Young's Post-Ch. 11 Future Is A Gray Area

As the Young Broadcasting bankruptcy claws its way toward a conclusion, employees of the 10-station group are wondering just who's in charge.

Last summer, those at seven of the stations were looking forward to working with the new outside management from Gray Television.

Then late last year, after a competing reorganization plan emerged, Gray was no longer welcome.

"Young management said it's best if there's no communication with the Gray people until this all works out," said a source familiar with the situation. "It's pretty clear the Gray people are not allowed on the property until there's clarity on who's going to operate the stations."

"We're still on hold," Robert Prather, president-COO of Gray said. "We're really not in a position to do anything. The lawyers are telling us to let the litigation play out. We've not been involved in day-to-day stuff for a couple months."

"Is there uncertainty? Yes, but not panic," the source said. "Everybody wants resolution."

During the hiatus, Gray continues to collect on its estimated $2.2 million annual management contract in quarterly payments of $550,000. "We'd rather be earning it," Prather said. "We can help these guys."

Young's bankruptcy, filed in February 2009 in the U.S. Bankruptcy Court for the Southern District of New York, has been challenging. After two auctions were canceled, the senior secured lenders' bid became the default choice last July.

The lenders include Highland Capital, Eaton Vance, Credit Suisse and Oppenheimer.

They outsourced to Gray management of the seven stations: WTEN Albany-Schenectady-Troy, N.Y. (ABC); WATE Knoxville, Tenn. (ABC); WBAY Green Bay, Wis. (ABC); KWQC Davenport, Iowa (NBC); KELO Sioux Falls, S.D. (CBS); KLFY Lafayette, La. (CBS); and WRIC Richmond, Va. (ABC).

The remaining three stations -- KRON San Francisco (MNT), WKRN Nashville (ABC) and WLNS Lansing, Mich. (CBS) -- will continued to be overseen by longtime Young President Deb McDermott.

By early last fall, everything appeared to be on track. But unsecured creditors, unhappy with the proposed reorganization plan, countered with their own plan. The Young board, still controlled by the old management, backed the competing plan and sent Gray to the sidelines.

That's where Gray has remained, even though Judge Arthur Gonzalez in mid-April gave the thumbs up to the senior lenders' plan and cleared the way for filing the necessary license transfer applications at the FCC in May.

The rejected unsecured creditors appealed, but such rulings are rarely reversed, people familiar with bankruptcy court say.

"We're not able to actually manage until we get FCC approval and the company changes hands," said Prather. "We were told our job was consulting, learn as much as we could, be ready to get into management when FCC approval comes."

David Pauker, Young's former chief restructuring officer and managing director at Goldin Associates, a restructuring advisory firm, is optimistic about a near-term Chapter 11 exit.

"Young expects to emerge from bankruptcy within the next 30 to 60 days, following FCC approval of Young's pending license application [by the FCC]," he said.

But Kevin Shea, the senior lenders' chief restructuring officer from the advisory firm Loughlin Meghji, was more restrained.

"There is no timeframe that has been established for any kind of exit," he said. "The judge clearly was very disappointed with the budgeting process that was undertaken and presented by management. We need a good, valid budget. That's the next thing on my list."

The current court-approved reorganization plan leaves Vincent Young as board chairman, but adds four new board members. Replacing McDermott and Morgan, who have resigned, are long-time broadcaster Tony Cassara and former Arthur Andersen partner and private equity investor Tom Sullivan.

Two additional board members, selected by the new owners, are Shea and Sheldon Galloway, a veteran broadcast industry executive currently at another station group, White Knight Broadcasting. (Correction: When this story was originally posted, Galloway was mistakenly identified as an executive at Communications Corp. of America.)

According to the current reorganization plan, Young, McDermott and Morgan all have employment contracts with the new owners. Terms of those contracts are under seal. However, sources familiar with the bankruptcy said there's about six months remaining on the contracts.

What happens when they expire? "No one really knows," said a person familiar with the company.

"There's a high degree of conflict between Vince and the banks, everyone knows that. It's not been an easy bankruptcy. There's been a lot of fighting. ... No one believes for moment he's the guy banks would like to be working with."

The emergence from bankruptcy may not be the end of the uncertainty for employees of Young.

The new owners -- the secured lenders -- don't want to run a broadcasting company long term and will likely be looking for the earliest possible exit. Strategic buyers know this and already are running the numbers.

"The reality is the Young stations are really pretty good stations," said Larry Patrick of Patrick Communications. "Bankruptcy actually has been helpful in releasing the stranglehold on the stations."

"There are probably a number of folks who would love to buy them," said one industry source. "It all comes down to price."

Potential buyers? Gray, Nexstar, New World and Local TV all could see the Young stations meshing with their current operations. Undoubtedly, others are analyzing whether some or all of the Young stations would fit in their portfolios.

"At the end of three years, I think the senior creditors will decide what they want to do," Prather said. "We'll take a look at that time."

An IPO would be another way for Young's new owners to recoup their investment. But that path is even more tangled than a possible sale, given current financial market and economic volatility.

How much is the station group worth?

Dueling estimates of Young's value were key features of the competing bankruptcy plans and offer a glimpse of what the company might be worth post-bankruptcy.

Tom Kuhn of Allen & Co., hired by the committee of unsecured creditors, painted a rosy scenario showing Young worth between $350 million and nearly $600 million by November 2012.

His valuation employed a multiple of 7-11 times estimated average broadcast cash flow of roughly $50 million in 2012. 

Contrast that with filings from Peter Cohen of Blackstone Advisory Group, hired by the senior secured lenders. He calculates Young being worth between $200 million and $300 million upon emergence from bankruptcy. His projections imply broadcast cash flow multiples of 4-6 times based on an estimated average 2010-13 cash flow of roughly $50 million.

The competing valuations reflect the current gulf between bid and ask prices for small to mid-market station groups.

The M&A market for that segment is still largely in hibernation, but sector economies are improving, credit markets are gradually easing and potential buyers and sellers are doing the math. Industry sources say bids are coming in at 6-8 times broadcast cash flow while would-be sellers are asking 10-12 times cash flow.

One more key post-bankruptcy question: What happens to KRON San Francisco, which the company purchased for a record $823 million in 2000 in what one industry insider has called  "the dumbest deal ever done in television." The purchase loaded the company with debt, and after losing its NBC affiliation, KRON's cash flow withered.

Chapter 11 has helped engineer something of a turnaround at KRON. Its cash flow has reversed course from negative to slightly positive and the station may actually be worth more than just a stick in a declining market.

NBC Universal, which has been exploring a "shared technical services" agreement with KRON, tops many lists as a likely buyer. An NBCU spokesperson, while declining to elaborate on what those services might be, noted that there is no agreement.

Multiple sources familiar with the situation say NBC has been "sniffing around" KRON but apparently didn't like what it smelled.

How much would KRON fetch? Figures range from as low as $25 million to "under $100 million," one source said.