Wall Street might be over local stations, but private investors aren’t.
The not-unexpected Chapter 11 filing by Granite Broadcasting last week brought with it a reminder that even the most underperforming, undervalued or heavily mortgaged TV station group can look pretty attractive to private equity companies that love the smell of cash flow in the market.
Granite’s filing Monday in the U.S. Bankruptcy Court for the Southern District of New York included a long-contemplated plan of reorganization that had been pre-negotiated with the company’s secured debtholders, chief among them Silver Point Finance, a Greenwich, Conn.-based private investment firm with more than $6 billion in capital.
Under the terms of the debt-for-equity restructuring plan, Granite would become privately held, and Silver Point and the other creditors would exchange the debt owed them for control of the company.
The restructuring is expected to be completed in the first half of 2007 and is designed to reduce the station group’s corporate debt by more than $275 million to about $230 million, Granite said in its filing.
The group, which owns, operates or provides services to 23 stations in 11 markets, has operated at a loss for the past three years and twice this year borrowed money to meet late interest payments of $19.7 million on its loans. As of September, when it reported on its third-quarter 2006 earnings, Granite said it had unrestricted cash and accumulated deficit of $18.23 million and $513.9 million, respectively. It said then that it lacked the cash to make the interest and principal payments that would be due Dec. 1.
Silver Point will choose six of the seven board members of the reorganized Granite and two of the three board members of each Granite debtor subsidiary. Granite CEO W. Don Cornwell will fill out each of the boards. Mr. Cornwell said the restructuring process is expected to be complete by the first half of 2007.
“It’s hard to criticize any publicly traded company for valuating the option of going private,” said Steve Ridge, corporate executive VP of consulting firm Frank N. Magid Associates. “Wall Street is loaded with legions of young analysts who have no appreciation for the true brand strength of local television. They’re fixated on historical margins, reward only top-line growth and narrowly focus on quarterly earnings.
“The shrewd private money sees long-term upside as local broadcasters leverage their unparalleled brand loyalty in an emerging digital and wireless world. Wall Street will someday wake up to the sustaining power of local television, likely well after private equity has extracted some healthy profit.”
A Private Affair
While “healthy profit” and “Granite Broadcasting” still are incongruities when they appear in the same sentence-selling off or downsizing properties is how profits most likely will be created-private equity firms often have money to spare, if not burn. Free of Wall Street’s narrow view of value and onerous federal regulations, they’re built to take risks.
Shareholders are scheduled to vote soon on the largest media or entertainment buyout ever: the $18.7 billion merger between Clear Channel Communications and Thomas H. Lee Partners and Bain Capital. Clear Channel’s 42 well-managed TV stations, a unit considered just a tiny part of Clear Channel’s empire, are up for sale, along with 448 radio stations.
Thomas H. Lee and Bain have been mentioned in connection with Tribune Co.’s plans to sell off all or part of its multimedia empire, which includes 24 TV stations.
“Wall Street understands only one thing in life: What do they think the revenue growth prospects are? They’ll pay you phenomenal multiples for unrealized but anticipated growth and they’ll give you nothing for existing business,” said Randy Bongarten, CEO of the new Bonten Media Group. “This creates opportunities for individuals and companies who can find value elsewhere, and there is a lot of value elsewhere.
“I think you’ll see a lot of public companies go private simply to get out of this whole public scrutiny arena they’re in now,” Mr. Bongarten said. “I don’t think we’ve seen all the implications of that rollout yet.”