Storer Girds for Fight to Stay Whole : Unusual FCC Ruling Opened Door to a Hostile Break-Up Bid

When Peter Storer became chief executive of his father’s broadcasting empire six years ago, he staked the company’s future on cable television.

Storer Communications became the nation’s fifth-largest cable-TV operator, but, burdened by construction and other costs, it ran up a debt of $785 million in the process. The Miami-based firm gambled that, by the late 1980s, the systems’ cash flow would pay off the debt and assure steady profits, vindicating management’s strategy.

Investors chafed, however, when the company reported losses totaling $56 million in its last two fiscal years, and the stock traded as low as $33.25, or roughly one-third to one-half the price analysts say the company could command if sold.

Vote Slated

Now, Storer finds itself on the eve of a proxy fight, triggered by a small investment firm that wants to liquidate the company for values ranging from $90 to $100 per share. Storer shareholders will vote Tuesday at their annual meeting for the incumbent board or the insurgents’ slate. Peter Storer has estimated that his extended family and all levels of Storer management together own about 15%, but institutional investors own more than 50% and will undoubtedly determine the outcome.

One institutional investor who favors Coniston Partners, the investment firm, points out that Storer is subject to a so-called cumulative voting system that makes the election of dissident directors easier. “There’s going to be (some) Coniston board members (elected) on Tuesday,” he says, predicting that they will be “raising all sorts of hell” at future board meetings, prolonging the battle.

Changed Firm’s Course

Regardless of Tuesday’s vote, Coniston Partners has changed Storer’s course, because the Storer board announced plans last week to merge with Kohlberg, Kravis, Roberts & Co., a New York investment banking firm that specializes in leveraged buy-outs.

Perhaps more important, Coniston has destroyed the notion that the broadcasting industry is immune to hostile takeovers. Coniston persuaded the Federal Communications Commission that it should be allowed to wage its proxy fight without undergoing a lengthy FCC review, and, last Thursday, a federal appeals court agreed.

“Coniston is clearing the way for more proxy fights,” said Paul Kagan, a Carmel-based consultant and Storer shareholder. “There had been an assumption that broadcast groups had protection against hostile (bids); it was never tested until Coniston.”

If the Coniston-led group prevails, it will have gained control of Storer without making a costly tender offer. So far, the group has invested about $43 million for about 5.2% of the shares outstanding. The amount seems small in view of Coniston’s contention that any sale or transaction concerning Storer will involve $2.3 billion.

The Coniston strategy has attracted considerable attention from other professionals in the investment community, according to Paul Tierney Jr., one of three principals of Coniston Partners. If compared to a tender offer, Tierney says, the Coniston maneuver “requires a lot less capital,” but he adds, “Expenses per share held are quite high.” Those expenses will be recovered only if Coniston prevails and Storer shareholders agree to pay Coniston’s fees.

Plans to Divest Units

One month after Coniston made its liquidation proposal, Atlanta broadcaster Ted Turner made a hostile bid for CBS, offering a package of high-yielding bonds but no cash for that company. If successful, Turner has said he plans to divest the company’s non-broadcasting businesses and merge the surviving company with Turner Broadcasting.

Such scenarios used to be unthinkable because hostile bids seemed destined to fail in the regulatory quagmires of the nation’s capital. The investment community was keenly aware of the long FCC proceedings required for even the friendliest mergers or transfers of control.

Since 1960, federal law has required the FCC to allow at least 30 days for public comment in all transfers of “ownership or control,” except for those of “minor concern.” Special-interest groups have become quite adept in interceding, sometimes prolonging the reviews for more than a year to thrash out such issues as minority hiring or local programming.

“There has never been a hostile takeover” in the broadcasting industry, former FCC Chairman Richard Wiley says, “because the commission’s procedures have always seemed to be a barrier.”

In the Coniston case, a majority of the commissioners ruled that a new Storer board would constitute a “change of control,” but they also held that the change would not be “substantial” and therefore would not require the filing of a standard “long-form” transfer application with its mandatory 30-day waiting period.

“Insistence on long-form procedures in this case . . . would not be evenhanded; it would favor the incumbent board,” the FCC said, ruling that Coniston could satisfy the commission’s immediate needs by adding certain information to a “short-form” application usually reserved for transfers of minor concern.

