Acme's Got No Debt; No Cash Flow Either

With its deal to sell two TV stations to Tribune Broadcasting, the Acme station group will virtually eliminate its debt. But it also will pretty much eliminate its cash flow, likely pushing it back into the red next year.

Tribune agreed to pay $275 million for Acme's two best stations, KPLR-TV St. Louis and KWBP(TV) Salem, Ore. (Portland).

Tribune Broadcasting CEO Pat Mullen called KPLR-TV "the WGN of St. Louis"—a VHF channel with strong prime time performance (as an affiliate of The WB), highly rated newscasts and TV home of the popular St. Louis Cardinals. (WGN-TV Chicago is Tribune's powerful flagship station.) Also, as 22.5% owner of The WB and operator of 17 of its affiliates, Tribune is always eager to add more The WB affiliates to its portfolio.

But KPLR-TV is also Acme's only substantial source of cash flow. After the sale and last week's $5.8 million acquisition of a The WB affiliate WBUW-TV Madison, Wis., the group is left with nine stations, all of them "developing" properties that are—or until recently were—weak-signaled UHF stations, poorly programmed in non-WB dayparts. (One station is a UPN affiliate.) Only one of the remaining stations, WIWB-TV Knoxville, Tenn., is expected to post profits for 2002.

Unmanageable debt

Acme had to sell its prized possessions because $276 million in debt, more than 23 times annual cash flow, had become unmanageable. The collapse of ad sales in 2001 left Acme far short of the financial plan set when it issued junk bonds in 1997. Interest payments on those bonds were deferred, but all of the bonds will be "cash pay" by March, draining $30 million in cash annually from a company that will probably post less than $12 million in operating cash flow for 2002 (including $16 million now disappearing from St. Louis and $3 million from Portland).

Acme Chairman Jamie Kellner insisted that he isn't holding a fire sale. "We were not going to sell the stations unless we get full and fair value for them,'" said Kellner, who is also chairman of AOL Time Warner's Turner Broadcasting and The WB.

Acme President Doug Gealy said that "2001 kind of knocked the wind out of us and we wanted to de-lever."

Tribune valued St. Louis at $200 million, or a mere 11.3 times estimated 2003 cash flow. (Acme bought the station in 1998 for $146 million.) Merrill Lynch media analyst Keith Fawcett had been hoping for $240 million, or 13.5 times cash flow.

The $75 million price on Portland comes to more than 20 times cash flow, but that's deceptively high because the station is considered "developing." (Acme paid $17.6 million for the station in 1997.)

But with Acme's debt coming down to just $15 million as a result of the sale, banks with which Acme had to renegotiate debt covenants in 2001 will probably resume offering plenty of credit based on expected cash flow from the remaining stations.

Financially flexible

Fawcett said he expects the company to resume buying weak stations ripe for turnarounds, either through better programming, upgraded towers and transmitters, or more aggressive marketing.

"They were asset rich and cash-flow poor," Fawcett said. "This de-levers Acme's balance sheet, giving them plenty of financial flexibility. The developing stations are far enough along, ratings are strong enough that the banks should be confident."

One media investment banker disagreed, saying he believes that Kellner is losing interest in Acme and that his dual role at Acme and the WB is drawing too much scrutiny about potential conflicts of interest from AOL Time Warner investors.

Tribune and AOL have agreed to buy out eight network executives and Kellner's 11% interest in The WB for $110 million. The banker contended that Kellner will parcel its remaining stations out to broadcasters looking for duopoly mates and financial players looking to stitch together a portfolio.

In acquisition mode

But Kellner and Gealy said that Acme is in acquisition mode. "It's really a formula," Kellner said of Acme's focus on turnaround situations.

As for Tribune, the deal increases its TV station total to 26 station, serving 40% of U.S. TV households (though still 5% below the FCC's 35%-of-households TV station ownership limit because the agency only counts half the households in markets if served by UHF stations).

Mullen said the company remains a buyer. "We are interested in stations in any of the top 30 markets," he said. While he would like to buy second stations in markets (duopolies) where Tribune already has one station, that's not any higher of a priority than simply getting stations in large markets.

Mullen expects more opportunities to arise if the FCC relaxes the ownership rules as expected. But the big kick would be the expected elimination of newspaper-TV cross-ownership rules that currently keep Tribune out of markets where it owns big newspapers like Orlando, Fla., and Baltimore.