With the 14-station group set to go on the auction block next Tuesday, it looks like there are three companies interested in buying all or part of the assets: Local TV LLC, Nexstar Broadcasting Group and Silver Point Capital. But the auction has been postponed twice before.
If parties in the Young Broadcasting bankruptcy were betting an auction would ignite a bidding war, they’d be better off playing the slots in Vegas.
“My sense is they have very short list of people interested,” said a source in the financial community.
According to other industry sources, there are at least three entities possibly interested in obtaining all, or at least a piece, of the bankrupt station group: Local TV LLC, Nexstar Broadcasting Group and Silver Point Capital.
And the same sources speculate that the Young group minus KRON San Francisco could go for between four and seven times cash flow, resetting station values for other troubled station groups.
KRON is the one-time NBC affiliate for which Young paid a staggering $823 million in 2000 in what one industry insider has called “the dumbest deal ever done.”
Young CEO Vincent Young envisioned KRON as the company’s crown jewel. But it quickly morphed into a poison apple after NBC pulled its affiliation. Ultimately, it was Young’s inability to sell KRON, coupled with the station’s estimated $15 million in negative cash flow, that dragged the company into bankruptcy in February.
Aside from KRON, Young’s stations were good cash flow generators until the downturn hit. They could be again if the economy and industry rebound.
In addition to KRON, the group comprises 13 stations, mostly ABC and CBS affiliates in middle and small markets. WKRN, the ABC outlet in Nashville (DMA 29), is the biggest of the lot.
Parties in the bankruptcy case, being overseen by the U.S. Bankruptcy Court-Southern District of New York State, reportedly favor selling the group as a whole with the possible exception of KRON.
An auction is scheduled for July 14. But sources contacted by TVNewsCheck think another delay is likely. There have already been two postponements and two likely reasons for them: no bids, or unacceptable bids.
Following is a look at the three players interested in Young’s assets.
Local TV LLC, a collection of former New York Times Co. and Fox stations owned by Oak Hill Capital Partners.
Pro: Local TV has been conducting serious due diligence on the Young assets, sources said. With 17 stations in its portfolio and a proven management team in place, integrating the Young stations is doable. The financing probably also is manageable.
“Through Oak Hill, Local TV has the financial capital to buy the whole thing,” a source in the broadcast sector said. “They have a pretty good appetite and may very well be bidders for the whole thing.”
Con: Oak Hill bought in near the top of the market, paying about 12.4 times cash flow for the nine New York Times stations. While Local TV could use the Young stations to enhance economies of scale, Oak Hill may be reluctant to up its bet on a struggling sector.
“It’s not about Local TV; it’s about Oak Hill,” said a source. “Oak Hill already has $2 billion worth of exposure in here. It’s a nice strategic fit, but a financial challenge.”
As of presstime, Local TV had not returned a call requesting comment.
Nexstar Broadcasting Group and its financial backer, the Boston-based private equity firm ABRY.
Pro: Nexstar CEO Perry Sook has been open about his desire to boost the company’s station portfolio.
When Nexstar acquired WCWJ Jacksoville, Fla., earlier this year from Media General, Sook characterized it as a deleveraging event because of the low cash-flow multiple Nexstar bought it for — less than five. The same could hold true for the Young stations, minus KRON.
Nexstar also is a leader in negotiating retrans fees and adding more stations increases its clout there. Additional cash from retrans could help finance the deal. In addition, with the deal earlier this year to manage Four Points Media’s seven stations, Nexstar achieved “favored nation” status in negotiating reduced pricing from Nielsen, the Associated Press and syndicated programming providers.
Con: The Jacksonville deal may have been deleveraging but Nexstar still has a mountain of debt — $652 million according to its most recent financial report. Even though the Young stations will almost certainly come cheap, it may be too much for ABRY’s comfort level.
“The hard part would be financing,” said Barry Lucas of Gabelli & Co. “That would make it tough for Perry though he’s managed to do other things, including buying the Jacksonville property from Media General.”
“Nexstar’s problem is while it’s doing pretty well, they need to restructure their own company and don’t have the cash to buy Young’s total portfolio,” said a broadcast industry source. “But I think Perry Sook would love to buy it.”
Sook did not return calls requesting comment.
Silver Point Capital, a hedge fund that owns Granite Broadcasting and Communications Corp. of America.
Silver Point acquired Granite and CCA by using the “loan-to-own” approach: When Granite needed help making an bond coupon payment, Silver Point stepped in with a loan. That loan boosted Silver Point to the top of the secured creditors list and as Granite’s debt was eventually converted to equity, Silver Point gained control.
An asset auction, where Silver Point might have to compete against other bidders, doesn’t favor the private equity firm. The loan-to-own approach does. A source familiar with the private equity sector said Silver Point was unlikely to participate in the auction.
Pro: Silver Point can come up with financing to do a package deal. It has an experienced team in place running Granite and CCA, so adding more stations to the fold doesn’t present a major obstacle.
Con: “Silver Point would make sense except on a weighting basis,” said a source in the financial sector. “If they feel they’re overexposed to TV, they might not want to do that.”
Silver Point, through a spokesman, declined to comment.
Another obstacle to an asset auction is the economy. Even the hungriest of potential buyers are worried not just about financing a deal but their own futures.
“You can’t find a corporate buyer in this group,” one source noted.
One-time likely buyers like Gannett, Belo, Meredith, Sinclair, Cox, Media General and Post-Newsweek are under severe financial stress themselves. Many of those groups also own newspapers, where staggering losses are even greater than among their broadcast properties.
Even potential financial buyers — the private equity guys and the station groups they own — would have to perform a delicate balancing act to make a wholesale deal happen.
As one source in the financial community noted, private equity groups already invested in broadcast are watching with dismay as the horizon for monetizing their investments recedes into the distance.
Historically, private equity firms have a five-to-seven-year window for cashing out. ABRY, which was actively marketing Nexstar when the credit crunch hit, has been invested in the company for about 13 years now.
Any deal for the Young stations will reset transaction valuations for other station groups on the verge of bankruptcy, a source in the financial community said. That’s as important, if not more, than who actually consummates the deal, the source added.
“The real question is what will be the impact of the Young transaction if it goes to auction,” the source said. “What’s the ripple effect for companies in walking bankruptcy?”
Hearst Corp. recently purchased 18 percent of Hearst Argyle Television — it already owned the rest — for about a discounted eight-times cash flow multiple. Nexstar bought Media General’s Jacksonville station (DMA 47) in January for less than five times cash flow, Sook said at the time.
So where’s the bar set now? No one knows because no deals are being done.
Analysts and industry insiders say a number of station groups that have either violated loan covenants or will this year face a fate similar to Young’s. Among those mentioned: Freedom Communications, Univision, New Vision, Gray, Allbritton and Belo.
In the past year, perhaps the most financially disruptive period in broadcast history, Pappas Telecasting, Equity Media, Tribune, Ion Media and Young have all declared bankruptcy.