Young Broadcasting Chairman Vincent Young has approached NBC about buying KRON-TV in San Francisco from him, sources say. Mr. Young declined to discuss the potential sale of his TV stations during an earnings call with analysts last week.
Mr. Young would like NBC to essentially match the $800 million he paid more than a year ago for the station, whose valuable NBC affiliation expires Jan. 1 because Young Broadcasting refuses to pay NBC reverse compensation. NBC, which has pursued KRON for years, wants to pay around $400 million, valuing the station as an independent.
NBC and Young are continuing their talks as Young scrambles to issue additional bonds and renegotiate with its bank lenders to ease covenant restrictions and pay off its $2 billion debt. A deal could involve cash from NBC and a swap of several of its smaller TV stations, sources say. NBC declines comment.
Although KRON is worth more with its NBC affiliation intact, Mr. Young says he is prepared with alternative programming, new promotions and a new station “look” if its independent conversion occurs as planned.
NBC could strike an eleventh-hour deal to acquire KRON and save its affiliation, while at the same time maintaining its promised new affiliation at Granite Broadcasting Corp.’s San Jose, Calif., station, KBWB-TV. Although both companies decline comment, sources say Granite is talking to NBC about ways the network could exercise its option to acquire Granite stock to give the smaller broadcaster some financial breathing room. Granite, which recently renegotiated its bank loan covenants, is working with Goldman Sachs to sell WDWB-TV, Detroit, possibly to Tribune or CBS, to raise an estimated $250 million in cash. Sources close to Granite say the station auction, so far, has been “robust.”
The only way NBC could acquire KRON and maintain a dual affiliation in the San Francisco market is also to buy or have a controlling interest in Granite’s KBWB, sources say.
Playing `chicken’
This classic game of “chicken” going on between NBC and Young will repeat itself many times during the next year as TV station groups of all sizes begin moving around money and assets in a dash to meet the debt ratio requirements of their bank loans and reduce leverage during the worst ad slump in their history. “Everyone is deep into big-time damage control,” a leading broadcast executive told me.
As broadcast companies report record double-digit revenue and cash flow declines as part of their most recent quarterly earnings, clearly some station groups have little choice but to sell assets or merge.
Ackerley Group recently agreed to be acquired by Clear Channel Communications for $795 million in stock and debt assumption.
Industry sources tell me the first of many bigger deals may soon come in the form of a merger of TV stations owned by Emmis Communications and Meredith Broadcasting, creating a new stand-alone group of more than $650 million in annual revenue that matches the size of Hearst-Argyle. Meredith and Emmis officials declined comment.
Sinclair Broadcast Group, which has hired Bear Stearns to explore its strategic options, has been trying to swap and sell individual stations, such as its ABC affiliate in St. Louis. But sources say the company could sell some or all of its stations affiliated with a specific broadcast network to that network. For instance, the company could sell its seven ABC stations to ABC for anywhere between $850 million and $1 billion, analysts say.
However, ABC’s corporate parent, The Walt Disney Co., which in the past would have aggressively pursued the Sinclair stations or Young’s two California TV stations to fill out its own holdings, also is more restricted.
A weak economy and advertising market have taken a toll on Disney’s core broadcast, film and theme park businesses. Its recent $5 billion purchase of Fox Family and aggressive buyback of its own stock have left it with little financial flexibility, according to Standard & Poor’s.
Clearly, the financial squeeze is not just a small company phenomenon.
Defaults abound
Smaller broadcasters such as Fisher Communications and Benedek Broadcasting, who have fewer options, have acknowledged being in default on bank loans.
Industry experts say among the groups most under pressure to meet debt obligations going into 2002 are Fisher Broadcasting, Benedek, Granite, Young, Emmis and Sinclair.
Station groups that also would be sale or merger candidates include Acme Communications, LIN Television and Allbritton Communications. Such groups are rekindling sale or merger talks they’ve had in the past, sources say.
Some small broadcasters are teetering on the edge of that or, worse, bankruptcy. The threats are real. Moody’s Investor Service says the default rate on corporate bonds is nearly 10 percent-the highest in a decade.
But even as big a player as Hearst-Argyle conceded in a recent earnings call that it is considering moves to stay in compliance with the debt-to-cash-flow-ratio requirements of its bank loans. In nearly every case, loan covenants were written based on historic growth projections in broadcasting that no longer exist.
Clearly, what looms for 2002 is a massive realignment of TV station ownership. What is less certain is whether the underlying fundamentals will be there to support broadcasting consolidation once the recession abates in a year or 18 months.
Key will be how much damage is done to local TV stations’ finances and infrastructure while companies strain to avoid defaulting on bond or bank loan covenants by further eliminating jobs, news operations, programs and other core functions.
Add to that the fact that overall advertising growth is at its worst level since the Depression-advertising declined 6.2 percent this year and is projected to be down 3.4 percent in 2002-and it’s easy to understand why all broadcast groups are running for cover.
This is not going to be a pretty sight for a while.