Is Nexstar Undermining A Minority Owner’s TV Operation?

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RBR+TVBR INFOCUS


On June 6, 2014, one of the nation’s largest broadcast television station groups acquired three licensees in an all-stock deal — Grant Broadcasting, Communications Corporation of America and White Knight Broadcasting.

Because of local ownership limits, three stations were sold to a newly formed entity led by a minority owner known for his 21-year stint as GM of a small Gary, Indiana AM targeting the African-American community and, concurrently, as the Group Publisher of the Los Angeles Wave Publications Group since June 1998.

Now, the TV company led by Pluria Marshall Jr. is suing the entity it acquired the three stations from, Nexstar Media Group, for what it says are Nexstar’s active efforts “to undermine” its TV trio.

Nearly five years ago, Marshall Broadcasting Group opened its doors by agreeing to acquire three full-powered FOX stations from Nexstar for $58.5 million.

Those stations are KMSS-33 in Shreveport, La.; KPEJ-24 in Odessa-Midland, Tex.; and KLJB-18 in Quad Cities, Ia.-Ill..

Nexstar CEO Perry Sook heralded the deal, saying at that time that it presented “an ideal framework for introducing and incubating a new, minority-controlled entrant to broadcasting, and for bringing additional news, information and specialized programming to MBG’s markets at the earliest possible opportunity.”

As reported by RBR+TVBR in June 2014, MBG intended to fund the station acquisitions via credit, which Nexstar has agreed to guarantee.

Further, the deal was structured so that Marshall would be acquiring the stations’ program contracts, equipment, and real estate interests in connection with studio and tower sites. Nexstar would provide sales and other non-programming services to MBG, allowing Marshall’s stations to use Nexstar personnel for engineering support, master control, traffic and billing and other administrative functions that do not relate to control of the stations or their programming.

This is likely where Marshall’s fight against Nexstar began. Per the original terms of the deal, MBG would be entitled to 70% of the revenue from advertising sold by Nexstar on the stations. It would not provide for any bonus payments to Nexstar for achieving revenue goals. Further, it would not be a fixed-fee payment; as total revenues increased, so would MBG’s share. The FCC required a modification, upping MBG’s ad revenue percentage to 85%.

This transaction structure was designed to provide Marshall with incentive to seek the best programming and, thus, maximize station advertising revenue while providing significant cost savings benefits.

Within days, reaction to the deal was swift and mostly positive. The National Association of Black Owned Broadcasters (NABOB) cheered, with Executive Director Jim Winston saying, “This is the type of transaction NABOB was hoping to see.”

But, he added that NABOB still had questions about the deal.

Then came a cautious endorsement of the Nexstar-Marshall transaction from David Honig, then-President of the Minority Media and Telecom Council (MMTC). Like NABOB, Honig said the FCC should require Nexstar and Marshall to answer additional questions about their proposed deal.

Attribution rules at the time fueled the questions. Under the Pai Commission, Joint Sales Agreements are no longer attributable to a company’s total station ownership percentage. Still, MMTC’s “critical question” is one that requires a second look today, given Marshall’s lawsuit against Nexstar: Is this transaction designed to produce a free-standing, independent broadcast operation at the conclusion of the JSA agreement?

‘DISINGENUOUS AND DAMAGING’

On Wednesday morning, a 31-page complaint was filed by Marshall’s legal counsel in New York Supreme Court, the state’s point of entry for legal cases, despite its name.

Marshall is represented by well-known communications attorney David Boies of Boies Schiller Flexner LLP.

In the complaint, Boies argues on behalf of Marshall that Nexstar “never intended the transaction to be a permanent divestiture. Rather, it hoped that it would be able to reacquire the stations that it had parked with MBG if FCC regulations were subsequently modified or relaxed.”

To ensure that it would be in position to do so, Marshall asserts that Nexstar “conceived and executed a scheme to hobble the operations of MBG and those three television stations so that Nexstar would be able to acquire the stations cheaply, either in a bankruptcy sale or from an MBG that would have no choice but to sell at a fire sale price.”

Why is New York Supreme Court the venue of choice for Boies, as MBG is a Texas corporation and Nexstar is also based in Irving, Tex., while is incorporated in the state of Delaware? Nexstar affirmatively submitted to the court’s jurisdiction in any actions arising out of or relating to Nexstar’s agreements to guarantee MBG’s repayment of the credit facilities provided by lenders to fund its purchase of the three stations.

