Majority of Shares in Freedom to Be Sold

Freedom Communications Inc. shareholders plan to cash out well over half their stock in the Irvine-based newspaper and television company in a financial restructuring that would put the founding family in partnership with outside investors for the first time.

The shareholders are to vote Wednesday on the partial sale, which would create a new company, Freedom Holdings, valued at more than $2 billion. Freedom has been family-owned since founder R.C. Hoiles bought the flagship Santa Ana Register in 1935.

To allow shareholders to cash out, investment firms Blackstone Group and Providence Equity Partners are prepared to pay hundreds of millions of dollars in cash and have arranged for the new company to borrow hundreds of millions more. As a result, Freedom Holdings, incorporated in Delaware, would have about three times as much debt as the $332 million the company carried on its books as of Sept. 30.

Still, Freedom board members said they were optimistic that a solid margin of shareholders would approve the proposal, which needs a simple majority to pass.

If shareholders do approve the proposal, their next step Wednesday would be to indicate how much stock they wish to unload. The more that is sold, the harder it would be for those family members who keep their stakes to achieve their goal of eventually buying all shares back from the two investment firms.

As of Monday, according to an update on a shareholder hotline, family members had indicated that they wished to cash out 47.97% of Freedom’s stock. In addition, R.C. Hoiles’ grandson, Timothy C. Hoiles, who has battled for decades to sell shares owned by his branch of the family, said his faction intended to cash out an additional 7.4% -- bringing the total to more than 55%.

Hoiles said he believed the amount could rise to 65%, although others in the family described that estimate as too high. Hoiles said he expected “a lot of lobbying” as those intending to remain shareholders try to limit the amount that others sell.

All told, 67.7% of shares would have to be cashed out for Blackstone/Providence to wind up with majority ownership of Freedom Holdings; the two investment firms would have to accept some nonvoting stock so the family initially would be guaranteed at least 50.1% voting control.

Under the agreement with Blackstone/Providence, the family would maintain control of Freedom’s stridently libertarian editorial voice.

Family members could sell additional stock to Blackstone/Providence at later dates, though if they sold too much they could lose control of the company. What’s more, if Blackstone/Providence ever holds more than 70% of all the voting and nonvoting shares of the company, the two firms could acquire voting control.

Increasing the chance of that taking place, the agreement grants Blackstone/Providence a special dividend increasing its stock holdings by 6% a year. The investment group also could demand that Freedom buy out its stake in the company after seven years.

Under terms of the deal, holders of Freedom’s more than 7.8 million shares would receive $220 for every share they sell, less the cost of buying out minority interests in certain Freedom partnerships. Sellers would net an estimated $212.71 a share, according to the 239-page proxy. Shareholders are free to change their minds about whether to cash out their stock until 10 days before the deal closes.

It’s uncertain when that may occur. To complete the transaction, Freedom needs the approval of the Federal Communications Commission because it owns eight TV stations as well as 65 newspapers. Freedom Chief Executive Alan J. Bell said his best guess was that the deal would close sometime in March.

Family members’ decisions about what to do with their stock is complicated by considerations about tax consequences, charitable donations, gifts to children and other financial factors. For some -- especially the family branches that have remained most involved in Freedom’s operations -- there are powerful emotional and philosophical ties to the company and its free-market editorial and opinion pages.

“It’s really very difficult to predict how it’s going to turn out,” Bell said. “Between now and then, something may happen in the privacy of their own heads that makes them act differently than how they are talking about it now.”

For a family to retain voting control even while holding a minority of shares would be unusual in many industries, but not in newspaper business, where founding families often maintain special voting rights, noted Jim Zukin, managing director of Los Angeles investment bank Houlihan Lokey Howard & Zukin.

“The people who own newspapers typically are not just in it for the money,” Zukin said. “They are in it because they have something they want to say to the public.”

What the Hoiles empire has consistently told readers through its editorials is that government is too costly and too restrictive -- ideas that moved its founder to oppose public schools and libraries.

Bell, who agreed to stay on as president and CEO after the deal is complete, is to hold a seat on the new company’s board, along with four family representatives, four from the buyout firms and four independent directors.

The proposed family directors are from a group of fourth-generation Hoileses who tried to patch up the feuds that have consumed their elders for decades and who engineered the entry of Blackstone and Providence. They are hopeful that an improving economy will help them strengthen Freedom’s profit, pay down its debt and ultimately buy out the stakes of the private equity firms.

The independent directors would be chosen with input from the family and the firms. Board members said they expected two of the current independent directors, Columbia House CEO Scott N. Flanders and Advanstar Inc. Chairman Robert L. Krakoff, to stay on.

Flanders, head of a director search committee, said several candidates were in the running for a seat that requires expertise in TV station operations as well as “an understanding of the strategic landscape.” He said the lead candidate for the final seat, one requiring newspaper expertise, was Burl Osborne, publisher emeritus of the Dallas Morning News and chairman of Associated Press. Osborne declined to comment on the company or its prospects.