Freedom Sets Higher Profit Target for 2003; Threshie Challenged
By RICK REIFF
Freedom Communications Inc., the embattled holding company of the Orange County Register, has set higher profit goals for 2003 after turning in a “middle of the pack” performance in 2002.
Financial figures, shared by chairman David Threshie with family shareholders in a Jan. 15 letter that was obtained by the Business Journal, suggest a company that likely would sell for at least $1.7 billion, and probably more than $2 billion.
Besides calling for higher profit, Threshie’s letter alluded to other developments that reflect the growing turmoil among the company’s some 80 shareholders, heirs of founder R.C. Hoiles.
Threshie, widely believed to favor keeping the company in family hands, reported that the board had increased dividends and raised directors’ pay.
The dividend hikes, totaling 7%, appear to be aimed at mollifying some shareholders who want higher payouts. Threshie said the increase in directors’ pay,to $50,000 from $30,000 a year and to $2,500 from $1,000 a meeting,would help Freedom compete for directors with public companies that can offer stock.
The letter also alluded to the latest volley from dissident shareholders,a call by director David Hardie that Threshie be replaced as chairman by a non-family director “mainly because of performance issues.”
A faction led by Hardie and Tim Hoiles has been agitating for Freedom to solicit bids from would-be buyers, a call that has alarmed those who fear a sale would mark the end of Freedom’s unique editorial voice.
The disclosures come as two important deadlines approach for Irvine-based Freedom, a champion of libertarianism whose holdings include the Register, 27 other daily papers, 37 weeklies and eight television stations.
The investment banking firm Morgan Stanley present to Freedom’s board on Feb. 11 its assessment of four “liquidity options”,an outright sale of the company; a merger with another media company; an initial public offering; or a combination of borrowing and asset sales that would allow some family members to cash out and others to maintain ownership.
Included in the last option is a possible transfer of control to the fourth generation of heirs from the third generation that includes Threshie, Hoiles and Hardie. Shareholders are slated to express their preferences in a non-binding vote due by Feb. 28.
“If you were to take the libertarianism out, what usually happens when a company gets into this kind of family turmoil, it winds up getting sold,” said media analyst John Morton in Silver Spring, Md. “But here you have an ideological component that might interfere, so who knows?”
Adding up figures in the Threshie letter, Freedom’s operations had EBITDA (earnings before interest, taxes, depreciation and amortization are factored in) totaling $169 million last year. Using a standard industry valuation multiple of 12 times EBITDA, this suggests a big publisher such as Gannett Co. could pay about $2 billion for all of Freedom’s assets.
But the letter stated Freedom’s consolidated EBITDA as $147 million, suggesting that $22 million was deducted for corporate overhead. Applying the 12-times multiple to the lower EBITDA figure values Freedom at about $1.7 billion, or $300 million less.
This points out one problem that the fourth-generation transfer or an employee stock ownership plan could have in competing with offers from other media companies, which could eliminate overhead costs if they bought Freedom.
(Of course, 12 times EBITDA is only a rule of thumb; a bidder might use a higher multiple, for example, if it thought Freedom had under-performing assets, as some suggest.)
Threshie reported that $11 million in severance payments, part of a cost-cutting program, reduced 2002 EBITDA to $136 million, which he noted was still $2 million more than the budgeted figure.
“This performance puts us right in the middle of the pack as compared to our public peer companies,” he wrote.
Figures provided in the letter show Freedom had 2002 revenue of $784 million, and has budgeted for a 4% increase this year, to $815 million.
Threshie’s letter said the company’s 2002 margin on the $136 million EBITDA figure was 17%, and the 2003 target was for increases to $163 million and 20%. (Adding in overhead costs to the targeted EBITDA figure and using the 12-times multiplier would increase Freedom’s value to $2.2 billion.)
The letter did not reference 2001 numbers, but interim Chief Executive Alan Bell previously said Freedom’s profits from continuing operations, excluding write-offs, was up 45% in 2002, and was expected to grow another 20% in 2003.
Freedom’s Metro Division, comprised of the flagship Register and dailies in Mesa, Ariz. and Colorado Springs, Colo., accounted for a little more than half of Freedom’s 2002 revenue but only a third,$57 million,of EBITDA, according to the letter’s numbers.
The smaller papers generated $73 million of EBITDA, while the television stations kicked in $39 million.
Threshie’s letter said Hardie’s suggestion of a change in the chairmanship, raised at the Jan. 14 board meeting, prompted a discussion that “dealt generally with the political polarity existing in the family.”
Some outside directors said the issue should be left to shareholders, the letter stated.
The letter also said the board has postponed its search for a permanent chief executive “until the liquidity process moves along further.” Television executive Bell, 70, has been in charge since Sam Wolgemuth was fired in August.
Hardie and Bell declined to comment on the letter. Threshie and Hoiles did not return calls seeking comment.
