The Worst Stock in Television

How Drew Carey can be blamed for this broadcaster's woes

Don Cornwell picked a great name when he created Granite Broadcasting. Projecting an image of stability could only help as he asked Wall Street for support in building a portfolio of TV stations.

If only Granite had lived up to that image. Sixteen years later, the broadcaster is a crumbled mess. Profits are a trickle, while debt is a tsunami. Operating cash flow doesn't come anywhere close to covering Granite's interest costs. The company is living with the legacy of bad deals and poor operating decisions. NASDAQ delisted Granite's stock in August.

All that gives Granite the unfortunate distinction of being this year's single worst stock in the TV and radio business. Of all the public media companies B&C tracks, Granite is running dead last, off 75% from the beginning of the year.

That could conceivably change in the remaining days of the year (Paxson Communications is close behind), but Deutsche Bank TV analyst Drew Marcus has a sell rating on Granite. Even assuming Cornwell could sell some stations he wants to unload, Marcus estimates the value of Granite stock at zero.

Granite's sales are expected to grow 5% to $113 million, and its cash-flow margins are substantially lower than its peers'. Its $7.3 million in cash flow for 2004 will fall well short of the $38.7 million in cash required to service Granite's $517 million in total debt. The company is borrowing more money to keep all the balls in the air.

“We Need a Break”

“Operationally, we've had a good year, mid-single-digit revenue growth,” Cornwell told me in a recent conversation. “We can compete. We need a break or two here and there.”

He is still leading the charge, but Granite co-founder Stuart Beck has left. The longtime president resigned in August to take another post: full-time ambassador to the United Nations for the tiny nation of Palau. A lovely Pacific island with a population of 21,000, Palau subsists pretty much on payments for hosting U.S. military bases. Its revenues from tourism and agriculture wouldn't cover Granite's interest payments.

Since World War II, Palau had been a U.S. protectorate, but Beck, a lawyer, helped the island negotiate its independence in 1993. Even though Granite had been sinking on his watch for four years, Beck got a $1.1 million going-away deal, payments owed him under his contract.

In the U.S., Granite owns eight stations covering about 7% of the country, which makes it the largest black-controlled TV broadcaster. That's a small distinction, Cornwell notes, since so few stations are owned by minorities of any kind.

Some of Granite's problems are obvious. Six stations are affiliated with one of the Big Three networks, and they operate in small markets. Those are growing and make money.

Two others are in more-lucrative, large markets—San Francisco and Detroit—but are affiliates of The WB. Sales are shrinking, and the stations are losing money. Part of the problem is The WB, whose national ratings are plunging.

Syndication Misstep

But Granite has made its own missteps. The company badly overpaid for syndicated sitcoms that are now underperforming. The company committed to pay $6 million to air The Drew Carey Show on two stations in San Francisco and Detroit. Ratings tanked. The show is being replaced by My Wife & Kids—at a price 90% less.

Overpayment for Dharma & Greg in San Francisco has been costing $3 million per year, but the show will be replaced next year by According to Jim for just $600,000. All of this demonstrates how damaging a few bad syndication buys can be.

Cornwell started Granite in 1988, seizing on federal tax breaks available for media companies that sold stations to black-owned companies. An investment banker at Goldman Sachs, he got backing from the firm and started buying stations, mostly in smaller markets but also in Detroit and San Jose, Calif.

Most station groups can trace their decline to the dotcom bust or the recession. Not Granite. The trigger for its slide was the company's bizarrely expensive “reverse-compensation” deal to secure an NBC affiliation for its San Jose station, KNTV.

Other stations were fighting to preserve the antiquated compensation system by which the major networks paid the stations to secure distribution. Granite stunned the industry by agreeing to pay $362 million over 10 years to become NBC's sole affiliate, not just in San Jose (the No. 119 TV market) but in all of San Francisco (the fourth-largest market).

“Permanently Unprofitable”

The size of that payment panicked investors, because it rendered the station “permanently unprofitable,” says one securities analyst. Investors caused Granite's healthy $14 stock price to sink 40%. Within months, the company was in a financial crisis and struggling to refinance its debt. It quickly sold the station to NBC for $230 million. Cornwell considers the KNTV panic “old news.” But some analysts say it marks an important break in Wall Street's faith in the company.

All those past sins would be forgiven if Granite somehow gets back on track. Cornwell is encouraged by the price of recent TV-station deals. He wants to sell his WB stations, hopefully to the owners of larger stations in the markets, which can create duopolies and eliminate the losses.

Says Cornwell, “We've been pretty clear that we didn't think we had the right mix of assets.”

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