Granite Broadcasting Corporation
Granite Broadcasting Corporation
Incorporated: 1988Employees: 900
Sales: $140.1 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: GBTVK
NAIC: 513120 Television Broadcasting Stations
Granite Broadcasting Corporation, based in New York City, owns and operates nine television stations in the states of California, Illinois, Indiana, Michigan, Minnesota, New York, and Wisconsin. It is one of the most important minority-controlled media companies in the United States, named by Black Enterprise magazine as its 1995 company of the year. In Granite’s brief history it has displayed a willingness to be innovative. Well ahead of the curve, it teamed up with Yahoo! to provide local newscasts via the Internet as well as to develop other online features. A controversial deal with NBC in 2000, however, in which Granite agreed to pay the network for the right of one of its stations to be an affiliate, not only sent shock waves throughout the industry, it has had a detrimental effect on the company’s stock price and profitability. Although publicly traded, Granite is controlled by founders W. Don Cornwell, chairman and CEO, and Stuart Beck, president, who hold all of the company’s voting stock.
Establishing Granite Broadcasting: 1988
Cornwell is the driving force behind Granite. One of five children, he was born in Cushing, Oklahoma, in 1948 and was raised in Tacoma, Washington. His mother was a schoolteacher who instilled in him a love for academics. While an undergraduate at Occidental College in Los Angeles he studied pre-law, more interested in politics than business. In addition to applying for law school, however, he decided to apply for business school, resulting in the rare option of choosing between Harvard Law School and Harvard Business School. He chose the business school and soon discovered a penchant for finance. After earning his Harvard M.B.A. in 1971 he went to work on Wall Street with investment bank Goldman Sachs, where he would be employed for the next 17 years. He gained valuable experience that would prove helpful when he finally was able to pursue a dream of owning television stations. In a 1994 press interview, well after Granite was established, he explained, “I spent the last seven years at Goldman as chief operating officer of corporate finance. I dealt with 150 professionals and 90 support staffers, handling everything from compensation to technology. That prepared me a lot better for this job than people might think.” Moreover, at Goldman he learned the perspective of advertisers by working with a number of consumer products companies, including American Greetings, Bristol-Myers, Gerber, Hershey Foods, and Rubbermaid.
In 1982 Cornwell was introduced to his business partner Beck by a mutual friend. A graduate of Harvard College and Yale Law School, Beck was a trial lawyer with practices in both New York and Washington, D.C. He also had contacts to the broadcast industry through his father, Martin Beck, chairman of Beck-Ross Communications. Cornwell and Beck’s first media venture together was an unsuccessful application for a New Jersey radio station. Then in 1987 they decided to form a company. Beck’s father and James Greenwald, chairman of Katz Communications, were instrumental in helping them attract investors. On February 8, 1988, Granite was incorporated in Delaware. For Cornwell, “granite” had significance because it was a black rock that served as a ready symbol for both himself and his company. The new venture raised initial funds of $45 million from investors that included Goldman Sachs, influential Washington attorney Vernon Jordan, and talk show host Oprah Winfrey.
Cornwell shopped for his first acquisitions in 1988, with a five-year goal of Granite owning at least six and perhaps as many as eight television stations. A major advantage Granite possessed, in addition to its solid backing, was a Federal Communications Commission (FCC) tax break intended to encourage minority media ownership that would be bestowed upon sellers. The program began in 1978 at a time when less than 1 percent of all broadcast television stations was owned by minorities. What Cornwell was looking for in an acquisition candidate was a station in a medium-sized market that had the potential to be the area’s leading news outlet and was not realizing its potential revenues. News was local television’s unquestioned moneymaker. Cornwell told Black Enterprise in 1995, “If you can buy the news leader [in a market] that underperforms and is fat, it’s like dying and going to heaven.” Granite closed on its first two television stations in October 1988, buying WEEK-TV in Peoria, Illinois, for $30 million in cash, and KBJR-TV in Duluth, Minnesota, for approximately $10.8 million in cash and stock. Cornwell then began to apply the principles that would become the hallmark of Granite ownership. He believed that the most important corporate decision was the hiring of the station manager, who would be granted considerable latitude after agreeing to a strict business plan. Granite emphasized the strict control of operating expenses, but more important was its emphasis on expanding local news coverage, to not only increase the number of broadcast hours devoted to news, but to find additional outlets for the station’s news franchise through local radio and cable TV systems. Granite also wanted its station managers to develop what it called value-added advertising opportunities by producing local programming, as well as sponsoring community events that targeted specific audiences for the station. In general, Granite hoped to attract advertisers who had never before turned to television.
