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Political Ads Keep Saving Local TV

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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Meredith, the 113-year-old Des Moines, Iowa-based publisher of Better Homes and Gardens, Family Circle and Martha Stewart Living, has had chances over the past few years to become the world’s biggest magazine company by combining with most of Time Inc. or buying it outright.

But Meredith’s executives have now decided that it would be much more fun to run a local television company. And really, who can blame them?

Thanks in large part to the campaign spending flood unleashed in 2010 by the Supreme Court’s landmark Citizens United ruling and the D.C. Circuit Court of Appeals’ SpeechNOW.org decision, local broadcast television remains that rare legacy media business where things are still looking up. Political advertising spending on TV is projected to hit $4.4 billion in the 2016 election cycle, up from $3.8 billion in 2012, according to Kantar Media’s Campaign Media Analysis Group, with about three-quarters of that going to local broadcast stations.

Meredith, which got about a third of its revenue and 59 percent of its operating income in its last fiscal year from the 17 local stations it already owns, isn’t getting rid of the magazines, at least not yet. But it is combining with Media General, a former newspaper publisher (its flagship was the Richmond Times-Dispatch) with an even bigger local TV footprint. Technically Media General is acquiring Meredith, but Meredith’s top executives will be in charge of the merged company and, well, I’ll let Bloomberg’s Gerry Smith, Amy Thomson and Tom Lavell explain:

The deal looks almost like a leveraged buyout. JPMorgan Chase & Co. and RBC Capital Markets have committed $2.8 billion to back the transaction, which dwarfs the equity value of the merger. Initially, the funding would boost the new company’s net debt to almost 5.5 times a measure of its earnings, although the companies said it expects to decrease that leverage to between 3 and 3.5 times earnings within two years.

How will they do that? With all the money they’re expecting to pour in from political advertisers between now and Nov. 8, 2016, of course. They’re banking on lots of other advertising revenue too, but it was telling how much attention Meredith executives lavished on the 2016 campaign in Tuesday’s merger conference call. There was this map from the merger presentation, for example, with a handy list of presidential battleground political states.

source: meredith media general merger presentation

Elaborated Stephen M. Lacy, the Meredith chief executive officer who is slated to stay in that role in the combined company:

One of the challenges for Meredith historically was that with a footprint of only about 10 percent of the TV households, there could be a really aggressive political advertising opportunity, but we might not have been in the right place. With this portfolio and with that long list of battleground states that I articulated, we're going to as a combined company have a much greater opportunity to be in the right place at the right time.

So, bully for them. They’re surely right that a political bounty awaits them during the next couple of years. (Meredith Chief Financial Officer Joseph H. Ceryanec said in the conference call that political ad revenue at the two companies added up to $245 million during the last presidential cycle and that, “hopefully, we’ll do better” this time around.) And as I’ve written before, it really is remarkable the way an explosion of political spending by billionaires is helping keep an entire industry afloat.

But how long can this last? Political advertising remains far more concentrated on TV than other kinds of advertising, although digital is making inroads. Borrell Associates projects that digital political advertising will top $1 billion for the first time in the 2016 election cycle, compared with $5.8 billion in TV ad spending (TVNewsCheck’s Harry A. Jessell makes a valiant effort to explain why this number is so different from Kantar’s), and will be siphoning billions more away from TV by 2016.

The key reason why political advertisers have stayed so loyal to TV while other advertisers have been straying has to do with the target demographic. Product advertisers have traditionally sought out consumers in the 25-to-54 age range because they spend the most. Political advertisers are more interested in reaching people older than that because they are the most likely to vote. And while younger viewers have been abandoning traditional TV, older ones have stayed quite loyal.

It is inevitable that generational shifts will someday doom TV’s near-monopoly on political ads, and political candidates who need support from younger voters to win -- such as the current president in his 2008 and 2012 campaigns -- are already investing heavily in non-TV means of reaching people. But the demographics of voting seem to guarantee that it will continue to be a much slower transition than with most other advertising categories. Slow enough for Meredith Media General, as the combined company will be called, to pay down its debts for the next two years, then go looking for more local-TV stations to buy before the 2018 election cycle.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net