When W. Don Cornwell left Goldman, Sachs & Co. in 1988 to build his own media empire from the ground up, he had more than a few things going for him. Cornwell boasted 17 years of investment banking experience and a modest nest egg to put up as capital. Wealthy friends--including attorney Vernon Jordan and talk-show host Oprah Winfrey--invested, too.
That Cornwell is African American would have posed a major hurdle to entrepreneurship in many other industries. But in broadcasting, his race qualified him for a Federal Communications Commission tax break meant to encourage minority ownership of broadcast properties. That helped him build a vigorous public company called Granite Broadcasting Corp., which now owns seven TV stations in such midsize markets as Austin, Tex., and San Jose, Calif.
A FOOT IN THE DOOR. The tax break is the same one that has caused a firestorm on Capitol Hill. At issue: Viacom Inc.'s planned $2.3 billion sale of its cable-TV properties to black entrepreneur Frank Washington. The regulation allows a seller to defer capital gains on a sale to a minority in hopes of making such deals more attractive. But in the Viacom deal, it meant that one of the nation's biggest companies could reap as much as a $600 million tax break, even though Washington owns only 21% of the acquiring company and is backed by giant Tele-Communications Inc.
Republicans in Congress are outraged by what they see as the cynical abuse of the system. So on Feb. 8, the House Ways & Means Committee voted to kill the program. The full House votes on the matter as soon as Feb. 21, and many legislators are pronouncing the tax break a goner.
Whatever you think of the Viacom deal or the FCC program itself, however, it clearly has achieved its stated purpose in Cornwell's case: Granite has been a smashing success. On Feb. 15, amidst all the Viacom-induced Sturm und Drang, Cornwell announced that operating cash flow swelled 71% in 1994, to $25 million, on revenue of $63 million. The stock has doubled in the past year, to around 71/8. Says TV station broker Brian E. Cobb of Media Venture Partners: "He has earned the respect of other broadcasters."
Cornwell says the tax credit was critical to his early deals--mostly as a way for an upstart to get in the door. Those first buys, though, weren't exactly bargains. Despite help from the FCC, Granite paid more than 13 times operating cash flow for a Duluth (Minn.) station and 10 times cash flow for a Peoria (Ill.) station in 1988, while similar properties were selling at about 8.5 times, says broker Cobb. "In [anyone's] first deals, it's hard to get a serious seller to consider you," notes Lazard Frres & Co. analyst James P. Gorman, who follows the company.
The debate in Washington stems from a string of cases like the Viacom deal in which minorities appeared to be used as fronts for large corporations such as TCI, only to be bought out later. Cornwell, on the other hand, has won kudos as a hands-on operator who boosts profitability, usually by beefing up local newscasts and ad revenues. He has never sold a station and intends to keep buying until Granite hits the FCC limit of 14 stations. "Our company should be the poster boy" to illustrate how the tax break should work,
Cornwell's clout means that his company will likely keep growing no matter what happens to the tax break. In a pending $54 million acquisition of a station in Kalamazoo, Mich., Granite is getting a $7 million to $10 million break on the purchase price. But Cornwell could easily pay the difference if Congress overrules the FCC.
And a likely acquisition of a Buffalo station later this year owes purely to Cornwell's dealmaking skills. In 1993, when broadcast values were depressed, Granite paid Prudential Securities Inc. $7.5 million for Pru's 45% equity stake in the ABC affiliate. Granite also got a $29 million note Prudential was holding on the property, which is collateralized by the remaining 55% of the equity. If the majority partner defaults, as is widely expected, Granite will control a station valued at about $110 million.
SAVING DIVERSITY. So why does Cornwell care what happens in Congress? He would prefer to keep any financial advantage he has, of course. But it's more than that. "When the FCC program began in 1978," he notes, "only 0.5% of the 10,000 broadcast properties were owned by minorities." Now, the number is 2.9%. "To me," Cornwell says, "the harm is in the broader sense: Diversity is going to go away" if the tax break dies. It's up to Congress to decide if that's important.