How Public Radio Tuned in to Great Ratings
from January/February 2003
by Julie Connelly
As a director of one or more public companies, you are undoubtedly asked every now and then to join the board of a nonprofit organization. It wants you for your coin and connections, and you may say yes because you feel you ought to give something back.
What many directors don’t realize is that accepting such an invitation commits them to contributing the same governance skills that made them desirable in the first place. “You may be doing this because it’s ‘charitable,’ but that’s not good enough,” says Stefan S. Anderson, chairman of First Merchants Corporation, a Midwest banking company headquartered in Muncie, Indiana. “You can’t just lend your name. Oversight is as important in a nonprofit as in a
for-profit.”
Anderson practices what he preaches as a director of a nonprofit entrepreneurial start-up called Public Radio Capital, in suburban Boulder, Colorado. In 2001 the outfit went into the business of helping listener-sponsored public radio broadcasters raise capital to acquire new frequencies and expand their services. It has 10 board members, including three managing directors who run the company with a staff comprising a part-time business manager and a part-time assistant.
Recruiting the seven outsiders was largely the responsibility of managing director Susan Harmon, 57. She is a lively woman who has managed two public radio stations, WAMU-FM in Washington, D.C., and KERA-FM in Dallas, and retains that distinctively easy-on-the-ear voice of the FM radio announcer. “This was new, and we wanted high-level smart people who would commit to a new venture,” she explains. “A third of our directors had to have served on the boards of their local public broadcasters. And then we wanted specific business experience—finance, banking, law.”
Public Radio Capital’s ambitious goal is to raise money in the capital markets for public radio stations. Think of it as a nonprofit investment banker helping financially sound stations navigate the credit-rating process so they can issue tax-exempt bonds, and advising others with shakier finances about getting their balance sheets in order. In addition, the firm is a station broker and aims to be a clearinghouse hooking buyers up with entities like universities and municipalities that have public radio stations to sell. From time to time, when arcane laws prevent broadcasters from buying stations, the firm will buy a station itself and then find a broadcaster to operate it.
In the fiscal year that ended on June 30, 2002, Public Radio Capital pulled in over $1 million in revenues. Of that, $390,000 came in as fees for the consulting, financing, and brokerage work of the managing directors, while $640,000 came from philanthropic gifts. By 2005, if the business expands as planned, fees from investment banking and brokerage will cover the core operating budget, and gifts will be used for special projects. The three principals are compensated reasonably, according to Fred Marienthal, a partner in the Denver office of Kutak Rock, the law firm that represents Public Radio Capital, “but reasonably is below what they’d be paid finding deals for Rupert Murdoch.”
The financing and brokering aspects of the work are in the hands of managing director Marc Hand, 50, who after 10 years in public radio became a well-known broker of commercial radio stations. Working with him is managing director Bruce Theriault, 52, a former senior vice president of Public Radio International, which distributes such popular public-radio fare as A Prairie Home Companion.
Public radio is not merely an advertising-free amalgam of news, information, and classical music supported by listener and corporate donations. It is a cause. Edward Skloot, executive director of the Surdna Foundation in New York City, which has so far given Public Radio Capital $400,000 to cover operating expenses, observes: “In commercial radio, the biggest broadcasters are just peanut-buttering most everything, and all stations are very much the same. Public Radio Capital offers an opportunity for the airwaves to stay local and stay very much derived from and responsive to the public need.”
People in public radio speak of preservation of the airwaves with the same fervor conservationists display when they talk about saving the wilderness. The government reserves the frequencies between 88.1 and 91.9 on the FM band for noncommercial use, and there are roughly 2,400 noncommercial stations in the U.S. Public radio has about 700 of these stations, with 29 million listeners. Initially the licenses to use the frequencies and operate the stations assigned to them were free to any nonprofit organization that turned in an application and agreed to run the stations in the community interest.
