Entrepreneur Builds Broadcast Empire on Debt

Nearly 20 years ago, George Gillett put together his first diversified business. Buying and borrowing, laying brick on brick, he troweled together a small conglomerate that included the Harlem Globetrotters basketball team, a golf-club maker, radio stations and retail boat franchises.

Gillett’s tower rose to the sky--until the 1975 recession hit, earnings dwindled and he was forced to sell assets to pay debts.

Gillett started over in the television station business in 1978, borrowing and buying, piling paper on paper, until by this year he had amassed the largest group of network-affiliated stations outside those owned by the networks themselves.

People said George Gillett was a major player. And some people wondered about his debts.

“They say we borrow too much, that we bid too high, and in the face of that cautiousness, we charge ahead,” says Gillett, 49, a voluble man whose voice seems to boom from a barrel. “Why do we do it? Why does the salmon swim upstream?”

In the past two years, this one-time salesman has emerged from obscurity to become one of the most influential--and controversial--of broadcasters. With 12 major stations that reach 13% of the U.S. television audience, he is the very model of the new broadcast entrepreneur, borrowing heavily, bidding high and wringing from his stations profits unimagined by the family concerns that once dominated the industry.

Gillett takes aggressive advantage of broadcast deregulation, prompting some in Congress to charge that he has sought to dodge government rules limiting station ownership and has exploited tax breaks offered to minority TV station owners.

Gillett has also won respect for his ability to improve stations’ financial performance and for his interest in quality broadcast news.

Buying and selling at a rapid clip, Gillett has purchased 12 major-market stations for $1.26 billion over the past year. Gillett Holdings, his closely held company, paid more than $600 million for a 51% interest in six of the seven stations formerly owned by the now-defunct Storer Communications and $365 million for a majority interest in a big Tampa, Fla., station.

The company also owns a Wisconsin meatpacking company and the Vail and Beaver Creek, Colo., ski resorts, and it recently sold another five stations to a trust set up for Gillett’s children. Gillett Holdings’ TV stations now include three in California: KCST in San Diego, KSBY in San Luis Obispo-Santa Barbara and KSBW in Salinas-Monterey.

He has assembled the chain against daunting competition, for in recent years TV stations have attracted the hungry eyes of major media corporations, investment heavyweights such as Warren Buffett and Saul Steinberg, even doctors and dentists searching for a place to park cash. These investors prize stations for their ability to turn profits in good times and bad and for their ready marketability; they favor network affiliates in particular because of their strong attraction for TV audiences.

21 Times Cash Flow

But Gillett has usually been willing to bid more for properties, betting always that his strategy for managing the stations would make them profitable enough to cover his debts.

And the debts have piled up--to more than $1.5 billion, some estimate--as Gillett has paid top dollar and sold high-yield “junk bonds” bearing lofty interest rates of 13% to 17%. The company and its venture partners have raised $1.16 billion in the past two years through the sale of junk bonds underwritten by Drexel Burnham Lambert.

Last spring, in outbidding NBC and Westinghouse Corp. for the Tampa station, Gillett offered 21 times that station’s cash flow--or net income plus depreciation--which was substantially above the 10 to 12 times cash flow that buyers usually feel comfortable offering.

Gillett Holdings had operating profits of $90 million on revenue of $670 million last year, according to a company prospectus for a junk-bond offering. Revenue should edge close to $1 billion this year, with the addition of the Storer stations, which were bought in a joint venture with the leveraged buyout specialists Kohlberg Kravis Roberts & Co.

“George has put all his chips on the red and spun the roulette wheel,” says Jeffrey N. Epstein, a First Boston Corp. investment banker who specializes in the communications industry. “He’s a smart gambler. Myself, I wouldn’t do what he’s done.”

Key Player

A native of Racine, Wis., Gillett began his career as a salesman for Crown Zellerbach Corp., then went on to work as a McKinsey & Co. management consultant, put together a computer software company, and managed and owned a part of the Miami Dolphins professional football team.

In 1968 he acquired the Harlem Globetrotters, which became the core of his first diversified company, which was called Globetrotter Communications.

