ACME Communications Feeling Buffy About IPO

Since the Federal Communications Commission ruled Aug. 5 to allow television networks to own two television stations in the same market, station groups not owned by the major networks have become attractive acquisition candidates.

Shortly after the ruling, NBC was rumored to be investing more than $300 million for a minority equity stake in Paxson Communications, which owns 72 UHF stations across the country. Also, Barry Diller reportedly had “exploratory” discussions with ABC last month about linking the 13 stations owned by his USA Networks Inc. with the alphabet network.

How valuable are these stations, once the graveyard of the television broadcast landscape, as a result of the ruling? Wall Street will make a preliminary ruling later this fall when venture-backed Acme Communications Inc. goes public.

On July 30, Santa Clara, Calif.-based Acme filed initial public offering documents and expects to raise as much as $115 million to fund future acquisitions and to repay debt. Deutsche Banc Alex. Brown is the lead underwriter of the offering, which is expected to price the week of Sept. 27. Merrill Lynch & Co., Morgan Stanley Dean Witter and CIBC World Markets are co-managing the offering.

Acme owns and operates nine broadcast stations in medium-sized markets, covering approximately 5.4% of the country.

Each Acme station is an affiliate of the WB Network, the mini-network run by Time Warner and Tribune Co.

The burgeoning network has put Acme’s holdings on the map. Prior to their affiliation with the WB, five Acme stations did not even generate Nielsen ratings, and Acme has built three of its stations from the ground up.

Although Acme is not owned and operated by the WB, its ties to the network are vaguely incestuous. Acme was co-founded in 1997 by WB Chief Executive Jamie Kellner, Tom Allen, former chief financial officer for Fox Broadcasting, and television station executive Doug Gealy. Kellner, who also moonlights as Acme’s CEO, holds a 5.27% equity stake in Acme and owns 11% of the WB. Neither Time Warner nor Tribune, however, own any part of Acme.

“We are building value by acquiring under-performing stations where there had been no reportable audience and affiliating them with the WB,” says Gealy, who serves as Acme’s president.

While the company is focusing on future acquisitions, Gealy said Acme would consider acquisition offers.

“We would love to continue to operate,” says Gealy. “But we do own a valuable niche that the older networks are looking for.”

Three of Acme’s venture-backers, BancBoston Ventures Inc., Alta Communications and CEA Capital Partners, have worked with Kellner in the past, investing in Fox-affiliated station groups. Their interest in the company goes beyond building a distribution vehicle for the WB.

“The FCC ruling gives the company and its shareholders options that they did not have before,” says BancBoston Managing Director Sanford Anstey. “But it does not effect its core strategy at this point.”

In June 1997, Acme raised $1.3 million from affiliates of BancBoston, CEA Capital, Alta, ACME Capital Partners and TCW Asset Management Co. In a separate transaction that month, Peregrine Capital Inc. acquired 4,400 units of Acme’s predecessor Acme Television Holdings LLC, to finance station acquisitions.

“They can be a very attractive target for somebody planning an acquisition,” said Sandra Kresch, broadcast analyst for PricewaterhouseCoopers. “It is unlikely, however, for Time Warner to allow those stations to be turned around at the cost of undermining the network.”

Are broadcasters an endangered species?

Kresch added that with the proliferation of video delivery, the long-term viability of owning television stations is in question.

“As distribution becomes more ubiquitous, there will be a serious discussion about the value of these stations,” she says. “Networks may potentially decide that they have to trade the value of a broadcast station for a better deal in order to get better distribution of their programming.”

To Gealy, the expansion of viewing options means that television stations will adopt the niche-oriented distribution models used by radio broadcasters.

“Radio is extremely successful in branding themselves and promoting to a specific demo,” he said. “That is what the WB has already shown it can do.”

High praise for a network that in its infancy aired situation comedies starring Tom Arnold and Jason Bateman.