But now the band is crowded, and public broadcasters who want to expand their listener base by acquiring additional licenses usually have to buy them. They raise the money to do that through cumbersome three- to five-year capital campaigns. If you’ve ever tuned in to a public radio station, you know what a capital campaign is—that’s when the announcer tantalizes you by promising the latest from Lake Wobegon if you’ll just hang on through an interminable appeal for money, usually to qualify for some matching grant.
What has made capital campaigns particularly inefficient is that there is a new and fast-moving competitor in the market. Nonprofit religious broadcasters have active radio ministries and the wherewithal to pounce quickly when a noncommercial station comes up for sale. As a result, they now own about 50% of the frequencies. Public radio broadcasters speak of their rivals in tones so carefully neutral that you just know each station has a handsome dartboard with a bull’s-eye superimposed over evangelist Pat Robertson’s face. Among other things, Robertson runs the 700 Club over the Christian Broadcasting Network, which is carried on 141 stations in 36 states plus the District of Columbia.
The idea for Public Radio Capital was born when WDCU-FM, a public radio station in Washington, D.C., that specialized in jazz, came up for sale with an asking price of $5 million. Salem Communications, a religious broadcaster, picked it up for an undisclosed sum and then sold it to C-Span for $13 million. This was a wake-up call to the public broadcasters. Says Marc Hand: “We weren’t prepared as a system to jump in and really compete for those opportunities.”
Meanwhile, the passage of the Telecommunications Act in 1996 removed some of the station-ownership limits on commercial broadcasters. So when public radio broadcasters looked outside the noncommercial band to buy stations, they ran smack into competition from well-financed behemoths like Clear Channel Inc., owner of 1,200 radio stations. Prices for all stations—commercial and noncommercial—have risen sharply, especially for FM frequencies, which are more desirable because they have a higher-fidelity sound than AM. Last May a new record was set when Spanish Broadcasting System Inc. paid $250 million for KXOL-FM in Los Angeles.
It became clear that to survive and prosper, listener-sponsored public radio needed a mechanism for raising money—and raising it fast—when stations came on the market. “This required access to capital markets. But it was virtually unknown for a public radio station to raise money in the public markets,” says Thomas J. Thomas, co-CEO of the Station Resource Group in Takoma Park, Maryland, an alliance of 45 of the biggest public broadcasters. SRG brought Harmon, Hand, and Theriault together to figure out what it would take to make Wall Street comfortable underwriting the debt of entities whose revenues were largely derived from voluntary contributions. Ultimately SRG decided to spin off Public Radio Capital as an independent organization, so that it would be free to work with all public radio broadcasters, not just the SRG membership.
That’s when Harmon and her colleagues began putting the board together. “We talked to a lot of people,” she says. “You figure out who the kind of person is that you want on the board, and then you either get that person or someone like him.” All in all, she estimates that she canvassed nearly 100 people, looking first for some entrepreneurial-minded directors who had served as chairmen of their local public broadcasters. These board members could help Public Radio Capital create a strategy to increase the reach of public radio.
Four of the seven outside directors had experience in public broadcasting. They were Dallas real estate developer Peter Baldwin, who had been chairman of the KERA board when Harmon was working there; Carolyn Grinstein, also a member of the KERA board during Harmon’s tenure and now a civic leader in Seattle; Tennessee businessman William King, chairman of Board Member Inc., which publishes Corporate Board Member, and former chairman of Nashville Public Radio; and Leo Martinez, academic dean of the University of California’s Hastings College of Law and former chairman of KQED-FM in San Francisco.
Then Public Radio Capital went looking for specific business skills and corralled three more directors. They had no particular knowledge of public broadcasting beyond being enthusiastic listeners, but two of them, banker Stefan Anderson and Jan Nicholson, formerly an investment banker at Citicorp and managing director of bond insurer MBIA, brought expertise in capital markets to the board. The third, George Sissel, former chairman and CEO of Ball Corp., brought knowledge of governance, strategic planning, and, as Ball’s former general counsel, corporate law.
