Lawyer Article

Republished with permission of Radio and Television Business Report. Originally published in RBR Business Report, December 2006, Volume 23, Issue 12

The once popular broadcaster fashion to “go public” seemed to have hit the skids early in this decade and now appears to be in full retreat. This is evidenced by recent Wall Street reports and by Emmis Corporation CEO Jeff Smulyan’s well-publicized, but failed effort to bring Emmis private earlier this year.¹ It appears that Wall Street, as well as fellow publicly-held broadcasters, were rooting for Jeff to succeed, because the market value of Emmis stock dropped significantly shortly after he called off the effort to go private² — even though the cash was there. Even venerable old line publicly-held communications companies like Hearst-Argyle Television, Inc. have been making noise about becoming private.³ The real industry bombshell hit in late October 2006 when Clear Channel hopped on the going private carousel.⁴

Why is the ripple toward privatization becoming a flood? Much of what we observed during the summer of 2005⁵ continues to be true today – and then some. Growth in broadcasting stocks has continued to trend downwards (with the recent uptick in radio revenue a notable exception) and broadcasting companies are losing market share to satellite radio, the Internet, podcasting and even mobile phones. Nevertheless, many industry executives are still looking for ways to support the price of what they believe is undervalued stock.⁶ Businesses have continued to rail against the "one size fits all" requirements of the Sarbanes-Oxley Act of 2002, which has led to the formation of a special committee to assess the impact of Sarbanes-Oxley on the ability of the U.S. capital markets to compete competitively with foreign and private markets.⁷ As a result and not surprisingly, for some pure-play companies the idea of “going private” remains an attractive alternative to dealing with the continued high costs of compliance with Sarbanes-Oxley⁸ and the white-hot spotlight of Wall Street quarterly expectations.

In broadcasting, there is also increasing speculation that consolidation has hit its ceiling. In the face of competition from alternative distribution platforms and growing listener and consumer apathy for conventional broadcasting, some believe that a return to broadcasting’s roots by creating compelling local programming through smaller station groups, away from Wall Street’s focus on short-term growth and profit, is the only real hope for salvation. Witness this recent Radio Business Report Epaper Publisher Note excerpt, which we believe supports the notion that more focus and investment is critically needed at the local level:

Money is needed at many stations in Research, Marketing, Promotion, and Talent as Content is King. Money has been ripped from so many stations the red finally caught up. As for hope RBR agrees with hope but hard work and commitment we believe in more. All CEO’s give your teams the tools, financial resources and most of all Leadership needed. If not view Radio Media Moves to see what happens.⁹

Much of the going private activity is being driven by cash-rich hedge funds and private equity groups that are actively looking for undervalued public companies. At the recent NAB Radio Show financial session, lenders and venture capital funds, including John Brooks of Wells Fargo Foothill and Drew Marcus of Deutsche Bank, expressed great interest in broadcasting deals. Brooks noted that "despite the difficulties of public companies on Wall Street[,] '[w]e believe that even in a low growth or no growth environment such as this one, we can still make good loans,'" while Marcus stated that "private equity investors have the opposite view of the public markets, preferring maximum debt leverage to maximize the potential rate of return from future profits."¹⁰

One recent estimate placed the value of the private equity market at $800 billion, with at least 260 firms managing at least $1 billion in capital. More MBA graduates are going directly to private equity firms than has historically been the case and many former public company executives (including former General Electric CEO Jack Welch) currently serve in various positions at private equity firms.¹¹ During 2006 alone, private equity firms have raised approximately $159 billion – a record for the industry.¹² With more and more resources to bring to bear, it makes sense that these firms are trying to unlock the intrinsic value of publiclytraded broadcasting companies by taking them private.

In the most recent example of the going private phenomenon, Clear Channel Communications, Inc. was reported to have received formal buyout offers from a number of private equity groups on November 13, 2006.¹³ The Mays family-led company put itself up for auction in October 2006 after a series of stock repurchase programs failed to re-energize its stock price.¹⁴ It looks like the company may have found another way to reach its goal. As we discussed conceptually in our 2005 series of articles, Clear Channel has agreed to join forces with venture capital firms Thomas H. Lee Partners and Bain Capital to take out the public shareholders, with the founders staying in the game and retaining management of the company.¹⁵ It is noteworthy that in conjunction with its decision to go private (and in keeping with the trend suggested by the RBR “Publisher Note” discussed above), Clear Channel is shedding its TV stations and ancillary businesses and putting up for sale 448 radio stations in some 90 markets, with speculation that there will be more to come in an effort to make this a leaner, more focused company.¹⁶

The proposed Clear Channel buyout comes on the heels of the October 2006 offer by the Dolan family to take Cablevision Systems Corporation private¹⁷ and Univision Communications Inc.’s June 2006 decision to sell itself to a group of investors for $12.3 billion.¹⁸ Another notable private equity broadcasting target is Tribune Company, which formed a special committee earlier this fall to consider going private (among other strategic alternatives) and recently received a joint buyout offer from companies controlled by billionaires Eli Broad and Ron Burkle.¹⁹ These recent developments reflect a spate of buyouts in the broadcasting industry – particularly with respect to cable companies – that began a couple of years ago with Cox Communications and Insight Communications.

When you put the pieces together, the broadcasting financial puzzle takes on a pretty clear picture. Even though some broadcasting companies have reported significant recent revenue growth over the past quarter,²⁰ the Wall Street bloom is off the rose, as it appears to believe that broadcasting has run its course of rapid, sustainable growth. Further cost-cutting simply is not a possibility; indeed, the industry is facing a new need for capital to invest in new technologies and transition to multi-platform delivery (the subject of a future article). There is still a great business in radio and television, where returns on investment remain the envy of the majority of other businesses, all the while offering unparalleled opportunities for community service. The way out for some will be to sell back the local stations that are not a good fit for a large public company to local or smaller groups, financed by debt and venture capital, and to move slowly but deliberately to finance strong local programming and multiple platform delivery. As many public company executives are becoming increasingly convinced, a private company with a sophisticated board may be the better vehicle to transport broadcasters in this millennium. We set out one potential path for that transition, including some of the pitfalls and considerations, in our "going private" series of articles, reproduced below.

To review the footnotes and references go to www.rbr.com/legal/1206.html.

Related Articles:
Considerations and Consequences of a "Going Private" Transaction
Considerations and Consequences - Part II