Why Hicks Muse Put Chancellor Media on the Block
The two keys: Soaring debt and corporate infighting
When Chancellor Media Corp. put itself up for sale on Jan. 20, Wall Street was stunned. After all, Chancellor had only burst on the scene last year, gobbling up radio stations across the country as well as billboard-advertising and TV outlets. Had Dallas-based buyout firm Hicks Muse Tate & Furst Inc., the driving force behind Chancellor, lost faith in its biggest media play?
Thomas O. Hicks, 53, the dealmeister who chairs both Chancellor and Hicks Muse, insists it hasn't. "We love the media business," he says. Hicks Muse will stay on as a shareholder, he says, but decided to seek a partner because the company's shares were lagging behind rivals'. A disappointing stock performance is only part of the story, though. Corporate infighting that pitted Chancellor brass against its brash new chief executive, Jeffrey A. Marcus, also played a role, according to former and current Chancellor execs, as well as others familiar with the situation. Indeed, turmoil in Chancellor's executive suite had become so heated that "I think the only choice [Hicks] had was to fire Jeff Marcus or put the company up for sale," says one person close to the action.REDUCED ROLE. In one fell swoop, Hicks may end up doing both. The most likely buyer for Chancellor is San Antonio-based radio and billboard-advertising giant Clear Channel Communications Inc. Clear Channel is studying an acquisition through an $18 billion stock-for-stock transaction, says a source close to the situation. Marcus, who declined to be interviewed, won't stay on if the deal happens. Hicks Muse, which will own 27% of Chancellor after two pending deals are completed, would emerge as the largest single shareholder in Clear Channel. But its role in guiding the business--and as a rising force in media--could be greatly diminished.
At the heart of the story is the knotty friendship between Marcus and Tom Hicks, whose buyout firm created Chancellor in 1993. Before joining Chancellor as its CEO last June, Marcus, 52, had spent 30 years in the cable industry, culminating in the sale of namesake Marcus Cable Co.--a large private operator in which he owned a minority stake--to billionaire Paul G. Allen.
With Hicks's blessing, Marcus went on a dizzying $8 billion shopping spree to snap up television, billboard, and radio assets over a three-month period last year. That "multimedia" concept played well on Wall Street, buoying the stock of Clear Channel and the recent spin-off of Infinity Broadcasting Corp. by CBS Corp. But Chancellor stock, which climbed more than 250% from its 1996 IPO, hit a wall. By last month, it was trading at a much lower multiple than its peers (table).
A main culprit was debt, which stands at nearly seven times expected 1999 cash flow. Other factors: Hicks Muse's eyebrow-raising plans to draw fees from folding other companies it controls into Chancellor, as well as Wall Street's aversion to surprises. Indeed, the decision to sell came three weeks after the sudden exit on Jan. 7 of Matthew E. Devine, Chancellor's respected chief financial officer.
Sources trace that departure to Marcus' arrival last June. Soon after, Marcus began clashing with Devine and President James E. de Castro. Key issues, the sources say, were Marcus' lack of radio experience and his spending habits; one Chancellor insider recalls Marcus hiring a "jet-set pack" of former cable executives and upgrading the company's Gulfstream III to a newer, glitzier model--a Gulfstream IV formerly owned by golf legend Greg Norman.FEE FUMES. Devine "was always challenging Jeff about costs," says one large Chancellor investor. "Jeff didn't like what [Devine] had to say." Devine could not be reached for comment. De Castro says of Marcus: "We get along very well. But, yes, we have had our differences of opinion." A rift between Marcus and Tom Hicks may have added to the tension. Sources say Hicks chafed when Marcus vetoed plans to give R. Steven Hicks, Tom's younger brother, a hands-on role at Chancellor after the planned acquisition of Capstar Broadcasting Corp., where Steven is CEO. Tom Hicks won't comment on the incident and says Marcus is "still a very good friend." But he adds that Chancellor's decision to find a new partner "will alleviate any tensions that have been built up."
If that new partner ends up being Clear Channel, analysts say as many as 100 of the two companies' combined 915 radio stations would have to be sold to satisfy Justice Dept. rules on multiple-station ownership. And still another buyer for Chancellor could emerge, including Phoenix-based billboard operator Outdoor Systems Inc.
If it's Clear Channel, sources say its CEO, L. Lowry Mays, is adamant that Hicks Muse no longer have an "advisory" or management role from which it can derive fees such as the $54 million it is expected to pocket on two pending Chancellor deals. That may be O.K. with Tom Hicks, since his fund has already made some $4 billion on its $1.3 billion investment in Chancellor. "We think we will see our investment grow to between $12 billion and $15 billion over the next five years," he says. If that happens, Chancellor's brief, ill-fated reign as a media takeover machine will be happily forgotten.By Stephanie Anderson Forest in Dallas and Richard Siklos in New York, with bureau reportsReturn to top