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District Cablevision Inc.’s politically connected investors cash in on broken promises.
On the morning of Nov. 9, Room 700 at One Judiciary Square looked like an executive board meeting for the D.C. Chamber of Commerce. Scrunched on metal chairs in the drab conference room—and away from the cameras that broadcast ordinary hearings downstairs in the D.C. Council chambers—sat some of the District’s heaviest hitters in business, law, and real estate: hardware mogul John Hechinger, Robert Johnson of Black Entertainment Television, Michele Hagans of Fort Lincoln New Town Development Corp., and lawyer and lobbyist David Wilmot.
The tycoons needed no introduction to D.C.’s political class, but Ward 4 Councilmember and Committee on Economic Development Chair Charlene Drew Jarvis indulged a bit. “Mr. Hechinger, welcome, sir,” she said as he positioned himself in front of the microphone to offer brief testimony. “A very esteemed member of our community, as is Mr. Johnson and all the other shareholders, very esteemed members of our community, a very successful, esteemed member of our community.”
Hechinger paused. “That’s overwhelming,” he deadpanned.
A generous philanthropist and political contributor to many District politicos including former Mayor Marion Barry, Hechinger had come to the council to advocate for a more personal asset: permission to sell 10,000 shares of stock in District Cablevision Limited Partnership.
In 1985, a hand-picked batch of 100 local investors including Hechinger and numerous other Barry compatriots won the city’s cable television franchise as partners in District Cablevision Inc. (DCI). Fifteen years later, the often griped-about cable firm’s shareholders have decided to sell their interest in the company to AT&T, which in the hurly-burly world of telecommunications had acquired a 75 percent stake in D.C.’s cable franchise as of February. The handoff will give AT&T 100 percent ownership in the company.
More important, the deal will turn a decade-and-a-half-old investment by a small coterie of political insiders into a pot of gold. The transfer agreement reached between DCI and AT&T will give $296 worth of AT&T stock for each original DCI stock share purchased for just $10. Johnson, who is also DCI’s president, made an initial investment of $100,000 in the company and will walk away with $2.96 million worth of AT&T shares.
Here’s how: Soon after AT&T acquired Tele-Communications Inc. (TCI) and assumed its 75 percent stake in the District cable firm, the local investors began negotiations with AT&T to cash out. The investors knew that AT&T would be very interested, since the company reportedly has plans to trade the District’s cable franchise to another cable giant, Comcast, in exchange for rights to purchase MediaOne Group Inc., a Colorado-based cable company.
The investors had one last hurdle before hopping on E*TRADE with their blue-chip AT&T stock: the D.C. Council. D.C. Code dictates that the council must give its consent to any transfer of stock in the company exceeding 5 percent.
The necessity of getting their windfall through the council brought almost a dozen stockholders down to the hearing—wingtips, cell phones, and all. “We took a very big risk at the time, and we feel the return on our investment is justified and appropriate,” argued Johnson—whose net worth is estimated at $300 million to $500 million in the November issue of Regardie’s Power. “To the 100 small investors, this is very important, obviously. It is the first realistic opportunity in over 17 years to sell our shares and to liquidate our investment.”
Throughout the nearly two-hour roundtable discussion, Johnson and his fellow stockholders failed to attach any numbers to their “small” dabble into the local telecommunications market. But according to figures confirmed by the D.C. Office of Cable Television and Telecommunications (OCTT), the 100 insiders’ “risky” $1.4 million investment will blossom into $41 million in AT&T stock.
“Most of us have a small percentage of DCI. The largest interest of any one shareholder is under 18 percent; many are under 6 percent; most under 1 percent,” Johnson modestly told councilmembers in attendance. Johnson’s $2.86 million profit makes a hefty 6 percent, indeed—actually 7. The largest DCI investor, Syndicated Communications Inc., which is headed by venture capitalist Herbert Wilkins, will cash in a cool $8.9 million for an original $300,000 investment.
Nice work if you can get it. Unfortunately for the rest of us, the price of admission was a political connection to Barry. The list of DCI investors reads like a D.C. political roll call. Aside from Johnson, the modest “under 6 percent” investors include David Abramson, Mayor Barry’s former advertising guru; Tyrone Brown, a former commissioner on the Federal Communications Commission; Hechinger; and Ann Kinney, Barry’s former campaign treasurer.
And the “under 1 percent” investors include the likes of Barry confidant and D.C. businessman John Clyburn; International Secretary-Treasurer of AFSCME—and once again longtime Barry friend—Bill Lucy; Wilmot; and D.C. Department of Human Services Director Jearline Williams. Their initial $5,000 investment will soon reap them $148,000 of AT&T stock.
DCI counsel Thomas Ingoldsby, an attorney with Verner, Liipfert, Bernhard, McPherson and Hand, referred all questions concerning the transfer of ownership to Johnson. Johnson has declined further comment on the matter at this time.
The politically savvy investors’ effort to profit from DCI stock comes right before another mile marker: the renewal of the District’s cable franchise agreement. Though still valuable, DCI’s franchise agreement holds less significance than it did in the early ’80s. Deregulation in the telecommunications industry has brought competitors to the D.C. market, including Starpower Communications Inc., which is using co-owner PEPCO’s infrastructure to go head-to-head with DCI in bringing a galaxy of channels to District households.
Back in 1985, though, the cable franchise agreement was supposedly the secret combination that unlocked the telecommunications vault. Like many other companies bidding on municipal cable contracts, DCI had a seemingly simple game plan: Promise the moon—which in this case meant an agreement to build a $130 million cable system that would bring 78 channels to every District home by 1990 while also linking government offices and the D.C. public schools—and then, once you have the contract in hand, deliver something rife with more earthly problems.
