Finance: Brands for Sale

The Gathering Storm may have been an HBO movie about Winston Churchill, but the title also describes a revolutionary change in the ownership of business assets from entrepreneurs and public corporations to wealthy individuals acting in concert via private equity funds. The weather began to change 40 years ago. But trillions of dollars later, the average citizen remains unaware of its full influence, because few consumers know who actually owns the brands they love to buy. That includes media brands. Early entrepreneurs like David and Robert Sarnoff (RCA), William Paley (CBS), William Randolph Hearst and Robert McCormick (Chicago Tribune) created and ran media businesses circa 1920-60. All dynamic individuals. They were followed by modern moguls like Charlie Bluhdorn, Larry Tisch, John Malone, Ted Turner, Rupert Murdoch, Sumner Redstone and Barry Diller, plus Kerry Packer (Australia), Leo Kirch (Germany) and Silvio Berlusconi (Italy). They used bank loans and junk bonds to buy companies circa 1960-2000, many aided by financing from Mike Milken and Drexel Burnham, who put savings & loans into the pool. Private equity made up another pool, including The Carlyle Group (1967, now a $40 billion fund) and TA Associates (1968, now a $10 billion fund). They were often needed by entrepreneurs for the equity layer to complete financing packages. The trend went global in 1988 when Kohlberg Kravis Roberts (founded in 1976 and now a $66 billion fund) led the takeover of RJR Nabisco for $25 billion (almost all of the world’s buyout capital at the time). Other big names in the field today include Apax, Blackstone, Bain, Providence Equity, Spectrum Equity, Texas Pacific and Thomas Lee. At first the storm was called Hostile Takeover, Corporate Raider and then, for the friendly deals, Leveraged or Management Buyout. Debt leverage drove the storm, but it was squeezed out of the system by the fall of Drexel and the credit crunch of 1990-93. When loans returned, huge mergers & acquisitions came back with a vengeance, culminating in the friendly, but fateful, acquisition of Time Warner by AOL in 2000. In this century, hostile approaches are rare and equity funds multiply their purchasing power by working together to outbid public companies for key acquisitions. Carlyle co-founder David Rubenstein told The Wall Street Journal last year that "nothing is off the table now." Equity funds have long been attracted to cable and other media for their high, and relatively stable, cash flows. Blackstone helped Insight go private last year, and Thomas Lee, Providence and KKR reportedly were interested in Adelphia when Time Warner and Comcast stepped up. Given their global sweep and the rising trajectory of their assets, private equity funds could eventually own a large share of the world’s media properties. Especially if wars, inflation, recessions and overzealous regulators keep depressing the stock prices of public companies. Paul Kagan is chairman/CEO of PK Worldmedia, Inc., in Carmel, Calif. As an analyst/investor he places values on, and invests in, public and private media companies. Information in his columns is not intended to be a recommendation to buy or sell securities.