A diversified holding company is building one of the largest networks of low-power broadcast stations in the country, expanding beyond its historical portfolio of industrial and telecom infrastructure assets.
Changing technological standards and disruption in the pay TV business are fueling what HC2 Holdings Inc. executives see as a new renaissance opportunity for over-the-air, or OTA, content. ATSC 3.0, a new IP-based broadcast standard, promises to bring more digital-like interactivity over the air and to mobile devices in a market where consumers are primed to seek alternatives to traditional cable and satellite TV packages. Over-the-air U.S. households totaled about 16.5 million as of the end of the second quarter, with a five-year compound annual growth rate of 4.12%, according to data from Kagan, a media research group within S&P Global Market Intelligence. HC2 executives have suggested that OTA could continue to grow as broadcast to mobile devices becomes more viable with ATSC 3.0.
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HC2 jumped into the broadcast sector in 2017 as the number of stations for sale rose following the Federal Communications Commission's 2016 incentive spectrum auction and several large-scale transactions led some companies to exit or slim down in certain markets. As of Sept. 30, HC2 had acquired 164 operating stations in 130 markets, including pending transactions, the company said in a Nov. 7 investor presentation. Net acquisitions totaled $137.7 million in aggregate from 2017 and the first nine months of 2018,
The goal, HC2 Holdings CEO Philip Falcone said on a Nov. 7 earnings conference call, "is to build a cohesive, technologically advanced distribution platform that will ultimately reach more than 80% of the U.S. markets."
While there are regional ownership caps for full-power stations to avoid duopolies, there are no such caps for low-power stations, allowing a vast footprint that would be impossible for full-power stations under current FCC regulations, Kagan analyst Volker Moerbitz said in an interview. Of HC2's 164 stations, only 14 are full-power assets. The company's footprint in lower-power class A stations represents about 10% of the total class A market in the U.S., Moerbitz said.
HC2 owns Hispanic channel Azteca network and recently signed a distribution deal with The Christian Broadcasting Network to distribute a new 24-hour CBN news channel. Falcone pointed to the latter of those deals as an example of how free-to-consumer distribution will become more and more important in a growing ecosystem of video content.
"With all these disparate acquisitions, the key is bringing them all under one umbrella and being able to then turn around and talk to quality content providers who are looking for an alternative to ... the cluttered broadband market," Falcone said.
HC2's broadcast vision has not come without a cost, however. The company has funded much of its acquisitions via financing, pushing its total debt to $702.2 million as of Sept. 30, up from $593.2 million nine months earlier. Its fledgling broadcast business also has yet to hit profitability: For the nine months ended Sept. 30, the company recorded a net loss in its broadcast segment of $29.2 million, which the company attributed primarily to operating expenses from assets acquired in the fourth quarter of 2017.
The retransmission, advertising and synergy propositions across such a large portfolio should drive the company's OTA business to break even in 2019, Falcone suggested on the earnings call. HC2 Holdings declined to comment further on its strategy and acquisition plans for this article, as it is currently seeking debt financing to fund continued deal activity.