First Major-Market Acquisition in 1990
Granite bought its third television station in late 1989 when it paid $26.5 million for WPTA-TV in Fort Wayne, Indiana. Three months later it made its first major-market buy, acquiring KNTV, located in San Jose, California, for $58.7 million with the help of a $38 million loan. Servicing that loan, however, would prove difficult during the country’s ailing economic climate of the early 1990s. Although ad revenues were down industrywide, Granite stations performed fairly well. In 1990 KNTV posted the highest revenues in station history, but interest payments on the $38 million loan resulted in a net loss. Overall, Granite’s debt was close to $110 million, and the company looked to go deeper in debt as it added to its roster of stations. Moreover, the company had lost some $30 million during this start-up phase.
To reduce its debt load, Granite made an initial public offering of stock in 1992. It was hardly a good time for an offering, with many broadcast stocks suffering in the market, but Cornwell’s Wall Street experience proved to be decisive. He was able to convince analysts that as the economy improved Granite would be poised to grow. Almost $3.5 million nonvoting shares were sold, netting $24 million. Granite stock was listed on the NASDAQ where it initially traded in the $7 range. Later in 1992 Granite initiated a $100 million junk bond sale to refinance the rest of the company’s debt, but high-yield market conditions soured, and Cornwell was forced to cancel the offering.
By December 1993 Granite’s balance sheet was strong enough to allow renewed expansion. The company paid Meredith Corp. $30 million for two stations, WTVH-TV in Syracuse, New York, and KSEE-TV in Fresno, California. It also paid Prudential Securities $7.5 million for a 45 percent interest in WNBW of Buffalo, New York, and acquired a $29 million note that Prudential held from the station’s majority owner, Queen City Broadcasting. Queen City appeared to be on the verge of defaulting on the note, which would allow Granite to pick up WKBW-TV at a fraction of its $110 million value. The transaction was not without controversy, however, because Queen City was owned by one of America’s leading black businessmen, J. Bruce Llewellyn, who portrayed Cornwell’s deal as an act of betrayal. To Cornwell, on the other hand, not only was he practicing good business, he was guaranteeing that the Buffalo television station remained minority-owned. It would eventually become part of the Granite fold in June 1995 and be renamed WNBW-TV.
With the addition of the Syracuse and Fresno stations, Granite saw its net revenues soar by 75 percent in 1994, totaling almost $63 million, after posting just $37.5 million in 1993. The price of Granite stock, which had languished since its IPO, also increased in value by 70 percent, making it the top performing media stock in the country. As a whole the television industry rebounded, the economy improved, and advertising revenues were aided by election year political ads. In addition, Granite benefited from increased competition between the major networks, as an aggressive Fox precipitated a number of affiliation changes that resulted in higher network compensation to broadcast stations.
Granite was now well positioned to add new television stations in 1995. In February it paid $54 million for KEYE-TV of Austin, Texas, and then in June it paid $98.9 million for WWMT-TV, which served Grand Rapids, Kalamazoo, and Battle Creek. With nine stations under its control, Granite was content to consolidate its gains before taking on any new acquisitions, which in any case would have to be accomplished with the aid of the FCC minority-ownership tax break. Congress repealed the program in 1995 after a number of media conglomerates used minority fronts to gain massive capital-gains tax breaks. A prime example was the $2.3 billion sale of Viacom’s cable television operations to black businessman Frank Washington, who owned only 21 percent of the purchasing company. The major player was actually Tele-Communications Inc., holder of the nation’s largest cable television system. While Granite was established and was expected to maintain its growth, other minority owners would now find it much more difficult to emulate Cornwell’s success.
