Outcome Was Predictable at Channel 51 : Television: Part-owner McKinnon held all the cards in negotiations with financially strapped USIA and ended up with the whole pot.
SAN DIEGO — It seemed almost inevitable that minority partner Michael McKinnon would end up the owner of KUSI-TV (Channel 51).
Years of legal and financial maneuvering preceded last week’s announcement that United States International University was selling its 74% interest in the station to McKinnon, who owns 26%. The deal is pending until several conditions are met, including approval by the Federal Communications Commission and the university’s review of McKinnon’s finances.
Throughout the negotiations, McKinnon was always in the driver’s seat--if not in charge, at least in control of the process. The owner of three stations in Texas had nothing to lose. He had time and resources; the university had neither.
With the prize an independent TV station, the final result of the back-room negotiations will have an effect on most San Diegans, considering the station’s vast, though as yet unrealized, potential for local programming.
McKinnon says a nightly 10 p.m. newscast is “almost automatic” when he takes over the station. Al Ittleson, a former executive with ABC News, is already in San Diego, working as a partner in the locally based McKinnon Productions, which is developing a variety of news, talk and magazine-style programming.
McKinnon plans to use KUSI as a “test market,” a launching pad for local and national shows.
A few years ago, the university, unwilling to sink the station’s financial resources into a long-range project, had quashed plans for KUSI to develop a news department. The university’s money problems have often meant that short-term financial goals were uppermost in trustees’ minds when it came to dealing with the station.
Certainly USIU’s need for quick money fueled the pace and intensity of the negotiations to sell the station, just as it originally prompted the university to bring McKinnon into the picture in 1982. After USIU was granted the station’s operating license--over a group that included McKinnon’s brother, Dan--it needed cash to put the station on the air. Michael McKinnon lent University Television Inc., the subsidiary that technically owns the stations, millions of dollars and leased it equipment. In return, the university, which made a minimal financial investment, signed an agreement that basically handed control of the station to McKinnon.
In addition to a management agreement that paid him more than $100,000 annually, McKinnon was given the right to veto most major decisions and the right of first refusal on any offer to buy the university’s shares in the station. In addition, USIU could not use its shares as collateral in any fund-raising scheme until it paid off McKinnon.
The university and McKinnon thought they were entering into a long-term deal that would be mutually rewarding--and the university needed McKinnon’s cash, equipment and television experience.
“Let’s say there was more trust between the parties at that time,” said Ted Vallas, chairman of the university’s board of trustees.
With McKinnon holding so many cards, coupled with USIU’s financial problems, the university eventually bowed to McKinnon rather than accept a potentially more lucrative deal.
“I gave them a fair market price, 10 times the station’s cash flow,” McKinnon said.
However, Boston-based ABRY Communications, owner of TV stations in Baltimore and Cincinnati, offered the university more money than McKinnon for its shares in the station. But USIU needed money quickly to meet payroll demands, among other financial commitments.
ABRY’s deal reportedly included a $3-million loan up front, but the paper work would have taken up to a week to complete. McKinnon was able to pay the university a $300,000 cash deposit, no strings attached.
“Never has someone gotten so much for so little,” said one source close to the negotiations.
Vallas acknowledged that McKinnon’s deal was not as lucrative for the university as ABRY’s would have been. “But we were looking at time delays” with the latter, he said.
McKinnon says he has agreed to pay the university $9 million up front, in addition to the $300,000 deposit and a $700,000 loan due to be paid this week. He will pay another $7 million in loans and forgive the university’s portion of the $6.2 million in debt owed him, as well as $3 million for equipment he owns. The total package, not including interest payments, comes to more than $26 million.
ABRY’s package for USIU’s shares alone reportedly totaled more than $25 million, plus paying off the money owed McKinnon, for a total package worth more than $30 million.
ABRY’s managing director, Andrew Banks, said he didn’t know why the university rejected his company’s offer.
“It’s very difficult to understand,” Banks said. He declined to comment further.
Besides the delays in receiving the initial payments, the university reportedly was scared off by the potential of lengthy lawsuits from McKinnon.
A healthy fear of McKinnon has apparently driven many of the university’s actions.
It never challenged details of the original agreement for fear of tying up university assets in a drawn-out lawsuit.
“Looking back, the university should have filed for some sort of relief through the courts,” Vallas said.
The working relationship between McKinnon and USIU began cordially, but turned adversarial in the past few years as the university chafed under McKinnon’s control of the assets.
Unable to borrow money using its shares in the station as collateral without McKinnon’s permission, the university found itself with a valuable asset that was producing no money.
The university began to explore options to sell its shares, but soon learned that few parties were interested in buying 74% of a station, especially when a minority partner exhibited such control.
McKinnon could quash all attempts to reach an “arrangement” he found unacceptable by his control of the debt. In 1988, University Television was late in its payment to McKinnon, and the debt was restructured.
The pot really began to boil last September, when the leases on the equipment expired. The university and McKinnon disagreed on terms, each accusing the other of attempting to take advantage of the situation.
Eventually, in a move clearly designed to enforce his leverage, McKinnon filed suit in Superior Court seeking the return of his equipment, without which the station could conceivably have been forced off the air.
Although the university tried to posture as if it was bargaining from a position of strength, it clearly was not in a position to make any demands.
In January, it failed to renew McKinnon’s consulting contract, and Vallas began meeting regularly with station management, but the steps made little difference.
A deal was nearly complete three weeks ago, when the station was suddenly placed in Chapter 11 bankruptcy proceedings--reportedly without the knowledge of some of the university’s negotiating team--the night before a hearing on McKinnon’s lawsuit involving the equipment. Vallas and company believed the bankruptcy filing would enhance the station’s position by allowing it to reorganize and remove some of McKinnon’s control. (McKinnon, noting that damaging the station would also hurt his interests, says he never intended to pull the equipment. He says he only filed the suit to emphasize his position.)
Officials hoped a competitive bidding situation would result, but it was far too late for such tactics. USIU was having trouble meeting its payroll. It needed money as soon as possible.
The deal finally approved was basically similar to the one agreed upon before the station was placed in Chapter 11. The biggest change, Vallas said, was McKinnon’s guarantee to pay the loans regardless of the performance of the station or potential disasters.
At the last minute, the deal nearly fell through again. Only a concession on McKinnon’s part that allowed the university to borrow money off a certain percentage of its shares pending approval of the deal saved it.
“It was obvious he (McKinnon) wanted to own the station,” said Vallas, who would have liked to buy the station if a way could have been found around McKinnon. “He succeeded in getting what he wanted.”
