KRON-TV's price of freedom
San Francisco station worth less without network, SEC filing shows
By Elizabeth A. Rathbun -- Broadcasting & Cable, 4/10/2000
How much is a network affiliation worth? If the station is the leader in the nation's fifth-largest television market and the network is NBC, up to $915 million. Without the affiliation, as little as $680 million.
Young Broadcasting Inc. bought the station-kron-tv San Francisco-for $823.6 million, assuming the end of the station's 41-year affiliation with NBC on Dec. 31, 2001.
The figures are revealed in a March 30 Securities and Exchange Commission filing about Young's November 1999 purchase of KRON-TV from Chronicle Broadcasting. Young's financial adviser, Lazard Frères & Co. LLC, estimated kron-tv's "net present equity value" at $815 million to $915 million if about $7.5 million a year in network compensation is included, $750 million to $840 million if it is not.
Chronicle's adviser, Donaldson, Lufkin & Jenrette Securities Corp. (DLJ), gave "an enterprise value range" of $680 million to $915 million.
Young, though, was not overly concerned, according to the filing. The New York-based company already ran an independent station in a major market: KCAL(TV) in No. 2 Los Angeles. Adding KRON-TV bulks up its syndicated buying power. Both stations air about four hours of news a day, for lower programming costs. And with $14.4 million in staff and benefit cuts and more local and national revenue at KRON-TV, Young assumes it can "manage costs effectively."
But investors aren't quite so sanguine. Since the deal was announced Nov. 16, Wall Street has socked Young's stock: It closed at a 52-week high $51.78125 on Nov. 15 but was at $21 last Thursday.
While "NBC's strong programming lineup.provides a strong foundation for kron-tv's successful program schedule," Young never planned to maintain the NBC affiliation, the filing says. Negotiations were conducted with that in mind, even though "the loss of one or more [of a Young station's] network affiliations would disrupt its business and could have a material adverse effect."
The SEC documents provide a fascinating account of the process that led Young to pay the highest-ever price for a stand-alone TV station, let alone an independent-to-be.
In February 1999, Chronicle hired DLJ to value its assets and, in May, authorized a sale. Young asked Lazard to check out KRON-TV. Besides being a UHF and the No. 1 station in the No. 5 market, it was attractive because it has room to improve its local ad revenue-it now ranks third in the market in local revenue share, second in total revenue-and historically has paid above-market rates for programming, the filing says.
By mid August, the field of "interested parties" had narrowed to "several," known to include NBC. In September, NBC President Robert Wright sent Chronicle a letter saying that any affiliation agreement would have to be settled before a deal was clinched and the new owner would have to pay $10 million per year, instead of being paid, for affiliation.
Young was so eager for KRON-TV that it submitted a bid of $600 million in cash and 3.4 million shares of stock before the Nov. 4 deadline and subsequently upped the bid twice.
On Nov. 15, the companies'boards unanimously approved terms of $650 million cash and about 3.7 million shares of Young stock for a total value of $823.6 million (B & C, Nov. 22, 1999).
To fund it, Young is seeking a loan of up to $850 million through Deutsche Bank AG, according to Bloomberg Business News, and intends to sell more stock. The deal is expected to close April 28.
