Clouds over Clear Channel

Dallas-based buyout veteran Hicks, Muse, Tate & Furst sees attractive investment opportunities in Europe, as well as the potential to forge relationships with institutional investors who want to join the firm in successes like Yell Group, its yellow pages platform that recently when public.

The firm, which maintains an office in London headed by John Muse, recently launched a fundraising campaign for its second European fund with a target of €1bn, with terms that have been described as disarmingly investor friendly.

But back in the States, the buyout firm is carefully managing a less friendly situation with some of its limited partners, who are angry that the firm continues to maintain a large position in Clear Channel Communications, a publicly traded company best known for its nationwide network of radio stations. ?A lot of LPs are pissed off and sick of paying fees? on the Clear Channel investment, says an LP source. The situation has been complicated by the fact that Hicks Muse's chairman, Tom Hicks, recently sold off a substantial amount of shares in Clear Channel.

Three channels
Hicks Muse acquired its current interest in the company when its radio broadcasting portfolio company, AMFM Inc., merged with San Antonio, Texas-based Clear Channel in August 2000. The combined company, which is currently capitalised at $24bn, now owns more than 1,000 radio stations throughout the US, as well as outdoor advertising assets and live entertainment operations. Tom Hicks occupies his firm's one Clear Channel board seat.

Hicks Muse had so much faith in its radio-station consolidation play that the firm invested in the strategy from three successive funds. From Fund II, which closed in 1993, the firm invested $120m in the original platform. Limited partners in that fund profited greatly from the investment: in 2001, Hicks Muse realised proceeds of more than $940m from the Clear Channel investment, representing a nearly eight-times return on invested capital.

Limited partners in Fund III and IV haven't been as lucky. Clear Channel's stock price peaked in January 2000 near $100 per share and has drifted downward ever since. At press time, shares in Clear Channel were trading near $39. With roughly $1.4bn in value still tied up in Clear Channel, one limited partner describes Hicks Muse's involvement with the company as ?an albatross.?

Hicks Muse's third fund, closed in 1997, invested roughly $436m in the aggressive radio-station roll-up, according to sources close to the firm. That investment was recently valued at $671m, giving the deal a roughly 7 per cent gross IRR. That unrealised, modest gain compares favourably with subsequent investments in Clear Channel from Hicks Muse IV, which closed on $4.1bn in 1998. Fund IV's $665m investment in Clear Channel from the fourth fund is valued slightly above cost at $710m.

Detractors feel that Hicks Muse should unwind its position in the company as soon as possible and return the capital, regardless of the deal's current IRR. ?I'm in the camp of trying to seek liquidity,? says a Hicks Muse limited partner. ?Every day they don't sell Clear Channel our price goes down. We talked to them a couple of years ago and they were saying, ?Hey, it's going to go to $100.? They didn't sell it and it went to $40.?

Strange looks
Much of the LP frustration at Hicks Muse's Clear Channel position has to do with the company's status as a publicly traded entity. They feel the buyout firm's most important role was in building an asset for sale to the public markets, but once that goal was accomplished, the firm should have been more aggressive in its efforts to liquidate its holdings.

These LPs argue that a private equity firm is not equipped to be a long-term manager of a quoted stock. ?We don't want to pay 2-and-20 for a damn public position,? says one investor, referring to the traditional two per cent management fee and 20 per cent carried interest charged by general partners. ?I already own this in my public index.?

?I've got some strange looks from my CIO,? says another LP, who oversees the private equity allocation in a larger investment portfolio. ?He says, ?Why do we have such a large position in Clear Channel? Why are we paying someone to manage that???

Not every Hicks Muse investor agrees that the position should be unwound. One, who attended the firm's limited partner meeting in Dallas in October, says he feels the stock has ?a little ways to go? and he wouldn't want to see the firm sell prematurely.

William Quinn, the president of American Airlines' investment arm, AMR Investments, a longtime Hicks Muse LP, says he might take a different view of the Clear Channel investment were Tom Hicks not on the company's board. ?This is an issue we all debate, which is at what point a stock should be distributed?, he says. ?But if a partnership can still add value [to a publicly traded portfolio company], then we will generally support the investment. In the case of Clear Channel, with Tom on the board, we feel we have someone working for us.?

Quinn notes that Hicks was ?instrumental? in persuading the management of Clear Channel to initiate a dividend. The company's current dividend is $0.40 per share, which yields roughly one per cent.

Potential upside
For its part, Hicks Muse argues that Clear Channel is undervalued and to sell now would be shortsighted. A spokesperson for the firm notes that the company's business driver is advertising, which has been in a serious slump in recent years but is poised for a comeback. Clear Channel's dominance of the local radio advertising market represents an asset with enormous upside potential, he says.

The firm's LP critics question how much value Tom Hicks' one board seat represents to the future of the media company. They also say they have been disconcerted to learn that while the firm was talking up the long-term potential of Clear Channel, Tom Hicks was selling down his personal holdings in the company.

Publicly available data shows that, in early September, Hicks Muse's chairman sold approximately $80m in Clear Channel stock. A source close to the firm says this represents one third of his personal holdings in the business, most of which he purchased on the open market. The sale was for ?diversification and liquidity,? the source says, adding Hicks continues to be very bullish on Clear Channel.

The more cynical of Hicks Muse's LPs say they suspect the firm's long-term commitment to Clear Channel has as much to do with management fees as it does with the stock's upside. As has been widely reported, the Texas firm's third and fourth funds may produce little if any carry for the GPs, thanks to disastrous investments in Regal Cinemas and a string of failed telecom engagements. The Clear Channel position, these LPs say, produces a nice fee income for the firm in these leaner times.

AMR Investments' Quinn says most of the management fees for Fund III are being offset by transaction and monitoring fees Hicks Muse charges its portfolio companies and then shares with its limited partners. As for Fund IV, Hicks Muse's spokesperson says that LPs are entering a ?postfee? period where they are not paying the GPs much more for the management of the Clear Channel position than they would pay a public equities management specialist.

The LP who wants the firm to exit Clear Channel admits that Hicks Muse has recently done well with ?meaningful? liquidity events related to portfolio companies Triton Oil and ConAgra. But in Clear Channel he still finds a ?partial misalignment of interests.?

?I'm sure they've got a model which tells them what is in their best interest,? he says. ?But that may not really be in their investors' best interest.?

This LP adds that if Hicks Muse is reluctant to forgo the potential upside of Clear Channel through a liquidation of its shares, it could at least ?give us the stock and let us do it.? An interesting suggestion: in-kind distribution could be a solution that might suit everyone.