News: Analysis & Commentary
THE LATEST MEDIA MOGUL: ALABAMA
Talk about media frenzy. By the end of the recent auction for Park Communications Inc., at least seven bidders were vying for Park's nine TV stations, 22 radio stations, and 106 small newspapers. When the winning offer of $711.4 million was announced on Oct. 26, some losers were actually relieved. "The price had gotten so high, we're glad we didn't win," says Bert Ellis, CEO of Atlanta media company Ellis Communications.
Even more surprising than the steep price was the identity of the winning bidders: two small-time financial operators who are borrowing almost every penny from Alabama's state pension fund. Their success has set tongues wagging among both media and pension-fund watchers. Among the questions: Who are Donald R. Tomlin Jr. and Gary B. Knapp, the deal's listed principals? Why is Retirement Systems of Alabama putting over 4% of its assets, or $573 million, into a single, highly leveraged transaction? And does the deal make any sense? Asks one losing bidder: "How could a couple of guys with virtually no media background and no capital outbid a bunch of very experienced, well-capitalized media groups?"
The answers start with David G. Bronner, chief executive of the Alabama pension fund. An iconoclastic populist who has crusaded against corruption in Alabama government, Bronner is far from the typical cautious pension-fund chief. His $14 billion fund has become the biggest office developer in downtown Montgomery, and has built a string of seven golf courses across Alabama. While the golf courses have struggled, Bronner's overall investment record has been good. His equity portfolio, for example, has handily beaten the market over the past decade.
When the Park Communications deal came along, Bronner says he was intrigued by the company's "unique mosaic" of media properties. Started in 1962 by Roy H. Park, who died last October, the Ithaca (N.Y.) company had assembled a network of small-town newspapers and broadcast stations--including a Birmingham (Ala.) CBS Inc. affiliate.
But after meeting stiff local opposition to a 1989 bid for the largest TV station in Montgomery, Bronner says: "I didn't want to do the equity side of the thing.... There were licensing problems. I had to find somebody to hold the license." Bronner turned to two longtime personal friends and business associates, Tomlin and Knapp. The deal: They would get the license and provide the management while Bronner supplied the cash. Because their funding was coming from a tax-free, long-term investor, the two could afford to outbid the field.
From the terms of their agreement, it's clear that Bronner is the real power behind the bid. Of the $711 million purchase price, Tomlin and Knapp will chip in just a few million dollars for lawyers' fees and the like. About $140 million will come from cash already on Park's balance sheet. Bronner's fund is supplying the rest in the form of a 20-year senior secured note, which carries an annual interest rate of 10.5%, with principal repayments starting in three years.
PROTECTED PLAY. Bronner also exacted some very favorable terms from his partners. One provision: If Knapp and Tomlin fail by 1998 to meet what Bronner calls very ambitious targets, Bronner's fund can exercise a warrant to take an 80% nonvoting equity stake in Park. If they do meet the targets, they must pay Bronner a higher interest rate--up to 13%. That, says Bronner, is why he teamed up with Tomlin and Knapp rather than a professional broadcasting company: A big partner "wouldn't have agreed to all the things in the transaction to protect me."
The deal will leave Park a highly leveraged company with a razor-thin margin for error. According to internal Park figures, the company is projected to generate $58.3 million in cash flow this year, up from $47.5 million last year. But even that wouldn't cover the $60.4 million a year in interest payments due Bronner's fund. Not to worry, says Bronner, who figures the cash flow can be boosted to $70 million a year. Adds Tomlin: "The company has an extremely good outlook for the next three years."
Other bidders for Park, among them Paxson Communications Corp. and Heritage Media Corp., also hoped to boost cash flow to $70 million or higher. But Park, long run with an iron grip on costs, is one of the leanest media companies around. Corporate expenses should amount to just $4 million this year, 2.4% mf revenues. "The only way to grow the cash flow is to grow the revenues," says one bidder. "You've got to put more into infrastructure and marketing."
Whether Tomlin and Knapp can make the most of Park isn't clear from their track records. Knapp, who struck up a friendship with Bronner while both attended Mankato State University in Minnesota in the mid-1960s, is a former University of Houston business school professor turned financial broker. Operating as a one-man firm in Lexington, Ky., Knapp says he specializes in selling mortgage-backed securities to institutions. His media experience: none.
A native and resident of Columbia, S.C., Tomlin's main experience is in real estate development and finance. In the 1980s, he was CEO of U.S. Capital Corp., a developer of low-cost condominiums and time-share units. Described by associates from back then as a shrewd, cigar-smoking dealmaker who drove a Rolls-Royce, Tomlin often came under fire from those who viewed his buildings as ugly blots on the landscape. "We called 'em stack-a-shacks," says one banker.
MEMORIES. By early 1986, though, U.S. Capital was in trouble. Arthur Andersen & Co. qualified its opinion for the year ended Apr. 30, 1986, citing "severe liquidity problems." That didn't stop Tomlin from attempting his biggest deal ever. In February, 1986, he signed a pact to pay $300 million for the Resorts International Casino Hotel in Atlantic City. The deal never went through. Tomlin says he had the financing, but the deal collapsed after the April, 1986, death of Resorts' founder, James M. Crosby. But two former Resorts executives, including former Executive Vice-President H. Steven Norton, recall that Tomlin couldn't get the money together.
Tomlin essentially liquidated his real estate business by 1989 and has since dabbled on the fringes of broadcasting. He took over a tiny, struggling chain of radio stations based in Charlotte, N.C., and sold off the stations. Then Chemical Bank hired him to run a small TV station in Dothan, Ala., that it acquired in a loan default. "We feel he has done a good job," says a Chemical spokesman.
But it's a long way from Dothan, Ala., to the big leagues of Park Communications. If Tomlin and Knapp can learn to hit major-league pitches in a hurry, they could get very rich from their friendship with Bronner. If not, David Bronner will end up controlling a bunch of media properties--which may suit him just fine. ALABAMA'S PRIZE
9 TV stations,
22 radio stations
47 other publications
Dorothy Park, widow of
founder Roy H. Park,
1994 CASH FLOW*
DATA: COMPANY REPORTS, BUSINESS WEEK
Mark Maremont in Boston