Case 19-36743 Document 23 Filed in TXSB on 12/09/19 Page 1 of 8 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION In re: Chapter 11 MARSHALL BROADCASTING GROUP, Case No. 19-36743 (DRJ) INC.,1 Debtor. PRELIMINARY OBJECTION OF NEXSTAR BROADCASTING, INC. TO DEBTOR’S EMERGENCY MOTION FOR INTERIM AND FINAL ORDERS (A) AUTHORIZING USE OF CASH COLLATERAL PURSUANT TO SECTION 363(C) AND (B) SCHEDUL- ING A FINAL HEARING PURSUANT TO BANKRUPTCY RULE 4001 Nexstar Broadcasting, Inc. (“Nexstar”) states as follows in support of this Preliminary Ob- jection to Debtor’s Emergency Motion for Interim and Final Orders (A) Authorizing Use of Cash Collateral Pursuant to Section 363(c) and (B) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001 (the “Cash Collateral Motion”). I. Background 1. Nexstar is the largest unsecured creditor of Marshall Broadcasting Group, Inc. (“MBG” or “Debtor”) and is owed over $14 million by MBG due to MBG’s unpaid fees under three Shared Services Agreements (“SSAs”)—one for each of the three stations owned by MBG. Pursuant to each of these agreements, Nexstar provides the real estate and virtually all of the ser- vices necessary to operate a television station—including the buildings where MBG’s stations are housed, hours of daily news programming, production of local commercials, sequencing of when to run commercials, along with other crucial back office support. Notably, while MBG has filed 1 The last four digits of the Debtor’s federal tax identification number are (7805). Case 19-36743 Document 23 Filed in TXSB on 12/09/19 Page 2 of 8 a motion to reject one type of contract between Nexstar and MBG (the Joint Services Agreements, pursuant to which Nexstar and MBG jointly shared in certain advertising revenue if Nexstar chose to place advertising for MBG),2 MBG is not seeking to reject the SSAs. This decision reflects the central role that the services provided by Nexstar under the SSAs play in the operation of the three television stations owned by MBG. Nonetheless, MBG’s proposed interim budget does not in- clude MBG actually paying Nexstar for any of these services from its cash collateral. Because Nexstar is obligated (and will continue) to provide these vital services to Nexstar, MBG should not be permitted to receive them gratis. Nexstar therefore objects to the Debtor’s Cash Collateral Motion on this basis.3 2. Nexstar is one of the largest operators of television stations in the United States. In 2014, Nexstar was expanding its ownership of television stations, in part by acquiring stations from Communications Corporation of America and Grant Broadcasting. In order to complete these transactions, Nexstar needed to find a buyer for three television stations—KLJB in Daven- port, Iowa (“KLJB”), KPEJ in Odessa, Texas (“KPEJ”), and KMSS in Shreveport, Louisiana (“KMSS”) (collectively, “the Stations”)—because FCC regulations limit the number of stations any one entity can own in a single market. 2 While not directly relevant to this Objection, Nexstar notes that the Debtor’s Motion to Reject Three (3) Executory Contracts with Nexstar Broadcasting, Inc. Effective as of December 6, 2019, Dkt. 17 (as well as the Declaration of Pluria Marshall, Jr. in Support of Chapter 11 Petition and First Day Motions, Dkt. 18) are replete with falsehoods and mischaracterizations about Nexstar and the relationship between Nexstar and MBG. Nexstar reserves all its rights to respond at the appropriate time. 3 Nexstar is aware that secured creditor Mission Broadcasting Group, Inc. (“Mission”) is filing its own objection to the Debtor’s application. Nexstar joins in, and adopts by reference, the arguments raised in Mission’s objection. 2 Case 19-36743 Document 23 Filed in TXSB on 12/09/19 Page 3 of 8 3. After the FCC declined to approve the sale of the Stations to Mission Broadcasting, Inc., Nexstar identified Pluria Marshall, Jr. as a potential buyer, and offered him the opportunity to purchase the Stations. Marshall created Marshall Broadcasting Group for the purpose of this transaction and obtained a nearly $60 million loan from a consortium of lenders, guaranteed at the time by Nexstar, to purchase the Stations. 4. As part of this transaction, Nexstar and MBG entered into three separate SSAs— one for each of the Stations.4 Pursuant to these agreements, Nexstar agreed to provide MBG with critical services that are necessary for MBG to operate the Stations, including execution of promo- tional policies, continuity and traffic support, master control, receivables support, transmission facilities maintenance, and newscast production and delivery. Exs. A, B, C at 2-4. In exchange, MBG agreed to remit monthly payments to Nexstar originally set at $535,000—$232,000 for KLJB, $180,000 for KMSS, and $123,500 for KPEJ—subject to 2.5% annual increases. Exs. A, B, C at 4. The total amount owed under the SSA by MBG for the three stations for the month of December 2019 totals $597,493.92. 