Can the Freedom Format Settle Other Family Feuds? LBO Investors Will Cash Out Dissidents While Leaving the Family in Control

Freedom Communications Inc., the family-owned media giant that has been wracked by a feud within the controlling Hoiles family, decided to punt in October rather than yield to the pressure of one faction for an outright sale. Freedom accepted a unique offer from two investment funds that were willing to pay for a partial interest composed of stock sold by the family members who want to cash out but vest control with relatives who want to hang in. The format has the potential for wider use at private companies where intra-family battles over the “sell or no-sell” decision are not uncommon. Even though it had fielded higher offers from bidders that wanted to buy the entire company, Freedom accepted the partial cash-out. Some dealmakers say the approach merely postpones a day of reckoning for the company. Under the agreement, Blackstone Group and Providence Equity Partners will pay $220 a share to family members who want to sell their stakes. On that basis, the deal values Freedom at about $1.7 billion. If the deal goes through, the new board would be made up of four directors from the family, four from the private equity firms, four independent directors, and Freedom President and CEO Alan Bell, but the remaining Hoiles shareholders will have voting control. Freedom owns the Orange Country Register daily newspaper, other print properties, and eight TV stations. Media investment bankers disagree about whether the deal’s structure might be used as a template for other family-owned or family-controlled media companies. “This is a unique situation. It’s a credit to the negotiating committee and its advisers that they were able to put it together,” says Roland DeSilva, a principal at DeSilva & Phillips. He says the deal gets high marks for the flexibility the parties built into it. Among the concerns negotiators juggled were the continued editorial independence of the company and its legacy of a libertarian political philosophy. On the fund side, the investors needed a deal that was large and that offered sufficient liquidity to make their exit options appealing. However, Kevin Lavalla, a media investment banker at Jordan Edmiston Group, says the Freedom deal could act as a model for resolving conflicts among other family-owned media companies. Dow Jones & Co. is one family-owned media company where perspective buyers sometimes approach descendants of the controlling Bancroft family. Last year Arthur Sulzberger Jr., publisher of the New York Times, proposed a merger with Dow Jones. The idea didn’t go anywhere. But with Dow Jones, Washington Post Co., and New York Times Co. still controlled by families, any structural options suggested by the Freedom deal are likely to be mulled carefully by dealmakers. Baran Rosen of Whitestone Communications, a media-oriented investment bank, says that the parties in the Freedom deal had been clever to carve out a role for the funds in this situation. But noting that the lifespan of most private equity investments between from five and seven years, he says that the Hoiles family had basically postponed the moment of truth when it will have to make a decision about the company’s future. The transaction does allow Tim Hoiles, a grandson of the company’s founder, and other disgruntled family shareholders to sell out without yielding control of the company in an outright sale. The auction process resulted in some unhappy bidders as higher offers were rejected in favor of the family-backed private equity bid. MediaNews Group Inc., publisher of the Denver Post, offered $235 per share in a joint bid with Gannett Co. Inc. Bell has said that a public offering or another recapitalization would be possibilities when the non-family private investors pull out. Presumably, a sale to another media company would also be considered at that time. Rosen says that, if anything, the assets of Freedom will be even more valuable in five or so years, given the increasingly consolidated media landscape, and that will outweigh any hard feelings among the losing bidders in this deal. Although the Freedom structure looks like a creative, albeit possibly short-term, solution to its problems, it still raises a number of issues. Some families don’t like to take in partners, and there is always a concern that sell-minded family members might be unwilling to settle for anything less than the maximum price that comes with a complete sale. The exit mechanism for the private equity investors also could be problematic. Copyright 2003 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com