How Falcon Cable Got to Be a Plugged-In Firm : Entertainment: Marc Nathanson keeps expanding his Los Angeles-based company, which is one of the most politically connected enterprises in the state.

For Marc Nathanson, mistaken identity can be costly.

The 47-year-old chairman of Falcon Holding Group, the only major cable TV operator based in Los Angeles, is often confused with Mark Nathanson, the former state coastal commissioner who has been indicted for allegedly attempting to extort bribes from Malibu beach residents.

Just how troublesome the mix-up can be became clear when one banker recently had his secretary call Nathanson’s office and sheepishly ask whether it was true that the cable TV entrepreneur had been indicted. If so, she tersely announced, lunch was canceled.

“It’s not so funny anymore,” sighs Nathanson, who first encountered the confusion years ago when patronizing maitre d’s would insist that he didn’t have to pay his restaurant tab.

Ironically, Marc Nathanson knows about paying bills. Falcon has about $980 million in bank debt and doles out more than $100 million in interest expense annually.

That is the price of taking Falcon from a small number of customers to more than 1 million subscribers in 26 states in a mere decade. Although Falcon is still dwarfed by cable giants such as Denver-based Tele-Communications Inc., it has become the largest independent cable company in California, with systems in dozens of small cities throughout the state.

Along the way, Nathanson has also made Falcon into one of the most politically connected companies in the state. Falcon’s largely ceremonial “advisory committees” include former California Atty. Gen. John Van de Kamp and former Oregon Gov. Neil Goldschmidt. Hillary Clinton sat on one committee until her husband, Arkansas Gov. Bill Clinton, decided to run for President. So did Carl Covitz, California secretary of business, housing and transportation until Gov. Pete Wilson appointed him to his Cabinet.

Those appointments have sometimes led to charges of conflict of interest. Goldschmidt, who chairs an Oregon task force that has proposed consolidating cable TV regulatory commissions, recently came under criticism for failing to disclose his Falcon affiliation to cable regulators.

But Nathanson has been able to continue his breakneck expansion pace largely by persuading banks, pension funds and other investors to provide hundreds of millions of dollars in both debt and equity financing to purchase “classic” cable TV properties--systems in mostly rural areas that are underserved by conventional TV broadcast signals.

While many larger cable TV companies have scrambled to wire major metropolitan areas with flashy, 75-channel, state-of-the-art cable TV systems, Falcon has found success in operating no-frills systems in areas that get poor TV reception.

Falcon’s revenue in 1991 climbed 18% to $221 million, and cash flow--income after operating expenses but before depreciation, amortization and interest expense--rose 22% to $130 million from the year before. The company, which is made up of eight separate limited partnerships, has never reported a profit because of its high debt level.

So why do investors continue to throw money at Nathanson--more than $400 million in equity alone since 1984?

The answer lies in the unique way cable TV is valued by the investment community.

Cable companies are typically measured by multiples of cash flow rather than more traditional yardsticks, such as net earnings. The high debt levels cable companies carry mean that profits are wiped out after depreciation and amortization expenses.

Banks do not mind lending to cable because the industry’s long and predictable cash flow history gives it a solid record at covering interest and principal payments.

“Notionally, our investment is doing what it’s supposed to do, and we’re happy with the results,” says Tully Friedman, managing partner of Hellman & Friedman, an investment firm in San Francisco. “The numbers come through like clockwork.”

Hellman & Friedman has invested about $85 million in four Falcon partnerships and owns 16% of Falcon Holding Group, the parent company and managing general partner. The Nathanson family owns 70%, in addition to minority stakes in each limited partnership. Nathanson’s brother, Greg, recently named general manager of KTLA-Channel 5 in Los Angeles, is also an investor.

Nathanson estimates that his company is worth about $2 billion--$1 billion after debt is subtracted--based on current industry valuations of about $2,000 per subscriber. Assuming even a low-end net valuation of $1 billion, that would imply huge returns for the approximately $400 million in equity.

“The cable business has very conservative investors,” he says. “We’ve been in this business since 1975 and have never failed to make a budget.”

Indeed, that kind of reputation has attracted blue chip investors such as the pension funds of AT&T; and IBM, Boston Ventures, Harvard and Stanford and the government of Singapore.

For Falcon Holding Group, managing the systems can be extremely lucrative. Falcon Holding typically collects a management fee of 5% of gross revenue from each of the partnerships, which in the case of publicly traded Falcon Cable Systems Co. totaled $3.65 million last year. In addition, Falcon Holding gets a 2.5% fee on the sale of any cable system.