The staff of Gillett Holdings has grown in recent years, but the key player is clearly still Gillett himself, who promotes his company with the ardor of the former salesman he is.

At work at his company headquarters in Nashville, Tenn., Gillett bustles between staff gatherings, bouncing an orange foam ball off the wall as he forcefully shares his point of view. He’s dressed in brown corduroy jeans and crepe-soled hiking boots, while most of the staff wear dark suits and white shirts.

“You produce a quality product, and you won’t be able to get out of the way of the money,” Gillett rumbles in his basso profundo.

Deal Maker

The chief executive is a gentleman sportsman, spending more than a third of his year on the ski slopes, the golf course, hunting or fishing. On the slopes at Vail, where he owns a home, Gillett introduces himself to strangers with a business card that identifies him as a quality control inspector.

Play is business, too, for Gillett tries to cultivate celebrities like Gerald Ford and Jack Nicklaus. “He’ll meet somebody on the golf course, then call them up later to say, ‘I enjoyed seeing you, and I’ve been thinking about such-and-such a deal you might be interested in,’ ” says a longtime associate. “He leverages people like he leverages assets.”

Fellow station owners say they are charmed by Gillett and acknowledge his skill as a deal maker and broadcaster. But some of the industry’s movers have recently been irked, too, because they feel that he has pushed the Federal Communications Commission rules so far that there may be a backlash that will chill the permissive climate that has benefited so many.

In buying WTVT in Tampa, for example, Gillett teamed up with a Washington communications lawyer, Clarence McKee, who is black, in a $365-million deal structured to qualify for a tax break that the FCC grants station buyers who are members of minority groups. The so-called minority tax certificate deferred the capital gains tax liability of the seller, Gaylord Broadcasting, and thus allowed Gaylord to trim $100 million from its price.

The use of minority tax certificates is not uncommon, and in recent years many minority and non-minority investors have teamed up to strike such deals. But the WTVT deal was more conspicuous, partly because it was the largest minority tax certificate TV deal ever and partly because McKee put up only a few thousand dollars.

In return for his participation, McKee got a 51% voting interest--though only a 21% equity interest. The voting interest technically gives McKee final say on any decisions, but the equity stake gives him a smaller claim on the station’s earnings.

Improved Image

A clause in the contract provides that, after two years, McKee can bail out of the company for $1 million if he wants--or can be bought out by Gillett for the same sum. McKee’s departure would undermine the purpose of the certificate program, which was to encourage lasting minority ownership, says Larry Irving, an aide to the House telecommunications and finance subcommittee.

“You can see why some committee members were concerned,” Irving said.

McKee says he hasn’t decided whether he’ll stay with the station but insists that he is an active owner who has already helped improve the station’s community image. “George and I have gotten so many arrows in our back over this, and it’s much ado about nothing,” McKee said.

While FCC officials insist that the Tampa deal was proper, the notoriety of the transaction seems to be changing regulators’ attitudes. Already, FCC staff members have discouraged several minority tax certificate proposals that were floated by them for preliminary review, according to an investment banker with firsthand knowledge of the proposals.

“The legacy of that deal is that it is going to be much tougher for others,” the banker said.

‘Mickey Mouse Trust’

Gillett also roiled the waters by selling five stations to a trust set up for his children and headed by Laurence Busse, a former Gillett Holdings executive. The sale came as Gillett was trying to buy the Storer stations, and to critics it seemed an effort to skirt FCC rules that limit the total number of stations that a company can own to 12.

The trust was approved by the FCC in October on condition that Gillett and Busse would communicate only in writing and only on those narrow matters that they were required to consider under government rules.

Robert Price, chief executive of Price Communications, a broadcast and newspaper chain in New York, said he was surprised that the FCC allowed “that Mickey Mouse trust. You can say it’s separate only if you assume Gillett never talks to his friend (Busse) or his kids. Can you believe that?”

For his part, Gillett insists that he has nothing to do with the trust stations. And he says Clarence McKee has proven to be an “excellent” manager of the Tampa station despite his lack of experience in broadcast management. “There was nothing nefarious about it,” he said, referring to the station’s acquisition.