In a press release distributed Wednesday, Marshall said its suit “seeks to make MBG whole from Nexstar’s disingenuous and damaging actions – bringing to light Nexstar’s effort to sabotage MBG’s business and eventually buy back the stations for pennies on the dollar.”

“It has become clear that our only value to Nexstar was diversity optics at the FCC,” said Marshall. “Ever since the deal was signed, Nexstar has gone to great lengths to constantly interfere, undercut our authority and sabotage our business, with little regard for the agreements in place with us or the FCC.”

Marshall then commented on the lack of diversity among broadcast TV owners. As of today, he said, 12 out of 1,400 full-power, commercial TV stations are Black-owned – less than one percent. As MBG owns 3 of the 12 stations, Nexstar’s efforts to push MBG out of business would remove 25% of the Black-owned stations on the air today, he claimed.

Civil rights leader Dr. Benjamin F. Chavis Jr. also spoke up against Nexstar on behalf of Marshall. Chavis is President/CEO of the National Newspaper Publishers Association, and said, “Nexstar’s bait and switch flies in the face of the FCC’s quest for diversity in ownership. If allowed to go unchecked, it could affect all minority owned businesses in the telecommunications space.”

HIGH PRICE TAG?

Marshall’s complaint against Nexstar also takes the company to task for the $58.5 million price it agreed to in selling the three TV stations.

Marshall says it was overcharged, as Nexstar intended to sell the trio to “another potential buyer” for $42.3 million.

Nexstar initially tried to bring its transaction into compliance by selling KPEJ and KMSS to Mission Broadcasting for $27 million, with Mission signing both JSA and Shared Services Agreements with Nexstar. Similarly, Nexstar tried to sell KLJB to Mission for $15.3 million, with JSA and SSA deals in the mix. The FCC rejected this plan, arguing that Nexstar’s control of the three stations was too large.

Enter Marshall, who created MBG in May 2014 for the express purpose of purchasing KPEJ, KMSS and KLJB.

Why did MBG pay $16.3 million more than what Mission had been contracted to pay? It could come down to the list of assets Nexstar intended to transfer to Mission, which were arguably less, given the differential in the pricing. However, Marshall notes that this asset list is not publicly available, making comparisons impossible for Boies and MBG.

“Because MBG believed Nexstar was operating in good faith, MBG believed Nexstar’s explanation for the increased purchase price and relied upon that representation when agreeing to that new purchase price,” MBG said in the complaint.

MBG moved forward, and after an SSA amendment was put in place was required to pay $535,500 per month to Nexstar for Shared Service Agreement fees, with 2.5% increases every year for the entire SSA term.

Now, MBG claims Nexstar failed to disclose that the SSA fees were changed “with the purpose of maintaining Nexstar’s level of income from the originally proposed agreement.”

CREDIT CANCELLATION CLAIM

Perhaps the most damaging claim made by Boies and Marshall is that Nexstar is trying to drive MBG out of business by attempting to cause Marshall Broadcasting to default on its credit facility.

Nexstar agreed to guarantee MBG’s credit facility for five years. According to MBG, Nexstar attempted to withdraw its guarantee after 3 1/2 years.

“Nexstar knew that MBG was in no position to refinance its debt without Nexstar’s guarantee,” MBG said Wednesday in a press statement. “Only after MBG threatened litigation did Nexstar abide by its contractual obligations.”

MBG’s acquisition of the stations was financed via a syndicated credit facility in the principal aggregate amount of $60 million. The financing was initially provided through a December 1, 2014 Credit Agreement between MBG, as borrower; Bank of America, as administrative agent and collateral agent; and various lending institutions.

Meanwhile, MBG says Nexstar has yet to turn over retransmission fee revenue it is owed, retaining “millions of dollars” from Marshall’s group.

MBG’s goal and that of Boies is to have the New York court grant judgment in Marshall’s favor, with monetary damages determined at trial, and punitive damages against Nexstar.

For now, Nexstar is preparing to build up its legal defense. In a statement, it said, “The allegations made by MBG in its lawsuit against the company are spurious and without merit. The company intends to vigorously defend itself regarding this matter in a court of law.”

As that happens, Marshall will continue to be vociferous in its efforts to sway public opinion, and that of a New York judge, in its favor.

 

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— Archival reporting by Carl Marcucci