In every market where it produces news, Granite is determined to be the leading provider of local news, weather and sports information. Granite takes a highly aggressive approach to station management and consistently achieves some of the best operating results in the industry .
Granite displayed its innovative spirit in 1996 by backing Datacast, a business that planned to transmit data over the analog spectrum to customers. The venture would lose money but lead to a digital business a few years later. More important in 1996 was Granite’s affiliation with Yahoo! before the Internet portal went public and became a major success story. Granite was the first to feature its local news content on Yahoo!, with both parties sharing advertising revenues. Granite also looked to expansion in the established medium of radio. In May 1996 it paid $1 million to acquire WIVR-FM in Eureka, Illinois. The call letters were changed to WEEK-FM, and then reformatted to augment Granite’s WEEK-TV station. Not only did the radio station use the television station’s news content, it featured local TV personalities as call-in show hosts, and also simulcast local programming, such as area minor league baseball and hockey games. Cornwell considered radio to be “a fairly low-cost way of expanding our franchise.”
First Top-Ten Acquisition in 1997
Granite added to its roster of television stations in 1997 by buying its first top-ten market property, paying $175 million for WXON-TV in Detroit, Michigan. Granite television stations now reached 7.75 percent of the total U.S. audience. A family-run business for many years, WXON-TV was the number six station in Detroit and did not even subscribe to the Nielsen ratings, a decision that kept ad rates low because advertisers had no verification of viewership. It was a classic example of an underperforming station that Granite had proven it could turn around. Coupled with its other Michigan station, Granite was now in a position to deliver 80 percent of all Michigan households to advertisers. Nevertheless, WXON-TV, soon renamed WDWB-TV, was the company’s first major-market project. Investors took a wait-and-see attitude and did not bid up Granite’s stock, which had been languishing in recent months. Moreover, Granite’s reported debt load had reached $376.5 million.
To restore Wall Street confidence and perhaps float a new stock offering, Granite looked to clean up its balance sheet. In July 1998 it sold its first Michigan acquisition, WWMT-TV, to Freedom Communications for $150.5 million. The company then exercised a right to purchase WLAJ-TV of Lansing, Michigan, and immediately resold it to Freedom. The proceeds from these transactions were then used to fund another purchase of a major market television station, San Francisco’s KBWB-TV, for which Granite paid more than $170 million in total compensation. Granite unloaded other properties in 1999, selling its
Austin television station for $160 million in cash and WEEK-FM for $1.15 million (thereby putting at least a temporary end to Cornwell’s plan of creating synergy between local television and radio stations) .
Wall Street approved of Granite’s moves and its stock price improved significantly, but the company’s next step would prompt immediate and harsh negative response from investors in 2000. Granite’s San Jose station, KNTV, was set to lose its affiliation with ABC, after accepting a $14 million payment from the network to give up that affiliation five years early. At the same time in San Francisco, NBC failed in an attempt to purchase its longtime affiliate KRON-TV, losing out to Young Broadcasting. The network demanded that the station now pay it $10 million a year to keep its affiliation, a reversal of the traditional arrangement in which networks paid stations to be affiliates. Young refused to comply. The industry, as well as Wall Street, was then stunned when NBC and Granite announced that Granite had agreed to pay NBC $362 million to make KNTV the NBC affiliate that would serve San Francisco beginning in 2002. In addition, three Granite stations located in Duluth, Fresno, and Peoria would receive ten-year deals at no extra cost. The signal of KNTV reached only portions of San Francisco and was not represented on all the city’s cable systems, but Granite expected to work out those problems by 2002. From Cornwell’s point of view, the deal was a masterstroke. Young had just paid $823 million for what it expected was the NBC affiliate for San Francisco, and now for less than half the price Cornwell was able to transform KNTV into that level of franchise. He also was looking to team with NBC to create a Bay Area cable news channel that would compete with Young’s Bay TV.
