Private Equity’s Role in Communications Debated on Capitol Hill
House Telecommunications & Internet Subcommittee Hearing Led by Chairman Ed Markey
By John Eggerton -- Broadcasting & Cable, 3/11/2008 9:02:00 AM
The role of private equity in the communications sector was the subject of pointed inquiry on Capitol Hill Tuesday, but it was not cast as quite the "chop shop," "strip and flip" villain some have made it out to be.
House Telecommunications & Internet Subcommittee chairman Ed Markey (D-Mass.), who presided over the hearing, said the subcommittee would put increased scrutiny on the deals "as the year unfolds," because he believes a worsening economy will "reveal certain inconsistencies in the telecommunications marketplace that otherwise would have never been revealed."
But in general, private-equity firms got their say, with Harvard Business School Professor Josh Lerner saying studies indicated that such firms were no more likely to go bankrupt or to decrease investments in innovation than other companies. In fact, he added, studies showed that they were somewhat less likely to fail or be in distress than other companies.
Markey himself raised the issue of the possible upside of private equity, the "deconsolidation of assets" by firms selling off pieces of the company.
Former Viacom and Time Warner executive Richard Bressler, managing director of private-equity firm Thomas H. Lee Partners, assured legislators that its investments were for the long-term, although that was defined as 5-7 years. Those investments have included Univision Communications and the pending purchase of Clear Channel Communications.
He pointed out that the company was investing $100 million toward Univision's digital conversion, including $20 million in 2008, and said that when it made the purchase, not a lot of companies were stepping up to buy it or make that investment.
He said he saw a bright future in television and, as a former broadcast and cable executive, he recognized and respected the special public-interest obligations of media companies.
On the deconsolidation issues, Bressler pointed out that Clear Channel was selling off radio stations, including looking for minority buyers, saying that private-equity deals could help to spur media diversity.
But while Lerner essentially stuck up for private-equity firms, Eli Noam of Columbia University said examples of private-equity takeovers in Europe suggested that the firms had disinvested in infrastructure, taken out huge dividends, then gone to government for rate increases for investment, essentially putting those investments on the backs of consumers.
But even Noam suggested that the solution was more transparency in reporting rather than hefty government regulation.
The case made for private-equity firms by Bressler and some Republicans on the committee was that it freed companies from the short-term pressures of quarterly reports to focus on long-term investment, although again, the long-term was the 5-8 years before the private-equity firm tried to "exit" the deal.
Noam said there was an even longer-term to be considered -- that of infrastructure investments with benefits that might not be realized until further down the timeline. That was the investment he was concerned would not be made by private-equity firms if two case studies in Europe were any indication.
One key issue for Federal Communications Commission member Michael Copps in private-equity deals was whether the complicated ownership structure outstripped the FCC's ability to identify and hold to account that ownership.
Markey echoed that concern, but Bressler pointed out that private-equity firms were subject to the same limits -- foreign-ownership limits, for example -- and to all of the FCC reporting requirements of any other media-company owner.
Providing a firsthand assessment was Republican Greg Walden of Oregon, who recently sold his five-station radio group to a private-equity firm. “Nobody on Wall Street wanted to buy us. Now, the stations have access to capital we never had,” he said, “to things we couldn't do. Private equity is a good thing."
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