T.H. Lee betting on broadcasting


Thomas H. Lee Partners Managing Director Richard J. Bressler said that the way to read his company’s proposed acquisition and privatization of Clear Channel was as a positive bet on the bright future of broadcasting in the digital era. He added that while the company would be free of the pressures of Wall Street, it would still be transparent, reporting to both bond holders and the FCC.

At issue was the role of private equity in the telecommunications sector, topic of a hearing before the House Subcommittee on Telecommunications and the Internet. Ed Markey (D-MA) summed up the questions. He said the role of private equity in start-up businesses has a long positive history, but its investment in going concerns raises questions. The company is definitely coming in for financial gain, but in this sector, will that result in net loss to the public interest?

Three others testified alongside Bressler. That of Carlito P. Caliboso of the Public Utilities Commission of Hawaii, limited to the telecom portion of communications, essentially boiled to the fact that it was possible for regulatory agencies to establish meaningful oversight when private equity ownership is in place. Columbia Business School Professor Eli M. Noam noted bad results from such investors in Europe and said that sunshine cures most ills — regulatory restraints need not be emplaced if sufficient reporting requirements are maintained. Finally, Harvard’s Josh Lerner said in studying private equity, there was no evidence of an overriding tendency to gut and run; divisions may be spun or downsized, but new investments canceled that out and created new jobs. And the average PE hold on a company was eight years.

Bressler said T.H. Lee is definitely a patient, long-term investor, and since it reports to bond holders, there is no difference between it and a public stock company when it comes to quarterly reporting. He noted that being a safe distance from Wall Streeters hungry for swift results allows investments, such as the presidential debates held for both parties by Univision.

Greg Walden (R-OR), who only last year exited the radio ownership business, commented that his small group was picked up by a small equity firm looking to build a regional group. They have been able to make investments in the stations that Walden could not afford, to the benefit of local listeners. Walden argued the system works as is.

RBR/TVBR observation: Under questioning, Bressler testified that in no way is his company a "chop shop." More importantly, he explained that T.H. Lee sees opportunity at a time when most investment money is scurrying away from broadcasting. We would further note that in the case of Clear Channel, the decision to focus on larger markets greatly reduces the level of media consolidation and opens opportunities for new or additional minority ownership. T.H. Lee retains reporting requirements. Many think it is taking on a risky proposition (which accounts for the lack of competition to buy the firm), but other than that, where is the downside of private equity as opposed to any other type of financing?

Even though one academic noted a general PE tendency to nurture and sell rather than chop and sell, the other academic was able to produce examples of abuse. However, he said transparency can ease that objection, and with a regulatory expert testimony that working with PE ownership is basically the same as any type, it would seem there should be little or no motivation for strong legislative action, as long as this testimony is taken to heart.

* Carlito P. Caliboso, Chairman, Public Utilities Commission, Hawaii: Discussesd experiences as a state regulator of Hawaiian Telecom, owned by PE firm Carlyle Group. Added conditions to PE’s acquisition of interest. Nonetheless, situation has not been smooth. However, there is no reason to believe the problems had anything to do with PE — could have occurred under any type of ownership. PE does have the resources to invest in the company, but it remains to be seen if that will continue. However, PE can be managed by regulatory authorities.

* Mr. Richard J. Bressler, Managing Director, Thomas H. Lee Partners: Also representing Private Counsel, trade association for PE firms. We create value for our partners and competitive benefits for consumers. Background in broadcasting, very aware of public interest aspects of running broadcast business. Recognize uniqueness of telecom interests. Long list of well-known companies are held by PE firms. Business based on patience and commitment. Wall Street imposes pressure — imagine running for office every three months. Not all PE firms succeed, but to do so they must invest with the long term in mind. Sirius Satellite Radio, telecom firms nurtured by PE, all while being mindful of public interest rules. Clear Channel: seeking to address dearth of minority ownership. Trying to preserve viability of free over-the-air TV and radio. Broadcast sector faces daunting competitive challenges, particularly from subscription-based competitors. Some think broadcast future is too flabby, but we think differently, and we’ve put our money where our mouth is. Univision: We’re working with experienced broadcast management to maintain #1 position in Hispanic broadcasting, and will help Clear Channel try to succeed with fewer stations.

* Eli M. Noam, Director, Columbia Institute for Tele-Information, Professor of Finance and Economics Columbia Business School: Concrete issues, concrete examples. Two telecoms in Europe went private, in Ireland and Denmark. In Ireland, where there were two PE buys, it was a disaster as PE firm disinvested, took funds out of telecom company. Ireland second to last in European broadband penetration. Better results in Denmark. Even with challenges, managed to pay dividend. But longterm investment slowed. In both cases, firms came to regulators looking for permission to charge higher prices. In sum, they took money out of the companies and then on the backside tried to tap consumers to put more back in. Firms in other developed nations have similar debt ratios. The problem is that we are dealing with critical national infrastructure. Issues and remedies must focus on strong disclosure requirements on PE firms.

* Josh Lerner, Jacob H. Schiff Professor of Investment Banking, Harvard Business School: Debt equity is growing in size and market reach, much concern about its impact on society. Tried to determine the global impact beyond the anecdote level. 1. There is relative infrequency of bankruptcy as a result of PE investment, better than for example, bond investments. 2. Holding periods have been growing longer. Quick flips have decreased. 3. Long run investment. Level of innovation before and after buyouts is quite constant, but higher impact moves tend to come after PE moves in. 4. Employment (US), jobs were going away at target companies before PE buyout, trend continued after PE buyout for two or three years, but creation of new related facilities at these companies add new jobs, offsetting other losses. Much more study, however, is needed.