The Price of Freedom: Hoiles Family Control?
By ANDREW SIMONS and RICK REIFF
Last week’s deal at Irvine-based Freedom Communications Inc.,publisher of the Orange County Register,was billed as a way to “enable continued control by descendents of founder R.C. Hoiles.”
But a look at the deal shows Hoiles’ descendants are giving up their hold on the company’s board and may see Freedom’s direction dominated by two East Coast private equity firms who are buying out disgruntled family shareholders.
“They may have control on paper, but they’re facing a new reality,” said Sam Yau, chairman of the Forum for Corporate Directors, a local corporate governance group. “The dynamic in the board room will change. Control will slip away from the family.”
Investment bankers and people familiar with the deal also said they see a loss of control for Chairman R. David Threshie Jr. and other family members who resisted selling the company to big media suitors such as MediaNews Group Inc. and Gannett Co. A joint offer from those two companies was 7% more per share than the winning bid.
Jilted MediaNews Group Chief Executive William Dean Singleton told the Los Angeles Times that the Hoileses “are naive beach boys who have invited the sharks over to swim with them.”
‘Dead Wrong’
Alan Bell, Freedom’s chief executive, called speculation the family has lost control “dead wrong.”
“The family is in control,” he said.
That point will be made clear when the proxy statement,”a long, detailed document”,is distributed to shareholders in coming days, Bell said.
As for Singleton’s observation about sharks and beach boys, Bell said, “It’s a good thing he doesn’t make wine, because with grapes as sour as that he’d have trouble marketing it.”
The deal with New York-based Blackstone Group LP and Providence Equity Partners Inc. of Rhode Island buys the family some time before the sale issue resurfaces in a few years, according to sources.
“If you’re a private equity firm, you’re going to want a liquidity event at some point down the road,” said Murry Rudin, general partner with the Irvine office of Los Angeles-based private equity firm Riordan, Lewis & Haden.
Other Freedom executives and family members declined to talk for this story, possibly out of fear of legal reprisals for breaking terms of the deal or for breaching the confidentiality of losing bids.
As such, many fine points were unknown last week.
What is clear is that Blackstone and Providence have agreed to buy out family members who want to sell their shares. How many will do so is unclear.
The deal was sparked in large part by Tim Hoiles, the 50-year-old grandson of founder Raymond C. Hoiles. For months, Tim Hoiles pushed for a Freedom sale so he could cash out his 8.6% stake in the company. Other family members also are interested in selling some or all of their shares.
In a statement, Tim Hoiles said he is “thrilled” with the deal.
Blackstone and Providence reportedly can buy more than 50% of Freedom’s shares. But anything beyond 49% stands to be in the form of nonvoting shares, keeping the majority of voting stock in the family’s hands.
But the family’s voting control may not be all that it seems. For one thing, it’s not a given that family members will vote together on key issues. Some might be inclined to align more closely with the interests of Blackstone and Providence.
Threshie and other family members will have less power on the Freedom board, too–just four of 13 seats.
And some family shareholders not aligned with Threshie could retain shares. Dissident shareholder David Hardie, a proponent of maximizing the value of Freedom stock, previously had said he might sell just part of his 10% stake. Tim Hoiles could do the same.
Hardie’s support alone could swing the balance of voting power. Hardie declined to comment last week.
The private equity firms will have four seats among them. Chief Executive Bell will get a seat. The other seats will go to independent directors.
How the independents and even the family directors will be selected is unclear.
Either way, family members seeking to retain long-term control of the company and Freedom’s libertarian heritage stand to be outnumbered by directors largely focused on financial performance and maximizing value in the runup to a sale or public offering a few years out.
Showdowns Foreseen
The deal includes several provisions, one allowing family members to buy out shares held by outside investors in three years’ time.
But some observers doubt family members will be able to do so if they didn’t have the money to buy out dissidents this time around.
“There’s a legitimate question there,” Rudin said. “Are the goals and objectives of the private equity partners consistent with those of the family? What’s in the best interest of the business may not be in the best interest of other, shall we say, non-business issues. Reasonable people can differ. But it’s hard to argue that helping out Aunt Jane justifies a change in the business.”
Some foresee board showdowns over further cutting at the Register and other Freedom holdings.
Freedom has been cutting for the past few years. The Register itself has cut more than 100 jobs in the past couple of years. But with 7,000 Freedom workers in all, there’s likely room for more paring, including at the Register, with its nearly 2,000 workers.
“We’re going to drive for efficiency in all of our businesses,” Bell said. “And Blackstone-Providence knows that. That’s one of the reasons that they are investing.”
Singleton said he knows that, too.
“They’ll clean these properties up, cut a lot of cost and put them on the market again in three to five years,” Singleton told the New York Times. “When they do, I suspect we’ll be there.”