Several Groups Protested

Several public-interest and special-interest groups protested vigorously.

“To call replacing one board, which wants to continue the company, with another that wants to dissolve the company a transfer of control of ‘minor concern’ is ludicrous,” attorneys for the Media Access Project argued in documents filed with the U.S. Court of Appeals in the Washington.

Those arguments were rejected, however, by the three-judge panel that upheld the FCC’s decision in a ruling last Thursday, clearing the way for Coniston’s final push in the proxy fight.

Mario Gabelli, who heads a New York investment firm of the same name, says he believes that FCC Chairman Mark Fowler “was looking for a test case to show the world that this FCC is free market-oriented.”

In its opinion, however, the FCC warned the industry that it intends to study the commission’s role in future hostile takeover attempts and plans to institute a rule-making procedure.

Several broadcasting executives and lawyers declined last week to offer their opinion on the FCC ruling because each has some matter pending before the regulatory agency. Some speculated, however, that broadcasters might seek legislative protection from hostile bids.

Stephen Sharp, a former FCC member who represented Coniston before the agency, disagrees. “I don’t see this as a deep congressional concern,” says Sharp, who is now a member of the law firm of Skadden, Arps, Slate, Meagher & Flom, which specializes in takeovers and takeover defenses. Sharp notes that Storer apparently failed to enlist much support from other broadcasters in its fight at the FCC.

Few Are Vulnerable

The FCC ruling, backed by the appellate court, “serves notice on everyone in broadcasting management that they have to do something for their shareholders,” Sharp says. But in his view, and that of several other industry lawyers and executives, few companies are as vulnerable to a liquidation proposal as Storer, because their founding families have retained larger blocks of stock or because the companies have performed profitably.

Storer’s management team has not won accolades from most securities analysts. In interviews last year, a number of analysts complained that Storer’s TV stations lag behind industry leaders in their operating margins and said Storer cable systems could produce more cash.

Some analysts expressed annoyance with management’s failure to meet its own projections. They complained that the company was too optimistic about cable-TV subscriber growth, while underestimating the amount of debt that would be required to build the systems.

One analyst, however, defended Storer executives, saying, “They built this company and don’t know how to show it well.”

In the past year, Storer has worked hard to sell off some of its most troublesome cable-TV systems. The company received just $36 million from such sales last year, but Peter Storer recently told a news conference that he expects the company to receive a total of $180 million in cash and notes when certain sales are concluded later this year.

Debt Increased

The company reported a long-term debt of $785 million at the end of 1984, compared to about $729 million at the end of 1983.

In a long interview with The Times one year ago, Peter Storer said he regarded the company’s debt as a deterrent to either a takeover or a leveraged buy-out.

“I thoroughly enjoy the job,” Storer said, when he explained his aversion last year to selling the company. As for converting the company to private ownership, he said, “I don’t think the economics would work. It would only work . . . by selling off the television operation, because no creation of the leveraged buy-out could stand the kind of additional debt on top of the debt we already have.

“And frankly,” the chairman continued, “I just have absolutely no personal interest, having worked for this company over 30 years now, in seeing it split apart to theoretically make a lot more money for stockholders, me particularly.”

Indeed, Storer Communications spurned the first buy-out offer made last month by Kohlberg, Kravis, Roberts, in favor of a plan to buy back as much as 36% of its own stock.

Accepted Offer

Four days later, however, after Wall Street reacted unfavorably to the self-tender plan, Storer accepted a slightly sweetened offer from KKR that will leave Storer’s name and top management in place.

Most analysts presume that KKR will sell off some Storer assets gradually, as it has done since its acquisition last year of Wometco Enterprises, another Miami-based communications firm.

Peter Storer lost control of the company his father founded in 1927, but he negotiated a sale at a price valued at about $87 per share, these analysts say. Kagan, for one, says Storer’s incumbent board will get his vote “because I think the Kohlberg deal is pretty good.” The alternative plan of liquidation “implies a play-out of 1 1/2 to 2 years to get my money out.”

But the institutional investor who is voting for Coniston disagrees. Asking to remain anonymous, the investor explains his vote by saying the KKR deal “includes a large stake in the new company for the old management. That makes them less objective than they otherwise might be. I think they could get more if they sold the company outright, but they did not show much of an interest in entertaining bids of that nature.”