Firm: Oak Hill Capital Partners
Target: Local TV Holdings LLC
Hold Period: About six years
Return Multiple: 3.5x
High-Yield Lenders: Deutsche Bank (on the left); UBS (on the right)
Advisers At Exit: Moelis & Co, Wells Fargo
Key Executives On Deal: Managing Partner J. Taylor Crandall and Partners Benjamin Diesbach, Jonathan Friesel and Scott Baker
WHY THE FIRM WON
- Recognized hidden value in local TV station retransmission rights
- Realized bonanza in political advertising from stations located in swing states
- Enterprise value grew from $1.6 billion to $2.7 billion during hold period
- Employment grew from 2,215 to 2,314
Oak Hill Capital, founded in 1986 with financial backing from the Texas oil billionaire Robert Bass, acquired the main assets of Local TV Holdings through two principal transactions. The first was the $575 million purchase in spring 2007 of nine local TV stations, mainly affiliated with ABC, CBS or NBC, from the New York Times Co. That was followed in July of the next year by the $1.1 billion purchase of eight Fox network-affiliated stations from News Corp. The stations operated in a number of mid-sized and large markets across the Midwest, South and mid-Atlantic states.
The deal was a long time in the making for Oak Hill Capital, which has more than $8 billion under management and which closed its third fund in 2007 at $3.8 billion. A team at Oak Hill Capital had partnered with two former Taft Broadcasting executives to look for TV and radio stations to buy starting in the early 2000s. Both executives had operating expertise in the highly competitive radio market: Randy Michaels, who became Local TV Holdings’s first CEO, and Bobby Lawrence, who succeeded him.
“Anything that came on the market we had a look at,” said Benjamin Diesbach, a partner at Oak Hill Capital and former executive vice president in charge of cable TV operations at media conglomerate Taft Broadcasting, pointing to TV and radio stations being shopped by Clear Channel Communications, Gray Television Inc, LIN Television Corp and Nexstar Broadcasting Group. But the Oak Hill Capital team had developed an investment thesis that compelled them to be highly selective. They sought stations that had a strong focus on local news and that were either the number one or two players in their market—positioning them not just to win business from the car dealerships and other local advertisers that account for most local TV station revenue but also to charge cable TV companies top dollar for retransmission rights. They also favored stations located in what the team expected to be electoral swing states, which stood to benefit from an influx of political advertising.
Headwinds were many. Online competition for eyeballs was rapidly heating up in the late 2000s from Netflix, YouTube and other rivals. And the stations didn’t come cheaply: Oak Hill Capital ended up paying more than 10x EBITDA for the properties, right before heading into the teeth of the financial crisis of 2008 and Great Recession that lasted well into 2009. “Had we known about the recession we might have forestalled,” acknowledged J. Taylor Crandall, managing partner.
But there was no forestalling, and the management team ended up executing on an investment thesis that played out just as anticipated. Said Diesbach: “We were happy to pay 10x, because we knew what to do with (the stations) and how to improve (them).” Indeed, during Oak Hill Capital’s ownership, EBITDA nearly doubled at the company, to $260 million from $136 million (using two-year averages, as is conventional in the local TV business).
Transmission Rights Key
By far the biggest factor in that growth was the negotiation of retransmission rights with cable TV companies—rights available to local TV companies since passage of the 1992 United States Cable Television Protection and Competition Act.
The New York Times Co had generated approximately $5 million in revenue from these rights at the time it sold its stations to Local TV Holdings; News Corp generated nominal revenue from them, choosing instead to barter the retransmission rights to cable TV companies in exchange for their agreeing to carry Fox cable channels. “We had a greenfield in front of us,” said Diesbach.
Intent on making the retransmission rights more valuable, Local TV Holdings invested heavily in local news. During Oak Hill Capital’s ownership, Local TV Holdings boosted its local news production to 785 hours per week from 587 hours. It was Lawrence who led negotiations with the likes of Comcast Corp, Cox Enterprises and Time Warner Cable Inc, and he left little on the table. “We got a very big stick to use and we used it effectively,” said Diesbach. ”We were ready to shut down if we had to.” By the time of its sale, Local TV Holdings was generating more than $80 million in revenue from retransmission rights.
Other key factors in the success of the investment included the following:
- Owning stations based in presidential election swing states such as Colorado and Ohio meant a huge influx of advertising dollars in 2008 and 2012.
- The management team cut costs by approximately $60 million through reducing the amount of syndicated programming the company purchased, upgrading technology, and other strategies. EBITDA margins at the company grew to 45 percent from about 30 percent during Oak Hill Capital’s ownership.
- The company engaged in five M&A transactions, including two tuck-in acquisitions and two local partnerships with Tribune Company in which Local TV Holdings agreed to manage their stations, achieving more than $10 million in cost savings.
That last deal helped set the stage for the eventual exit of the company. On Dec. 27 of last year Oak Hill Capital closed the sale of the company to Tribune Company for $2.725 billion. The transaction generated a gain of $1.2 billion on the sponsor’s $493 million equity investment, for a 3.5x return multiple and 26 percent gross IRR.
“We were almost a must-buy for them in the end,” said Diesbach. “They were thrilled to death with this deal.”
David Toll is editor-in-charge of Buyouts Magazine.