Duh: Don't Buy Granite Stock

Linda Lipp has more on the state of Granite Broadcasting in this week's Greater Fort Wayne Business Journal:

And a respected bond analyst who has followed the company since 2001 said the $180 million Granite will earn from its sale of stations in Detroit and San Francisco this quarter will only be enough to keep the company afloat for another year — at best.

“Even if they pay down some of their debt, the stations they have left can’t generate enough income to cover their interest payments,” analyst Shelly Lombard, of Gimme Credit, said last week.

[...]The sales price Granite is getting for its WB stations in San Francisco and Detroit was a disappointment to shareholders, bond holders and other creditors. “People were hoping for $250 million,” Lombard said.

“What worked against Granite is that buyers knew they needed to sell,” Lombard added. “It’s like selling a house in the middle of a divorce. Everyone knows you’re desperate.”

The company said it plans to use $30 million of the sale proceeds for general corporate purposes, including interest and operating expenses. It also will acquire a $2.5-million stake in AM Media, which is buying the stations. The remaining $147.5 million could be used either to either repay debt or buy more major network-affiliated stations.

But Granite faces serious financial problems next year no matter how it chooses to use the proceeds from the station sales.

The New York company’s current debt totals $460 million, including $405 million in bonds. The annual interest is about $45 million.

If Granite uses $147.5 million to pay down debt, it would reduce its annual interest payments to about $30 million. But it would only be able to generate about $20 million to $25 million in earnings with its current holdings, Lombard estimated.

If Granite uses the $147.5 million for expansion, it could improve its earnings to $30 million to $40 million in 2006. That would fall short of the $45 million needed for interest payments if the debt isn’t reduced.

Good reporting by Lipp, but this isn't likely to be welcome news over on Butler Road.

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