The day the Reader came out I got an email from a former KDLH employee. The email exchange between us clarifies some of the highlights of the the purchase of the station. I'm keeping his/her name to myself.
March 18, 2005 2:24 PM
finances graded 'F'
The operations of two of Fort Wayne's local television stations are in the hands of a company that has one of the worst balance sheets in the industry.
Morningstar gives Granite Broadcasting's stock, which closed at 33 cents per share Wednesday, grades of "F" in growth, profitability and financial health. The "Fs" represent performance in the bottom 10 percent of the industry.
"They're one of the weaker players," said Shelly Lombard, senior bond analyst with Gimme Credit, an independent corporate bond research firm in New Jersey.
"They do a good job of managing their stations ... but they just have too much debt," she said Tuesday.
Last week, Granite completed its purchase of WISE, Channel 33, from New Vision Television, and the simultaneous sale of WPTA, Channel 21, to startup Malara Broadcast Group.
The company also executed a shared-services agreement with Malara that means it now provides news programming for both stations. Granite fired 57 WISE workers last week, and transferred the WISE newscasts to the WPTA studios, where WISE anchor Linda Jackson anchors repeats of WPTA news stories.
The deal is expected to improve Granite's cash flow, but the impact won't be felt until 2006. That may be too late for a company that didn't generate enough earnings last year to cover the interest payments on its debt, Lombard said.
Granite used $25 million of its cash to secure the debt on the Malara deal, leaving it with about $40 million.
"It looks like they have enough cash to last a year or so," Lombard said.
Granite's financial woes are shared with the broadcast television industry, which has performed poorly in the last five to 10 years. But, "this stock has been one of the worst performers in the industry," according to an analysis on Morningstar.com.
"Most stocks in the broadcast TV industry have seen steadily growing revenue and earnings over the past three years. This stock has actually seen declining revenue growth over the past three years," Morningstar said.
Granite's net revenue grew more than 6 percent in the fourth quarter of 2004, and broadcast cash flow increased 30 percent, but the company still lost nearly $30.2 million, or $1.56 a share.
For the entire year, Granite posted a loss of $83.3 million, or $4.30 a share.
The figures for the last quarter of 2004 included $4.1 million in incremental revenue from political advertising, which accounted for 14 percent of total ad revenue. But 2005 is not a big election year, so the company can't count on a repeat performance.
"At this time, we expect a first-quarter revenue decline of 6.5 percent to 7.5 percent," Granite's chief financial officer said in last week's earnings report.
"They may have to restructure," Lombard said. "They may have to sell some stations."
The most likely candidates for sale are Granite's WB affiliates in Detroit and San Francisco. They are valuable properties, because they are both in Top 10 media markets, but they also are expensive to operate, Lombard said.
The company could work with its bond holders to restructure its debt out of court. Or, "worst case scenario," it could file bankruptcy, she added.
If that happens, viewers are unlikely to notice a difference in station operations. Just as Kmart and other companies have continued to operate through bankruptcy proceedings, Granite could be expected to conduct business as usual, Lombard said.
Whatever solution Granite chooses, the clock is ticking.
"They need to get it together this year," Lombard said.
Friday, March 18, 2005 2:57 PM
Thanks ____, Obviously there is a little more to this than I thought.
I'm still puzzling over this info. So, Granite loaned Malara the money to buy KDLH? Then that means it is Granite that is to blame for gutting the KDLH news staff and not Malara? Have I got that right?
Is Malara a creature of Granite created as a subsidiary to set up similar deals like this one and the one in Ft. Wayne? Did Granite fail to make small staff cuts years ago so that it is now forced to make catastrophic staff cuts today? And finally, in your opinion, is Duluth too small to support three network news stations?
Friday, March 18, 2005 3:25 PM
Harry, Yes, yes, yes, yes, yes, no. The FCC created a 'loophole' last year allowing for 'shared services agreements' in small media markets. In larger media markets, these types of arrangements are usually ok because the FCC feels there are enough diverse voices. This is new for small markets. I think that absolutely three stations can survive in Duluth, even thrive. But in TV, as in business, it's a question of management, liquidity, and filling a need. KBJR has a (self-admitted) huge built-in advantage because their new building and state-of-the-art infrastructure was built with insurance money following their fire in '97 (one month after I arrived at KDLH!). Prior to the fire, their facility was abysmal. WDIO, owned by Hubbard Broadcasting in St. Paul, is a debt free company. For years it has low-balled the rates for commercials in this market knowing that the debt-ridden competitors would suffer greater impact over time. Both of these factors had significant impact on KDLH.
Other Future Factors:
--Digital TV station upgrades by 2009: huge investment for stations
--Networks have stopped paying affiliates for airing their programming ($1 million/yr./station in Duluth alone).
--No market growth in Duluth.
KDLH is culpable to a degree. In my opinion
KDLH certainly did not manage their costs effectively relative to their
ratings/revenue. But that is not what brought this about in my view. Way more
than you probably wanted to know. Eric
Malara Broadcasting financed its acquisition of WPTA(TV) and KDLH(TV) with the proceeds of borrowings pursuant to a Malara Broadcasting Credit Agreement, a copy of which is attached as Exhibit 4.1. The Malara Broadcasting Credit Agreement provides for two term loans totaling $48.5 million and a revolving credit facility of $5 million. The $23.5 million Malara Broadcasting Term Loan A is secured by a letter of credit. To secure the letter of credit, the Company pledged $25 million of U.S. Government Securities purchased with cash. The $25 million Malara Broadcasting Term Loan B and the $5 million revolving credit loan are secured by the assets of WPTA(TV) and KDLH (TV), and guaranteed on an unsecured basis by the Company, a copy of which is attached as Exhibit 10.1 hereto.