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WDWB-TV goes on the block

Granite Broadcasting put its WB affiliate WDWB-TV Detroit up for sale last week, succumbing to what ails many TV groups these days: mounting debt and decreasing cash flow.

"Like many broadcasters, Granite has some balance-sheet issues they have to deal with pretty quickly," said Credit Suisse First Boston broadcasting analyst Paul Sweeney.

According to Bob Kricheff, CSFB high-yield analyst for the media industry, Granite has a little more than $400 million in bank and bond debt and another $255 million in outstanding preferred stock. For the first half of the year, broadcast cash flow was off about 75% from 2000, $5.3 million vs. $22.5 million.

Granite, headed by Chairman and CEO Don Cornwell, is preparing to take over the NBC affiliation in the San Francisco market, for which it will pay NBC more than $30 million a year for 10 years. Some on Wall Street say the company may try to sell additional stations to further improve its balance sheet and provide more resources for the market, where it has a duopoly of soon-to-be-NBC-affiliate KNTV(TV) and WB affiliate KWWB (TV).

However, according to a well-placed source, the company has no intention of selling any other stations. In fact, the source said, it didn't want to sell Detroit, but its board decided that it had to address the messy balance sheet by selling an asset.

CSFB's Kricheff believes the company's lenders may have encouraged, if not demanded, that Granite reduce debt load by selling a station.

Granite officials declined to comment. But one source close to the company said, "I think the real question is, are they working cooperatively with the banks in light of the capital structure? The answer is yes."

The source also stressed that the company has enough cash on hand—close to $50 million though a refinancing completed in March—to meet payrolls and other basic expenses through year-end. It has also prepaid NBC the first annual installment on the affiliate contract, with the second not due until January 2003.

Making it to January is critical for Granite. Despite speculation that NBC might kill the San Francisco deal at the last minute, network sources confirm that the current plan is to let it go forward. According to the agreement, NBC can bow out if it buys an attributable interest in a station in the market other than Paxson's KKPX-TV (NBC owns one-third of Paxson, with an option to buy more next year). Killing the affiliate deal would cost NBC a $14.5 million break-up fee—peanuts compared with the hundreds of millions it would pay for an attributable stake in any worthwhile station.

Though saying it's "business as usual with Granite," an NBC source acknowledges that the network is watching Granite's financial situation "very closely."

Granite is moving ahead on the affiliate switch. As of August, it had sold 30% of the inventory at prices it expects KNTV to reap as an NBC affiliate in first quarter 2002. The company has told Wall Street it thinks the station will generate $51 million in broadcast cash flow next year. Station revenues are projected to approach $90 million as an NBC affiliate in 2002.

It's not the best time to put a station on the block. In fact, analysts said, the TV-station sales market is as bearish as it has been in years. But Granite, a source said, believes there will always be a market for a top-10-market station and is confident there will be multiple bidders.

Sweeney agrees that WDWB-TV is valuable, if only because top-10 stations rarely come on the block. The bidder most speculated about is Tribune, the largest WB affiliate group. Kricheff said Granite's bondholders were maintaining their positions last week, a sign he took to mean that "people are pleased they are going to start realizing some asset value." Granite bought the station in 1997 for $175 million. What price will it bring? Hard to know, but Kricheff believes "they won't have to worry about a tax bill on it."