IRVING, Texas -- Leveraged buyout investors are sitting on huge unrealized gains in Chancellor Media Corp., following a secondary public offering of its stock earlier this month.
The initial $80 million investment in Chancellor by Hicks Muse Tate and Furst Inc., Dallas, and its investors now is worth close to $1 billion, Hicks Muse officials say. Hicks Muse is the LBO firm that controls Chancellor through a complex capitalization structure. Mike Levitt, a partner with Hicks Muse, said investors in its Equity II Fund paid between $3 1/2 and $3 3/4 a share; last week, Chancellor was trading at about $49 a share.
Formed by Hicks Muse in 1993, Chancellor has grown to become the second-largest radio station owner in the country, based on its cumulative audience.
Hicks Muse has increased the size of the company mainly through acquisitions of radio stations in major markets.
Pension fund investors in the Equity Fund II include American Airlines, Dallas-Fort Worth Airport, Texas; the Oregon Public Employes' Retirement System, Salem; and the Arkansas Teacher Retirement System, Little Rock.
William Quinn, president of AMR Investment Services Inc., which manages the $5 billion American Airlines defined benefit plan, said Hicks Muse's Equity II fund has "done extremely well."
American committed $20 million to $25 million to the Equity II fund, Mr. Quinn said.
"I think this has been a typical Hicks Muse investment," in which it buys a platform business in a particular sector and uses that platform for additional purchases, Mr. Quinn said.
Along the way, he said, the firm tries to improve the operations of the business through methods like cutting costs and economies of scale.
Mr. Quinn noted that Hicks Muse is following the same path as Capstar Broadcasting Corp., a company owned by Hicks Muse's Equity III fund that is focusing on buying medium- and small-market radio stations. One industry source said rumors are Capstar is on the verge of its own public offering.
Jay Fewel, senior equities investment officer with the $30 billion Oregon PERS, said Chancellor Media has led to good performance for the Equity II fund so far, but it's too early to deem the fund a success.
"It's got a ways to run," Mr. Fewel said.
Because Oregon doesn't closely track the performance of individual investment by its private equity funds, Mr. Fewel declined to comment on Chancellor itself.
Oregon has committed $50 million to the Equity II fund, and $100 million to Hicks Muse's Equity III fund.
Hicks Muse just sent information to Oregon on its upcoming fourth fund, he said.
Angelo Coppola, deputy director of the $6.2 billion Arkansas Teacher pension system, said the Equity II fund has been "very successful." Like Mr. Fewel, he couldn't comment specifically on individual investments.
The Arkansas fund has committed about $50 million to Equity II and voted to commit $100 million to the third fund, he said.
Last year, officials for the California Public Employees' Retirement System, Sacramento, slammed Hicks Muse for overpaying for media properties (Pensions & Investments, Sept. 15, 1997).
Nonetheless, the market warmly received Chancellor's secondary offering, and boosted its share price even higher. It was the largest broadcasting company public offering ever, according to co-lead underwriter BT Alex Brown Inc., Baltimore.
Chancellor's stock "has been a rocket," said Ron Sachs, an analyst for Denver-based mutual fund manager Janus, which owns more than 10 million shares of the company following the offering. Janus owned about 3.3 million shares as of the end of 1997, according to CDA/Spectrum, Rockville, Md.
The offering raised about $900 million and is expected to pay off some of Chancellor's higher-cost debt, accumulated during its buying spree. Chancellor has been involved in at least $2.2 billion worth of radio deals, according to Houlihan Lokey Howard & Zukin's Mergerstat, Los Angeles.
Mr. Sachs said the outlook for Chancellor continues to be positive, based on both its ability to buy more radio stations, and its expected improvement of operations.
"There's still some deals left to be done," while Chancellor's efforts to build a national radio network of its holdings should lead to higher advertising revenues, Mr. Sachs said.
"Ad rates are still one-third of what TV would be," he said.
"We made a conscious decision some five or six years ago that radio as an asset class was undervalued," said Hicks Muse's Mr. Levitt.
Although Hicks Muse and its Equity II fund own just 12% of outstanding shares as a result of the offering, Chancellor essentially is controlled by Hicks Muse. Three Chancellor directors are Hicks Muse executives, and Thomas O. Hicks, chairman of Hicks Muse, also is chairman of Chancellor.
Mr. Levitt declined to provide the size of the overall Equity II fund.