with cable system operators who had heretofore retransmitted its signal with no direct compensation. With major players on both sides of the fight watching the outcome, the industry was at a turning point that could affect the future fortunes of broadcasters, cable operators, and viewers alike.
Nexstar Finance Holdings, Inc.; Nexstar Broadcasting, Inc.
Sinclair Broadcast Group, Inc.; Hearst-Argyle Television, Inc.; Emmis Communications Corp.; Cox Television; Gannett Co., Inc.; ACME Communications, Inc.; LIN TV Corp.; Gray Television, Inc.; Raycom Media, Inc.; Media General, Inc.
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