Granite Broadcasting's red ink eased by KBJR-TV's ad revenues

New York-based Granite Broadcasting Corp. (OTCBB: GBTVK) is struggling to regain investor confidence after a serious setback earlier this year: the owner of KBJR-TV Channel 6 in Duluth/ Superior was delisted from the NASDAQ stock exchange when its market capitalization slipped below the exchange’s minimum value.

As a result of the delisting, a substantial debt burden, mounting red ink and regulatory uncertainty preventing the eight-station chain from selling two underachieving stations in Detroit and San Francisco, investors pushed down the company’s per-share price to 43 cents by Nov. 12.

Still, the company is hardly on the ropes, said W. Don Cornwell, chief executive. After releasing third quarter financials on Nov. 10, he said revenues got a boost from political advertising buys on KBJR, the only Granite station in a presidential election battleground.

“In the third quarter, I’d say the total market for political advertising in Duluth/Superior was somewhere in the neighborhood of $3.6 million, and that’s not including October when the presidential race really heated up,” Cornwell told BusinessNorth. “Over a full year, I’d expect that we’re going to get around 40 percent of that advertising pie in a market where the total spent on all television advertising is between $20 and $22 million.”

Cornwell said Granite’s third quarter revenues rose 9 percent over the year-earlier period, its ninth straight quarter of revenue growth. As important, broadcast cash flow from its “Big Three Network”-affiliated stations, including KBJR, jumped 30 percent to $1.2 million.

But Granite’s big picture is still one of oceans of red ink. It lost $20 million in the third quarter on revenues of $27 million, compared with a $15 million loss on revenues of $25.7 million in the year-earlier period. For the nine months ending Sept. 30, Granite bled $53 million on revenues of $82 million.

Station operating expenses ate up $25 million of the $27 million of the latest quarter’s revenues. But what’s really pushing the company into the red are interest payments on its $400 million in long-term debt and dividend payments on its $199 million in outstanding preferred stock. Those expenditures totaled $9.9 million and $1.1 million respectively in the third quarter.

To help counter that, Cornwell has mounted an aggressive cost-cutting regimen that’s already saved the company $2 million, he said.

“Virtually all of our stations had margin improvements, and we expect that to continue,” Cornwell said. “We are really highly focused on operational execution and we have an opportunity to drive (down) costs — even at our highest-margin stations — toward being more efficient. There was a little trepidation when it started, but now we have some managers who are asking to be next in line for this process.”

Cornwell said KBJR’s costs are not as high as some of its other stations, which are facing mandatory upgrades to digital transmission signals. That technology upgrade was addressed when the station was rebuilt in Canal Park after a 1997 fire gutted its downtown Duluth location.

“In a way, that fire was a blessing in disguise for Channel 6,” Cornwell said. “Thanks to the leadership of (general manager) Bob Wilmers, we had the foresight to incorporate all of the digital, high-tech equipment we’d later need when we rebuilt. What we essentially ended up with was a TV station of the future.” (Wilmers has since added the additional title of corporate vice president-technology and productivity.)

As an NBC affiliate, KBJR received more advertising revenue this year because of the network’s coverage of the Summer Olympics from Athens. That was part of a companywide revenue uptick of 11 percent from stations with a Big Three network affiliation: KBJR-TV, NBC; WKBW-TV, Buffalo, NY, ABC; KSEE-TV, Fresno, CA, NBC; WTVH-TV, Syracuse, NY, CBS; WPTA-TV, Fort Wayne, IN, ABC; and WEEK-TV, Peoria, IL, NBC).

As mentioned earlier, KBJR also was Granite’s only station in an election battleground market, meaning it was able to haul in substantial political ad revenues that are charged at a much higher rate than nonpolitical advertising. In a Nov. 10 conference call with financial analysts, Cornwell also indirectly pegged KBJR’s broadcast cash flow at $2 million annually when he said KBJR would be worth $40 million — based on an industry multiple of 20 times cash flow — were it put up for sale.

Not that Granite seems anxious to put the Duluth/Superior station on the sale block anytime soon. The context of Cornwell’s remark was a complaint that Granite’s stock is undervalued and “ridiculously beaten down” given the worth of its station portfolio if theoretically broken up and sale-valued piece-by-piece. Some analysts, however, doubt the breakup value would be enough to cover the firm’s debt load.

Cornwell is urging Granite investors to hang on until better times materialize, which he maintains will happen when the Federal Communications Commission (FCC) moves on two fronts. One move would be FCC approval of a seemingly non-controversial agreement reached in May between Granite and Malara Broadcast Group of Sarasota, FL.

If approved, KBJR will merge its “back room” advertising operations with KDLH-TV Channel 3, which is poised to be purchased by Malara. The same arrangement is slated in Fort Wayne, where Granite has agreed to swap its WPTA-TV for another station in that market, then merge their backroom functions. With FCC approval, Granite stands to “double” its operating income, Cornwell said.

The Malara deal should be decided before the end of the year, Cornwell said, adding it’s needed because the small size of the Duluth/Superior market (No. 136 nationally) makes KBJR one of the company’s laggards in terms of profit margin.

The other FCC hurdle for Granite is a judicial roadblock that’s slowing down the Commission’s proposed loosening of broadcast station ownership rules. Granite’s two worst-performing stations are affiliates of the WB Network in Detroit (WDWB-TV) and San Francisco (KBWB-TV), and the company wants to sell them to any interested buyer. But since a Sept. 3 federal appellate court ruling ordered the FCC to delay the rule changes, buy/sell activity in the broadcast market has come to a virtual standstill.

In the meantime, Cornwell said Granite is doing what it can to stem the losses at its WB Network stations: Third quarter revenues declined another 7 percent and costs jumped 28 percent. A significant fix came with Granite’s recent announcement it has secured broadcast rights for the National Basketball Association champion Detroit Pistons for WDWB-TV.

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KBJR-TV Channel 6

Granite Broadcasting