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Granite gets time to pay the Peacock

Mar 12, 2001  •  Post A Comment

Granite Broadcasting got itself two years of financial breathing room to convert and launch its KNTV independent as a San Francisco area NBC affiliate. But some analysts say it may not be enough.
A revised payment schedule for a total of $362 million in reverse compensation due to NBC over 10 years gives Granite time to build and launch KNTV as an NBC outlet starting Jan. 1. But there are no assurances when or if the station will generate sufficient cash flow to sustain its higher costs for news, programming and talent.
Granite said last week that as an NBC affiliate, KNTV could generate $51 million in broadcast cash flow in 2002. Granite said its 2002 capital expenditures are likely to exceed the $12 million expected in 2001 due to KNTV’s digital conversion costs. Granite officials said they have deferred optional expenses such as the construction of a new KNTV station complex, but declined to give analysts guidance on its full-year 2001 financial performance.
However, Granite said it expects first-quarter 2001 net revenues to decline 20 percent to 23 percent from a year ago.
“What they announced last week was very positive,” said Bishop Cheen, broadcast analyst at First Union. “But it’s debatable whether they have the financial liquidity and flexibility they will need to get through 2002 and KNTV’s first year as an NBC affiliate.”
Granite last week announced a $205 million bridge loan, provided by a consortium led by Goldman Sachs, where Granite Chairman and CEO Don Cornwell once worked. The loan made it possible for Granite to restructure its payments to NBC.
The senior debt facility, good until 2003, allows Granite to repay $114 million in debt, make an immediate $30.5 million payment to NBC and invest in KNTV’s digital conversion. Granite must meet certain financial performance standards to maintain the new senior credit facility at the initial terms.
As a result, NBC agreed that no further payments are due from Granite until Jan. 1, 2003. Granite will now pay $37.16 million in both 2003 and 2004, and $70 million in 2005 and in subsequent years.
Granite Chief Financial Officer Ellen McClain said the new arrangements give Granite three years of running KNTV as an NBC affiliate before it has to refinance debt and begin making substantial annual affiliation payments to NBC that can, by then, be supported by increased cash flow.
But what if cash flow does not grow fast enough to cover those payments and increased costs?
Mr. Cornwell said that’s unlikely. “In less than a year, KNTV will broadcast the Winter Olympic Games from Salt Lake City, and Granite will begin to reap the revenu e and value-creation benefits of having a large audience in a large television market,” he said.
Analysts say Granite could sell one of its other TV stations, such as WDWB-TV in Detroit, a WB affiliate that it acquired for $175 million several years ago. CBS and Tribune Co. would be potential buyers but would seek to pay less than that given falling broadcast multiples, sources say.
“We’re not happy at all with the return on investment on either of our WB assets,” Mr. Cornwell said. “That won’t last forever. If we believe we can get the returns to a more acceptable level in the next two or three years, we would think about other actions, including letting other people run them.”
NBC holds options to acquire 4.5 million shares of Granite stock and eventually bid for KNTV or the entire company-if the network doesn’t first go after its outgoing San Francisco affiliate, KRON, and its new owner, Young Broadcasting. NBC has said it has no plans to do that.
Mr. Cornwell said NBC is committed to KNTV’s conversion and formalized a secondary affiliation with the station, giving it even more leeway to broadcast sports, news, business and entertainment programming not cleared by current affiliate KRON.
KNTV’s NBC association will gradually become more obvious to Bay area viewers with promotions touting “NBC to be,” “KNTV NBC News” and “NBC 3.” The latter refers to KNTV’s new expanded carriage by AT&T Broadband, which services 99 percent of Bay area cable homes. Granite and NBC declined to quantify promotional spending.
Granite’s stock price has risked being removed from public trading on the NASDAQ because it has dipped so often below $5 a share.
Granite last week reported a fourth-quarter loss, before an extraordinary item of $7.2 million, or 82 cents per diluted share, compared with a loss of $355,000, or 40 cents a share, in the year-earlier period. Fourth-quarter broadcast cash flow fell 33 percent to $10.4 million. A weak advertising market forced fourth-quarter net revenues down 7 percent to $36.9 million.