Gillett describes his job at the company as “project broadcasting”--the remaking of second- or third-ranking stations into the top performers in their market. But an analysis undertaken for The Times by Broadcast Investment Analysts, a northern Virginia research firm, found that the company has a mixed record in improving ratings.

Of the 10 stations that Gillett Holdings and Busse Broadcast Communications (the Gillett children’s trust) have held for a year or more, three moved up in the ratings under the company’s management, two declined and five stayed about the same. Some of Gillett’s most important stations--including those in Nashville, Rochester, N.Y., and Lincoln, Neb.--were ranked first in their markets when the company bought them.

What Gillett has clearly improved are the stations’ profits. His strategy is straightforward: He buys stations that have been run without close attention to administrative expenses and cuts those costs, while also increasing spending on promotion, top syndicated programming and news operations, in hopes of raising ratings.

Gillett bought the company’s showcase station, WSMV in Nashville, from National Insurance Co., which had used it to promote its products and corporate name but had never generated high profits from it. Gillett cut administrative and support staffing, and over two years increased the price of a 30-second spot on the evening news by 50%, according to a broadcaster familiar with the station’s operations.

Not Worried

In Gillett’s first year of ownership, expenses fell 13%, revenue rose 30% and the station ended the year with pretax profits of $2.8 million, the broadcaster said.

The deal to acquire WSMV was cleverly structured. Gillett gave the insurance company no cash but $42 million in debt notes, and he agreed to pay interest at rates that began at 10% and were to rise each year to a whopping 22% in the fifth year.

The prime lending rate hovered near 20% when the deal was struck, but when it came down--as Gillett was betting--he refinanced the debt at a lower rate.

Gillett cites the sharp rise in station values as a reason he’s not worried about his debts. Though other buyers gasped at his $42-million purchase price, by some estimates the Nashville station may be worth $150 million today.

It is Gillett’s style to put down as little of his own cash as possible. He bought with a note and no cash in Nashville, as he did in 1984, when he paid $119 million for the four stations of Post Corp., a small Milwaukee media company, and in 1985, when he bought the Vail ski resort for $125 million.

Once he’s completed an acquisition, he can be a bruising competitor. When Gillett bought a Bakersfield station in 1978, he hired away the general manager of competitor WBAK and 12 other station executives and salespeople--all of whom left without notice.

“It left us in a bit of a spot,” says Burt I. Harris, chief executive of Harriscope Broadcasting Corp., the Los Angeles concern that then owned WBAK.

Gillett has won respect from competitors for increasing the amount of time his stations devote to news, encouraging use of lengthy news documentaries and adding news staff at many of them. In the six years that Gillett has owned WSMV in Nashville, the news staff has grown to 75 people from 39 while the total payroll at the station has fallen to 165 from 185, he says.

Tougher League

WSMV won points with broadcast journalists for a 1984 news series that criticized the government’s meat-inspection program and sanitary conditions at a Nashville meatpacking plant.

Gillett fretted over the series, fearing that it might sour his relations with federal meat inspectors at his own plant, Packerland Packing Co. In the end, he agreed to have it broadcast, however.

But if Gillett’s company has demonstrated broadcast and management skills, it will play in a tougher league with the Storer acquisition. In addition to KCST in San Diego, the group includes one non-network station--WSBK in Boston--and network affiliates WAGA in Atlanta, WJW in Cleveland, WJBK in Detroit and WITI in Milwaukee.

The stations are ranked second, third or fourth in their markets. Gillett says that over the next five years he hopes to nudge each station up by one position in the rankings.

But that may be tough, since he will be competing against such media powers as Capital Cities-ABC, Scripps-Howard Broadcasting and Washington Post Co., which owns the Post-Newsweek Stations. If a real competitive war were to break out, those companies will be better able to spend extra millions on programming, news and promotion, other broadcasters say.

Gillett insists that he is “perfectly comfortable” with the company’s level of debt, pointing out that he won’t start paying off the Drexel zero-coupon bonds for five years. A longtime associate agrees that Gillett is not the worrying type.

“I’d be losing a lot of sleep in his position,” the broadcaster says. “I can assure you George hasn’t lost 10 seconds.”