5. MBG could not operate the Stations without the services that Nexstar provides un- der the SSAs. For example, by providing MBG with execution of promotional policies, Nexstar handles all of the Stations’ marketing, graphic design, and promotional needs, including organiz- ing promotional events, building promotional spots for programming, and complying with promo- tional requirements MBG has under its affiliation agreements with Fox. Nexstar provides these promotional services to MBG every day. 6. Nexstar also provides continuity and traffic support to the Stations by which Nex- star ensures that the advertisement spots that have been purchased by MBG’s advertising clients 4 The SSAs for KLJB, KMSS, and KPEJ are attached hereto as Exhibits A, B, and C respectively. 3 Case 19-36743 Document 23 Filed in TXSB on 12/09/19 Page 4 of 8 run during the right program, at the right time. Executing this function correctly is central to maintaining the advertising relationships that sustain the Stations; without it, MBG’s ability to generate revenue would be frozen. Even if MBG wanted to replicate this service for the Stations itself (which, by maintaining the SSAs, it has indicated it does not), it would need to hire three or four full-time professional employees for each of the Stations. 7. Nexstar also provides master control services to MBG pursuant to the SSAs, which are the backbone of any television station. Master control is responsible for organizing and playing everything from programming to advertisements for the station. The employees assigned to master control watch every minute of programming, 24 hours a day, seven days a week, to ensure that all scheduled programming is being broadcast correctly. Without this service, the Stations could not operate. Were MBG to provide this service for itself, instead of relying on Nexstar, it would have to hire seven to eight additional personnel to handle this function alone for the Stations. 8. Nexstar’s accounts receivables support for MBG permits it to actually capture the revenue that the commercials advertisers buy generates. Under this SSA service, Nexstar sends invoices on MBG’s behalf, receives and processes payments for those invoices, and deposits such payments into accounts designated by MBG, upon MBG’s request. 9. Nexstar handles all of the transmissions facilities maintenance for MBG’s stations through its engineers on the ground at the Stations. Nexstar’s engineers identify what needs to be repaired at the Stations—often before MBG becomes aware of those problems—and handle what- ever repair or maintenance is required. This, too, is done pursuant to the SSAs. 10. Nexstar also produces all the local news broadcasts for MBG’s stations. News broadcasts are central to the Stations’ business operations because during local news broadcasting the Stations are entitled to sell 100% of the advertising time, as opposed to network broadcasts 4 Case 19-36743 Document 23 Filed in TXSB on 12/09/19 Page 5 of 8 when the Stations must share a significant portion of the advertising time and revenue with the broadcast networks (e.g., CBS or Fox). Nexstar produces between 12 and 16.5 weekly news hours of news for each of KLJB, KMSS, and KPEJ. The approximately two hours of newscasts daily for each MBG Station is significantly higher than Nexstar provides for other stations in similarly- situated markets. The initial cost of equipment for a station to begin production of such news broadcasts is $2.5-$3.0 million, before accounting for ongoing production costs, which would in- clude additional employee headcount, including on-air news reporters, assignment editors, pro- ducers, camera operators, and other support personnel. 11. Accordingly, there can be no doubt that the support services provided by Nexstar under the SSAs are extensive and comprehensive. Nexstar’s provision of services to MBG under the SSAs render the Stations turnkey operations. MBG could not replicate these necessary services without an extensive initial outlay of capital, with significant ongoing obligations including the hiring of dozens of full-time employees, and with ongoing licensing fees for all of the systems necessary for master control, continuity and traffic, and receivables. Simply put, without the ser- vices provided by Nexstar under the SSAs, KLJB, KMSS, and KPEJ would go dark. 12. In consideration for these services, each SSA includes a services fee to be paid by MBG to Nexstar on a monthly basis. 13. The KLJB SSA was entered into as of December 1, 2014. Ex. A at 1. Section 4(h) provides that MBG will pay to Nexstar a base amount of $232,000 on a monthly basis, which is to be increased by two and one-half percent (2.5%) every year on December 1.