- Company is incorporated; two television stations are purchased.
- San Jose’s KNTV becomes the company’s first major market acquisition.
- Company makes an initial public offering of stock.
- Black Enterprise magazine names Granite its company of the year.
- Detroit’s WXON-TV becomes the company’s first top-ten market acquisition.
- Company agrees to pay $362 million for NBC affiliation.
Other broadcast stations as well as Wall Street did not share Cornwell’s vision. They were horrified and angry, believing that in a single stroke Granite had changed the dynamics of television economics. Whereas most believed that the amount networks paid to affiliates needed to be lowered to reflect current realities, the thought of reverse compensation in which stations would pay the networks was nothing short of heresy. Network compensation provided between 5 percent and 10 percent of station revenues. The elimination or reversal of compensation would have significant adverse effect on the value of stations. Wall Street showed its displeasure with Granite by punishing its stock, which had only just rebounded. Famed money manager Mario Gabelli, one of whose funds was Granite’s third largest institutional investor, even called for Cornwell to resign. By the end of 2000 Granite stock was trading as low as $1 and in danger of being delisted. Although the company’s market capitalization was now just $20 million, Granite’s television stations were clearly worth far more than if sold off. Nevertheless, going into 2001 Granite was in serious financial difficulty. Soft ad revenues had hurt the company’s recent earnings, which only fueled the company’s plummeting stock price. To make matters worse, Granite faced large initial payments due on the NBC deal. The network, however, wished to see Granite succeed (even though it retained the right to cancel the affiliation deal should it find an unlikely means to pry KRON-TV away from Young). In addition, NBC agreed to provide KNTV with some program content to help it survive during the two years it would have to operate as an independent. It was Cornwell’s old firm, Goldman Sachs, however, that provided an even more important boost to Granite’s sagging fortunes when it arranged $205 million in financing. The company’s stock finally appeared to stabilize. Nevertheless, the true test of Cornwell’s gamble would come only when KNTV became an operational NBC affiliate. Should the station turn into a cash cow, the NBC deal would seem like an act of genius that would overshadow any temporary controversy over reverse compensation.
Principal Operating Units
KBWB-TV, San Francisco; WDWB-TV, Detroit; WNBW-TV, Buffalo; KNTV, San Jose; KSEE-TV, Fresno; WTVH-TV, Syracuse; WPTA-TV, Fort Wayne; WEEK-TV, Peoria; KBJR-TV, Duluth.
Sinclair Broadcast Group, Inc.; Young Broadcasting Inc.
Block, Valerie, “Granite Tries to Steady Its Shaky Picture,” Crain’s New York Business, December 18, 2000, p. 3.
Flint, Joe, “NBC Affiliate Agrees to Pay for Programs,” Wall Street Journal, February 15, 2000, p. A3.
Foisie, Geoffrey, “W. Don Cornwell,” Broadcasting & Cable, May 30, 1994, p. 69.
Lowery, Mark, “Solid As a Rock,” Black Enterprise, June 1995, p. 122.
McClellan, Steve, “Granite Stock in a Tailspin,” Broadcasting & Cable, December 18, 2000.
——, “Reversal of Fortune,” Broadcasting & Cable, February 21, 2000, p. 10.
Mermigas, Diane, “Granite Gets Time to Pay the Peacock,” Electronic Media, March 12, 2001, p. 5.
——, “Granite Scrambles to Avoid Hitting Rock Bottom,” Electronic Media, December 11, 2000, p. 2.
——, “Testing Granite’s Mettle,” Electronic Media, April 17, 2000, p. 1A.