Political connections, which DCI shareholders had in abundance, didn’t hurt, either. “The name of the game was: Be politically well-connected and promise as much as possible,” Carl Pilnick, an independent consultant hired by the city to examine the original cable bid, told Regardie’s in October 1985.
Back then, Pilnick told the council that all three bidders stood on shaky financial ground in terms of what they were promising to deliver to the District. “I was very skeptical from the beginning,” says former D.C. Councilmember Betty Ann Kane, who chaired the Committee on Public Services during the original bidding. “I knew how difficult it was for minority investor groups to raise money.”
The District did not attract bids from more well-known conglomerates for one specific reason: D.C. law mandated that the cable television franchise holder must be at least 35 percent minority-owned. The council also wanted the cable franchise award to go to a locally owned and operated concern.
Though Pilnick advised the city to choose Capital City Cable, which had forged a partnership with cable giant Viacom, DCI received council approval in the end. But, months after winning the franchise in 1985, DCI investors headed back to the D.C. Council to alter the contract. The oh-so-local investors could not finance the wiring all by themselves and wanted to bring in TCI, a national cable conglomerate, which ended up with a 75 percent interest in D.C.’s cable franchise.
“Instead of being a locally based, minority-managed business, as the city had wanted, D.C.’s cable system would actually be run by an out-of-state company with a reputation for arrogantly disregarding the wishes of consumers and municipal officials,” Regardie’s reported.
Even with the backing of TCI, DCI investors failed to deliver on their basic promises. Instead of 78, as originally outlined in the contract, District Cablevision subscribers currently have 67 channels to choose from. And DCI’s I-Net video network linking government offices and the D.C. school system never materialized at all. So much for the bright, bold future the soon-to-be-rich 100 investors brought D.C.
The entire intent of the original enabling legislation for cable was to make sure that minorities profited from D.C.’s high-tech future. And, given the stock payoffs in the current legislation, that goal will certainly be reached in the case of those minority group members who were close to political power.
But for the rest of D.C.’s minority community, the transfer of stock just means the city will have no local minority cable owner. The local cable provider will then become a wholly owned subsidiary of AT&T; its board will consist of three current board members—Johnson, Hagans, and DCI stockholder Ruby McZier—as well as four minority members from AT&T, according to Johnson’s testimony and OCTT.
The board will serve as a beard on a white-owned and white-managed multinational communications firm. “I think that it would not have been the original intent of the council to have a board that is composed of minority members, half of whom represent AT&T, essentially,” Jarvis pointed out at the hearing.
At the roundtable, OCTT Executive Director Darryl Anderson tried to fudge the issue of whether the ownership transfer would fly in the face of D.C. law and the council’s original intent. That is, until Ward 5 Councilmember Vincent Orange dug up a few lines from an OCTT draft memo that had inadvertently slipped into materials OCTT had sent the council.
“This proposed transaction would eliminate any significant local or minority ownership…as delineated in the legislative purposes of the cable act,” read the memo. “Local and minority ownership in the cable system is an important concern for the District of Columbia.”
“I don’t believe the executive branch should wash its hands of this process,” Orange said at the hearing, countering the assertion that getting a better deal for D.C. was up to the council. “Clearly, somewhere down the line there’s been some policy change of direction coming from your department, because you erroneously provided this material in our packets. It shows one line of thinking—and then here today it appears to be backing away from that line of thinking.”
Unsurprisingly, given the powerful folks rooting for the sale, councilmembers at last week’s hearing acted as if the stock sale were preordained. But some seemed to hope to extract at least a token payment to fund minority opportunities in local telecommunications. Even that effort failed.
“We put it before the actual applicants, the DCI investment group and their representatives….’Here’s an opportunity to continue to promote minority involvement, participation, and ownership,’” Anderson testified. “The applicants firmly indicated that they were not interested in making any contribution to the District to promote these things.”
Though DCI investors balked at the suggestion—noting it might have a “chilling effect” on further private investment in the District—other cities have used ownership transfers as leverage. “Los Angeles, Calif., received $300,000 for approving a franchise transfer; Decatur, Ga., received $400,000; Long Beach, Calif., got $2 million; Grand Island, Neb., received $380,000,” At-Large Councilmember Carol Schwartz informed her colleagues council meeting before they voted on the matter. “Our minority holders are now refusing even a goodwill payment for this transfer in spite of the $50 million they will make.”
“I would continue to oppose the transfer of stock until DCI shareholders comply with the original franchise agreement,” says former D.C. Councilmember Bill Lightfoot, who chaired the council’s Committee on Public Services, which oversaw the city’s cable franchise agreement in the early ’90s.
“I think it’s a last chance for the council to hold the franchise responsible,” argues Kane. “Many other cities have used stock-transfer agreements as their leverage.”
That leverage was nowhere in sight when
the entire council considered the stock swap last Tuesday. The votes were counted; the council had apparently decided that there was little reason to stand between the 100 investors and their big payday.
Councilmembers bravely suggested that the franchise renewal, which will occur in March 2000, will be a better time for consideration of issues like rates, never-delivered features, and quality of service. Only Schwartz raised concerns that the council was missing an opportunity to force the players in the cable debate to make good on some of their promises.
“I worry about putting all our cable benefits and services into one basket—the March of 2000 basket. But I will. Now, do not ask me to wait again, because I will not,” Schwartz said.
Shortly thereafter, the council voted unanimously to allow the stock transfer.
Never mind that the District residents never received the fabled I-Net, that they got shorted on channels, that the system is jammed with customer complaints. And never mind that the system was first conceived as a minority-owned franchise. Johnson and his cohorts will get their millions, and AT&T can now peddle its clean assets to another communications conglomerate. And for District residents? Probably more of the same—high rates, low performance, and little accountability. CP