Copps Fears Private Equity Investments Hinder FCC
The FCC has a tougher job overseeing companies bought by leveraged buyout firms that are less transparent than publicly traded media and telecom companies, said Commissioner Michael Copps. Assets purchased by buyout firms may be especially vulnerable in a U.S. economic downturn, since buyers often heap on debt, he said. The agency must look broadly at private equity and not “just stick your head in the sand and pretend the world has not changed,” Copps said in an interview. He was expanding on comments he made at Thursday’s FCC meeting. But others in and out of the commission said they're not concerned.
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Commissioner Robert McDowell believes the swoon in U.S. stock and debt markets makes this an especially bad time to subject private equity firms to more oversight, he said in an interview. FCC ownership attribution rules, which apply to all companies, seem sufficient for private equity, he said. FCC Chairman Kevin Martin made similar comments. “We have our normal attribution and ownership rules and they'll continue to apply,” Martin told reporters. “Thus far there is not any evidence that the commission has seen that this raises any particular or unique problems.”
U.S. telecom has “significantly improved” since the sector’s fortunes took a dive seven years ago, Martin said. “The telecommunications and media landscape have both significantly improved since the bubble that had burst when I first came on at the commission that Commissioner Copps referred to,” said Martin. He cited “dramatic growth in telecommunications investment” due to “more sound policies that we have put in place.”
Attribution rules don’t work if corporate ownership of media and telecom assets isn’t transparent, Copps said. Private equity firms need not report to the Securities and Exchange Commission, unlike publicly traded companies, said Copps. It was hard for him to learn what other broadcast assets the buyer of Clear Channel’s 56 TV stations also held, he said. Copps was the sole vote against that $1.2 billion sale to Providence Equity Partners (CD Nov 30 p13). The deal hasn’t been completed because the companies are thought to be renegotiating terms amid the credit crunch, industry lawyers said. A Clear Channel official didn’t immediately return messages seeking comment.
Commissioner Deborah Tate cited the $26.7 billion sale of the rest of Clear Channel to two other leveraged buyout firms in declaring that some industries the FCC oversees aren’t bulking up. All commissioners have approved that deal as Clear Channel continues to sell small-market stations to other companies (CD Jan 10 p5), though the order hasn’t been released. “If you look at the radio market, that has naturally been deconsolidating,” Tate said in an interview. “Clear Channel, CBS, ABC have actually been selling off radio stations.” She declined to enter into the fray on buyout firms and the economic downturn.
Copps doesn’t see a recession looming but said he worries that heavily indebted private equity companies could face trouble if growth slows further or the economy shrinks. “There is sufficient evidence in the macro economy to indicate there may be problems here and those problems may come into the telecommunications sector,” he said. “There are warning flags out there, yellow flags all over the damn place, and we ought to be looking at that.”
Private buyers of broadcasters might do okay in hard times, said Stanford Group analyst Paul Gallant. “Private equity firms might be less susceptible to the bubble phenomenon because they need to make the stations attractive to a future buyer -- that’s their end game. But there is clearly risk when lots of financial leverage is used to buy any kind of asset, broadcast or otherwise.”
The FCC may be harder pressed to investigate complaints against TV stations and other properties owned by leveraged buyout firms because the SEC has no information on them, Copps said. “What concerns me is, I can’t do my job as a regulator,” he told us. “These are fundamental changes that have gone on in our economy, and sometimes it takes us a while to catch up.” He'd like the FCC to start a broad examination of private equity’s role in communications, perhaps through a notice of inquiry, staff study or other method, he said. In recent years, private equity in general has been associated with an attitude of “strip it and flip it and go in and fire a bunch of people and stop the research and development and cut it down and flip it and see if you can make a quick profit,” said Copps. “I want to know if that’s what’s happening here,” in industries he oversees.
McDowell isn’t convinced there’s need for such FCC review of private equity, he said. “I'm still not quite sure what the problem is,” he said. “Private equity is the oldest form of ownership. Since the first cave man owned the first cave, that was private equity.” The threat of regulation could wave off would-be private equity buyers of telecom or media assets, he said. “With the uncertainty in the financial markets, the last thing you need to be doing is making it harder to raise capital from private equity sources. That could guarantee a deep recession.”