October 2017 Advocate: Who will pay for KCSM in the end?


Who will pay for KCSM in the end?

By Tracy Rosenberg, Executive Director of Media Alliance

(The Media Alliance, at media-alliance.org, is a Bay Area democratic communications advocate. Tracy fought a lonely war to save KCSM-TV between 2011 and 2013.)

When we last left off the story of KCSM-TV (see article in May 2017 Advocate), the 53-year-old public television station’s fate had become the subject of dueling lawsuits between the San Mateo Community College District, its owner and holder of the broadcasting license, and Locuspoint Networks LLC, a subsidiary of the Blackstone Group, the largest hedge firm in the world.

Board made deal with investment firm to sell KCSM’s spectrum to wireless companies

The saga began in 2011, when the District Board of Trustees issued the first of what turned out to be three consecutive requests for proposals (RFP’s) to sell the TV station. After rejecting 8 different offers from half a dozen new operators that would have allowed for the continued operation of the TV station, the San Mateo Community College District signed a contract with Blackstone Group-owned investment firm Locuspoint for the eradication of KCSM-TV by selling all of its spectrum to wireless companies via the FCC auction in return for 36% of the sale proceeds.

Three years later, Locuspoint Networks had poured $3.3 million into the District to subsidize KCSM-TV until the auction started. It looked like the big payoff was soon to be in hand. After expected bureaucratic delays, the FCC had gotten the spectrum auction up and running in 2016. Locuspoint hired accounting firm Price Waterhouse (of Academy Awards infamy) to assist the District through the bidding process.

Pending offer for spectrum was $114 million, but District failed to submit a bid

By FCC regulation only the licensed bidder may prepare and submit bids in the auction. In Round 53, disaster struck and although District VP Jan Roecks signed a bid submission confirmation sheet, she did not actually submit a bid by the deadline. KCSM was disqualified. At that point, the pending offer for KCSM’s spectrum was $114 million. Locuspoint was not told of the bid failure, and as they indignantly recount in their lawsuit, the District certified everything was proceeding as planned and cashed a $225,000 subsidy check a month after being ejected from the FCC auction. When the auction results were announced, the jig was up and Locuspoint headed to court.

KRCB, which made $72 million in spectrum sale, agrees to buy KCSM for $12 million

In the meantime, small KRCB in the North Bay with an annual budget of about $3 million, successfully navigated the spectrum auction, with no help from Price Waterhouse, and collected $72 million in a partial, not complete, spectrum sale. According to the counter lawsuit filed by the District, North Bay Public Media approached the Trustees about a KCSM-TV sale months ago and Locuspoint, which had seen at least a $25 million profit slip through its fingers, was not cooperative about a sale. Locuspoint requested the immediate return of their $3.3 million dollar investment plus interest and had not received a reply. Both boards of directors at SMCCD and KRCB approved the potential license transfer in September of 2017.

So what happens now? For those of us who didn’t want to see the end of the 5th largest noncommercial signal in California, the potential sale is a happier ending than the one that seemed likely a few short months ago. For those who saw a big financial windfall coming, there is grave disappointment.

The sale price of $12 million, about $5 million more than the District was offered in 2011-2012 by experienced brokers Marc Hand of Public Radio Capitol and John Schwartz of Independent Public Media, seems designed to pay off Locuspoint $5 million dollars to settle their lawsuit. That amount might cover some of Locuspoint’s contractor and legal fees, although possibly not all of them, since neither Price Waterhouse nor law firm O’Melveny and Myers come cheap. It is probably fair to say the Blackstone Group did not get to where they are today by accepting zero return on investment.

Locuspoint is suing District, citing their illegal, secretive process

Locuspoint’s attorney penned a letter to the District on September 11 objecting to the non-transparent nature of the sale to KCRB:

“KCSM’s sale to KCRB was fait accompli from the beginning, not the result of any sincere process to conduct a public auction for KCSM. KCRB’s president, Nancy Dobbs, has now stated that KCRB started asking about acquiring KCSM as soon as the FCC-imposed “quiet period” ended in February 2017, when KCRB learned that KCSM had failed in the FCC auction. Dobbs’ statement matches the District’s allegation that it was “approached” about a sale by an unnamed station around the same time. The RFP process that followed – required by California law – was little more than a charade to conceal a predetermined outcome in an apparent effort to gain a strategic litigation advantage at the expense of a bona fide public auction. Flouting requirements that the District issue and give public notice of a Request For Proposals to purchase KCSM, the RFP does not appear on the District’s website as either a current or archived proposal, calling into question how anyone could find it unless they knew to ask the District specifically for it. On September 7, the day after the Board gave the Chancellor authority to begin negotiating a sale agreement with KCRB, KCRB announced it had already purchased and operated KCSM. The next day on September 8, the District – in another late in the day stealth website post – stated the Board will vote on September 13 to ratify the KCSM sale agreement. In other words, the District had already executed the sales agreement that it only disclosed to the public for the first time two days earlier”.

It’s fairly infrequent that a public interest advocate like myself agrees with an attorney for a hedge firm, but the District’s process, from beginning to end, has been secretive.

FCC regulators, under Trump, likely to be more sympathetic to investors

Sales of broadcast licenses do not become final until federal regulators weigh in. The Federal Communications Commission (FCC) will do so in a process that can take anywhere from 6 months to several years. It is not unusual for the Commission to hold a transfer in abeyance until pending litigation against the license holder is resolved, especially when that litigation encompasses a claim to some or all of the license value. There is also a process called a “petition to deny” that can be filed by any member of the public and is required to be adjudicated by the agency prior to signing off on the deal. The new Trump FCC under chair Ajit Pai has been undoing public interest broadcast regulation at a startling rate, but can be assumed to have some sympathy for investment firms like the Blackstone Group, which contributed over $9.4 million in the 2016 election cycle.

Speculating on a public broadcast license abandoned educational mission; contracting with hedge firm created potential risk

Since the beginning of the lengthy process, Media Alliance’s position, and that of many other public interest media advocates, has been that we need more noncommercial media, not less, and speculating on broadcast licenses for cash is an abandonment of the educational mission of the college district and of the public commons. Inviting in an aggressive financial operator like Blackstone exposed the District to a partner whose objectives were not educational, and potentially placed public assets at risk.

The District’s position that Locuspoint’s contract is moot because the District paid the speculator to “handle” the bidding, is troubled. Ten Bay Area broadcasters, some quite small, navigated the auction without being kicked out for failing to submit a bid. (Successful auction participants in the Bay Area were KEXT, KEMO, KRCB, KRON, KTLN, KTMP, KOFY, KTSF, KQED and KTNC). Blackstone-owned Locuspoint were not retained by the District to offer expertise or technical assistance for the spectrum auction, they were retained to subsidize the financial obligations of the District without forfeiting the possibility of a later windfall in the spectrum auction.

The question now is whether the biggest hedge fund in the world will cash in their chips content to have a 6 year effort end in nothing more than breaking even. Or whether Locuspoint will hold out for the $25+ million dollar pay-off.

If the Blackstone Group does not go quietly into the night, the District’s colleges and their students could take a pretty big financial hit from the District’s decision to reject reasonable bids from several public television operators years ago.