A U.S. bankruptcy judge today tentatively approved the sale of bankrupt Young Broadcasting for $200 million to a group of secured lenders as well as their selection of Gray Television as the contract manager of seven of the group’s 10 stations.Young President Deb McDermott will continue to manage the other three stations, including KRON San Francisco, for the new owners.
U.S. Bankruptcy Court Judge Arthur Gonzalez has tentatively approved the sale of bankrupt Young Broadcasting to its secured lenders and an arrangement under which Gray Television would manage seven of of the 10 Young stations and current Young President Deb McDermott the other three, including KRON San Francisco.
The approval, which becomes official with the judge’s signature tomorrow, means Young’s new owners will be its senior secured lenders: Highland Capital, Eaton Vance, Credit Suisse and Oppenheimer. Wachovia Bank is lead agent for the lenders.
The order from the New York Southern District bankruptcy court calls for Young’s current board of directors to be dissolved and reconstituted with five members.
Those members would include Vincent Young, current chairman and CEO of Young, two current board members and two new independent directors selected by the buyers and elected by the current board.
The selection of Gray to manage the bulk of the stations is a coup for the Atlanta-based station group. Gray was one of five bidders for the management job.
TVNewsCheck incorrectly reported last week that Nexstar had won the bid. According to sources, other management bidders included New World, Bonten and Local TV.
Company representatives either declined to comment or did not return calls requesting comment.
According to terms of the Gray management contract disclosed in bankruptcy court filings, the station group will receive a $2.2 million annual fee for managing the Young stations.
The contract also calls for Gray to receive 25 percent of any excess of the “baseline” broadcast cash flow. That baseline for 2010 is $38.6 million. For 2011, it’s $33.5 million and for 2012 it’s $44.7 million.
The new owners would have the option to terminate the management agreement if Gray fails to achieve 90 percent of the baseline broadcast cash flow amounts unless that failure is the result of overall market conditions.
If there’s what the agreement calls a “sales event,” Gray would receive five percent of any amount greater than $250 million, but less than $290 million and 10 percent of any amount greater than $290 million.
Robert Prather, Gray’s chief operating officer, declined to discuss specifics of the contract.
Gray has 36 stations in 30 markets, mostly middle to smaller DMAs.
In addition to KRON, McDermott will also oversee Young’s ABC affiliate in Knoxville, WATE, and its CBS affiliate in Lansing, Mich., WLNS. (Young also operates WHTV, the MNT affiliate in Lansing, under a management contract.)
By putting WATE and WLNS under McDermott’s wing, the new owners may be avoiding running afoul of the FCC’s ban against common ownership of two top-rated stations in small markets. Gray also owns stations in Lansing and Knoxville.
The seven Young stations should be a good fit for Gray, industry analysts and observers said. The largest of them is WKRN, the ABC affiliate in Nashville, Tenn. (DMA 29).
“Young would fit well with Gray or Local or Nexstar,” a source said. “Still, the match does not create a lot of duopolies, just an attractive cheaper-by-the-dozen scale for the operators mentioned. It also gives the manager more clout with ABC and some extra influence with NBC.”
Gray’s affiliation agreements are largely with NBC and CBS; Young’s are mostly with ABC and CBS.
The key challenge for McDermott will be what to do with KRON. The station is expected to hit around a negative $15 million in cash flow this year on $25 million in revenues.
Young’s painful slow-motion financial train wreck started when the company outbid NBC and bought KRON for a staggering $823 million in 2000, hoping it would become the station group’s flagship.
Instead, after NBC pulled its affiliation, KRON became a sea anchor for Young and, coupled with the economic downturn, dragged the station group into bankruptcy in February.
Court approval of the lenders’ $200 million credit bid for Young’s assets and the management deal with Gray blows away most of the cloud of uncertainty hanging over Young.
For station employees, it provides clarity on their new boss and owner. For the secured lenders taking over Young’s assets, it expedites the stations’ return to a more normal operating climate and, presumably, revenue and cash flow generation without the pressure of continued draconian cost-cutting.
The lender group was one of four bidders that met the bid submission deadline. Two separate bidders — HIG Capital Management and Oak Hill Capital Partners/Bryant Park — each offered $120 million. Lambert Media, a fourth bidder, indicated it was willing to offer $215 million but failed to comply with bidding procedures, resulting in the bid being set aside by Young.
Oak Hill Capital Partners is the private equity firm behind Local TV LLC.
HIG and Oak Hill/Bryant Park were given an opportunity to match the lenders’ bid but declined. According to bankruptcy court filings, only HIG was willing to partner with Young in managing the stations.
The lenders’ $200 million credit bid represents a 44-percent discount to the $360 million — $340 million in debt plus about $20 million in accured interest — Young owes the secured creditors.
The tentative approval means Gonzalez is effectively rebuffing an objection by unsecured creditors that Young’s assets were worth more than the lenders’ credit bid.
According to a bankruptcy court filing by UBS, financial advisor to Young in the bankruptcy, 69 parties were contacted regarding their potential interest in Young. Of those, only three were willing to submit stalking horse bids. Young, however, found those bids unacceptable, even after the bidders revised them. That’s what led Young to cancel two scheduled auctions and ultimately chose the lenders’ bid as the “highest and best offer.”
For the broadcast sector, the lenders’ bid, if approved, would establish a new benchmark for cash flow multiples distressed properties might fetch. The secured lenders bid for Young works out to about a 5.5 multiple of two-year average cash flow.
Credit remains tight, keeping many potential asset buyers out of the market for properties, driving prices down. The Young, Pappas and Equity Media bankruptcies resulted in credit bids — in effect, creditors exchanging what they’re owed for a controlling equity interest in the company. New Vision, which filed a pre-packaged Chapter 11 bankruptcy earlier this month, could be headed in the same direction