Has Fisher Communications, Inc. (FSCI) Found a Merger Partner?

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In January, Fisher Communications, Inc. (NASDAQ:FSCI) announced that it was seeking strategic alternatives, after receiving pressure from its institutional investor base.  The company has spent the last few years shedding its non-core investments, including real estate and securities holdings, with the proceeds distributed to its investors through special dividends.  However, profits in its core television and radio businesses have come under attack from satellite radio and internet video networks, among others.  So, should this company be on your radar?

Fisher Communications, Inc. (NASDAQ:FSCI)Keeping it local

Fisher is an owner of television stations, primarily local affiliates of the ABC network in the western region of the U.S.  The industry has always enjoyed a profitable, highly-leveraged business model, due to the high cost of licenses, loyal viewers, and stable, recurring profit streams.  While this structure worked well when the networks were the predominant outlet for local advertising, the internet has brought thousands of new competitors to the advertising business and lowered the profit margins for the station owners.

In FY2012, Fisher reported weak overall financial results, with slightly lower revenues and a 25.2% decrease in its operating income.  However, its core television segment reported solid growth in revenues and operating income, as television remained a vital part of political advertising plans.  The segment also benefited from the resurgence of the auto sector and its perennially large marketing budgets, with Fisher’s advertising revenue from the auto category rising 11% during the period.

Given competitive threats from online news and advertising organizations, television station owners have built interactive websites to maintain engagement with their viewers.  Fisher’s online segment has news websites for each of their television affiliates, as well as 120 hyper-local websites that cater to a community’s demographic profile and interests.  While the company wasn’t successful at generating growth in online revenues during 2012, with a 4.0% decline, the segment is important as Fisher tries to maintain viewership during the migration to online news reporting.

While Fisher struggles to find revenue growth online, other television affiliate owners have been making aggressive moves to add online services to their business mix.  Local television affiliates have decades of experience in targeting advertising messages to their local communities, and they are well positioned to provide the service to third party companies.  Fellow television affiliate owner LIN TV Corp (NYSE:TVL) purchased Nami Media recently, which allowed the company to pursue growth in the online media management business.

In FY2012, Lin reported strong results for its portfolio of 43 stations, with increases in revenues and operating income of 23.9% and 68.3%, respectively, versus the prior-year period.  The company benefited from a sharp increase in political advertising spending related to the U.S. election cycle, as well as a 51% increase in its online revenues.  In addition, Lin used its strong operating cash flow, with $87.9 million in FY2012, to expand its network with the October 2012 purchase of eight television stations in complementary markets.  While the deal adds debt to the company’s balance sheet, it diversifies Lin’s viewership to 23 markets covering roughly 10% of the U.S. population.

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