But Falcon’s operating record is not unblemished. One of its partnerships slashed its quarterly dividend more than 60% and recently disclosed that it did not expect to be able to pay any more distributions after this year because of bank covenants. Analysts say Falcon was a victim of the credit crunch.

“The banks have become much stricter in recent years and are less willing to give waivers to these covenants than in the past,” says Alan Gould, a cable TV analyst at PaineWebber in New York. “Marc should have no problem renegotiating his bank loans.”

Not surprisingly, the news pounded the partnership’s stock, forcing it to a nadir of $10 per unit from a peak of about $22 back in 1989.

The plunge helped trigger a federal class-action lawsuit against Falcon. Investors have charged that Nathanson and others “knowingly and recklessly” defrauded them by keeping “material facts” from the public in an effort to inflate the price and “maintain an artificially high market” for the securities.

Falcon denies the charges, saying that it disclosed all pertinent information and “adjusted expectations in response to (the) downturn in the economy.” Both sides have declined to discuss specifics of the lawsuit while it is pending.

Such setbacks do not seem to have impaired Nathanson’s ability to tap into his network of banking sources and form new partnerships to acquire more subscribers. Last May, he formed his eighth partnership, Falcon Video Communications, with Dallas-based A. H. Belo Corp., owner of the Dallas Morning News, and New York-based Butler Capital Corp.

Belo, which never invested in cable before, will kick in $23 million toward the partnership’s initial capitalization of $58 million. Falcon Video has already agreed to buy a system totaling 67,000 subscribers in the Outer Banks of North Carolina.

More than 75% of Falcon’s subscribers, in fact, have come from acquisitions of other cable systems. With the cable system trading market in a two-year slump because of government restrictions on highly leveraged transactions, Falcon’s growth has slowed.

“Marc has two big challenges,” observes Steve Rattner, managing director of Lazard Freres & Co. in New York and a Falcon director. “The first is acquisitions, and the second is to replace what is inevitably temporary equity with permanent equity.”

By definition, the limited partnerships are set to dissolve after a specified period. The investors then can roll over into another partnership or new equity holders must be found.

Nathanson says consolidating all the Falcon partnerships and taking the company public is a possibility. He also hints at “forming a strategic alliance with a major studio or telephone company.”

Much of Nathanson’s success derives from his ability to forge relationships.

The son of a Chicago advertising executive, Nathanson got a graduate degree in political science at UC Santa Barbara before working as a door-to-door salesman for a local cable TV company owned by Burt Harris, a longtime Nathanson family friend who owns the Spanish-language TV station KWHY Channel 22 in Los Angeles.

After working for other cable TV companies and earning a reputation as a marketing whiz, Nathanson started Falcon in 1975 with $25,000 from his own pocket.

He also had help from wealthy family members.

Nathanson’s father-in-law, the late Fred Fallek, who made a fortune selling petrochemicals, loaned him $1 million. Nathanson’s father donated a cable system he owned in Altadena. Bank of Boston, a pioneer in media financing, loaned $6 million. With that money, Nathanson bought his first cable systems--in Gilroy, Porterville and San Luis Obispo.

As Falcon has grown, so has Nathanson’s stature as one of the state’s budding power brokers. A member of California’s Democratic Establishment, he served as finance chairman for Rep. Howard Berman (D-Panorama City) and counts as a close confidant Mickey Kantor, chairman of Bill Clinton’s presidential campaign in California.

Nathanson makes no apologies for placing prominent ex-office holders on his advisory committees.

“I’ve been involved in politics all my life,” he explains. “Do I have access? Sure. Can I convince them to do something? No. They do what they want to do.”

Although Nathanson says advisory committee members do not lobby on Falcon’s behalf (the company owns cable systems in Little Rock, capital of Clinton’s home state of Arkansas), the lines can become blurred, as they did in Oregon, where Falcon also operates.

Former Gov. Goldschmidt chairs a task force investigating ways to streamline government services. Among his proposals: consolidate the cable TV franchising commissions in the three-county area around Portland into one staff. But Goldschmidt, now an attorney in private practice, never told the franchising commissions that he sits on one of Falcon’s committees.

“We would hope a public official would be free of conflicts of interest,” notes Jon Stubenvoll, consumer advocate for the Portland-based Oregon State Public Interest Research Group. “Obviously, that’s not happening.”

Nathanson says that with the exception of a couple hundred subscribers in a small town east of Portland, all of Falcon’s cable systems are along the Oregon coast--outside the authority of the franchising commissions that might be consolidated.

Instead of lobbying, Nathanson explains, the politicians serve as a kind of sounding board about the communities where Falcon does business: “We wanted somebody from Oregon who was nonpartisan and could give us advice on the small towns in the state.”