It was important to have congenial people on the board—“No bulls in the china shop,” says Harmon—because a lot of PRC’s work would involve careful negotiation with public institutions about selling their broadcast assets or buying others. Moreover, as the directors, who serve one-year terms, started recruiting their successors, the three managing directors wanted to be sure that collegiality would remain. Currently the board meets twice a year for intense two-day sessions. “Twice a year is not the norm; most nonprofit boards would meet more often,” Anderson says. “But this is a brand-new venture, and meeting twice a year is probably appropriate for now.” The members keep in touch in between with e-mail and phone calls.
“One of the elements that struck us was that Public Radio Capital was really developing a team approach to the board,” says Vincent Stehle, the program officer at the Surdna Foundation, who keeps tabs on how his grantee is doing. “This was not just a group of fancy names, sort of public-broadcasting luminaries. It was people who brought either skills or resources or a point of view to the board that would be helpful in doing the work.”
So far the work has included five deals. Public Radio Capital has guided both Colorado Public Radio and Nashville Public Radio through the process of acquiring investment-grade credit ratings. The triple-B+ ratings enabled both to issue 20-year tax-exempt revenue bonds, $6.3 million in Colorado’s case and $5.6 million for Nashville. This permitted Colorado Public Radio to refinance acquisitions of AM stations and Nashville Public Radio to acquire an AM station and finance its building. Other deals include the $550,000 acquisition by WBEZ-FM in Chicago of Chesterton, Indiana’s WAJW-FM, and Maryland Public Radio’s $5 million purchase of the Johns Hopkins University station, WJHU-FM. In August, Bates Technical College in Tacoma, Washington, signed a letter of intent to sell its classic-rock station, KBTC-FM, to Public Radio Capital. PRC has to find another public-radio entity to operate the station.
Of this quintet—a remarkable example of hitting the ground running after only 13 months of operation—the biggest achievement was successfully shepherding the two broadcasters through the credit-rating terrain. Here director Jan Nicholson had a particularly important role to play. “I was brought in for my understanding of how you work with rating agencies and what’s needed to get that Good Housekeeping seal so that an entity can be financed,” Nicholson says. And she knew the three rating agencies, Standard & Poor’s, Moody’s Investor Service, and Fitch, had to be convinced that public radio was an industry that could be financed. She urged that S&P be commissioned to do a study of the public-broadcast industry and be given access to all the financial data, to demonstrate that revenues were predictable and growing. Then, when the two stations presented themselves to be rated, the industry would have an imprimatur.
Colorado Public Radio was able to show, for example, that listener contributions had been growing at a compound annual rate of 4.6% over the last five years, while corporate underwriting had increased 19.7% a year. (The signs of corporate underwriting are those discreet tag lines like “This has been the Jones Corp. jazz hour—at Jones, we’re jazzed on performance.”)
“Those voluntary contributions were stable because listeners were paying for a service they were receiving. To them, it was like paying for an Internet connection or cable,” says Max Wycisk, the president of Colorado Public Radio. He admits that at first getting a rating “looked to be a strange new process,” but he was excited about the idea when Public Radio Capital suggested it to him. What the firm did, he says, was “help the financial community understand public radio, and the public broadcasters understand how the financial community worked.”
Colorado Public Radio sold its bonds in January 2002, with Nashville following in March, and both issues “did wonderfully,” says Christine Tierney Maxwell, a vice president at underwriter George K. Baum. “They were priced aggressively and sold quickly” to institutional and retail investors across the country, she adds. “There was nothing quite like this out there.”
That phrase is the same one Public Radio Capital’s directors use to explain why they get such pleasure from serving on the board. Says Anderson: “Directors come from all over the country, and all are public-radio and public-broadcasting fans. We all share a great enthusiasm. We really look forward to board meetings as something new.” The sense of being trailblazers makes them willing to work hard, bringing a big-business perspective to an entrepreneurial little outfit that wants to use sophisticated financial tools to help it achieve its simple mission of expanding the universe of public broadcasting.
