Congressmen want inquiry into telecom, media buyouts

As private equity’s tax treatment continues to be examined on Capitol Hill, two congressmen have asked the Federal Communications Commission to analyse private equity deals in the telecom and media industries.

The Federal Communications Commission – the independent US government agency that regulates the media and communications industries – has been asked to examine buyouts in the media and telecom sectors, in what is the latest example of increasing congressional interest in private equity.

John Dingell, chairman of the US House of Representatives’ Committee on Energy and Commerce, and Edward Markey, chairman of the House’s Subcommittee on Telecommunications and the Internet, want the FCC to investigate possible policy implications including whether private equity ownership of companies like Clear Channel conflict with US media ownership rules.

On 12 July, Dingell, a Democrat from Michigan, and Markey, a Democrat from Massachusetts, sent a letter to FCC chairman Kevin Martin asking the agency to look into the “trend of increased private equity ownership”.

The Carlyle Group’s $1.6 billion purchase of Verizon’s Hawaiian phone business in 2004, the $13.7 billion club deal for Univision Communications in 2006, and Goldman Sachs and TPG’s recent $27.5 billion agreement to buy Alltel were among the deals noted by the Congressmen.

The legislators observe that private equity-owned companies are often thought to be “insulated from the financial market pressures to post ever-higher earnings each quarter”.

But they also worry that generalisations frequently heard about the industry – including a “financial management style focused on cutting costs, increasing revenues and the ultimate resale of the enterprise”, a “management structure that is not overly transparent” and “fluid asset management where actual holdings and control may vary significantly” – could be potential harmful. Those characteristics may be inconsistent with “many of the core public interest and localism values that Congress has assigned to local media outlets and may implicitly undermine the Commission’s media ownership rules”, the letter said.

Attached to the letter was a list of eight questions, including: Whether the FCC has considered the impact of PE ownership on consumer protection and service quality for the telecommunications carriers; whether the FCC’s ‘debt-plus-equity’ attribution rules ought to be revised to more accurately understand private equity ownership and control of broadcast companies; and whether the FCC has encountered any problems regarding management and financial transparency of licensees and entities owned by private equity firms.

The new-found interest in private equity’s media and telecom investments is completely unrelated to the various congressional committees that have conducted or will soon conduct hearings on private equity’s tax treatment, according to a person familiar with the matter.

The Energy and Commerce Committee and the Subcommittee on Telecommunications and the Internet became interested in the issue earlier this year, as media attention on communications-related buyouts increased, the source said.

The source said the aforementioned committees have no imminent plans to hold hearings on the matter, but added: “Never say never.”