The two competing applicants for the $100 million cable television franchise in Fairfax County have promised that if they win the franchise they will give their influential local partners stock worth far more than the local partners will invest.
The local partners of one major company, a lawyer and four members of Fairfax's influential builder-developer community, would receive at least two shares of stock for every share they buy, or an estimated $4 million of stock for a $2 million investment. The 200 stockholders of the local affiliate of the other applicant, after investing $870,000, would own 51 percent of the Fairfax cable company, expected to be worth millions of dollars.
In addition, a handful of stockholders in that affiliate will have been paid more than half of the $870,000 in fees or rent by this summer, when the franchise is scheduled to be awarded. The law firm of Virginia state Sen. Adelard L. Brault, stockholder and general counsel of one of the cable competitors, will earn a $40,000 payment if his cable company wins the franchise.
The Fairfax County supervisors, who will award the franchise, have repeatedly criticized companies that give free equity to local citizens--sometimes called "rent-a-citizen"--in return for lobbying help. Such arrangements often force cable subscribers to pay higher monthly rates once the coveted cable monopolies are handed out, the supervisors have said.
Hoping to avoid "rent-a-citizen" in Fairfax, the Board of Supervisors required unusually detailed disclosure of ownership information from applicants. The requirements, which several cable executives said discouraged them from even bidding in Fairfax, offer a rare view of the kind of business arrangements that have developed within the cable industry.
Both Media General Inc., of Richmond, a $367 million communications company, and the Colorado-based Telecommunications Inc., the second-largest cable company in the country, have promised their local partners an ownership share out of proportion to the dollars the locals will invest. Both also pledged to buy back stock from local investors, in one case at an already determined price.
The local investors say that in return they will advise their out-of-town partners on local needs and desires. Several of them heatedly rejected any kinship with "rent-a-citizen," pointing out that they will pledge thousands of dollars and assume some risk. In other localities, local cable partners have received large chunks of stock for no investment whatever.
"I'm also putting in a tremendous amount of sweat equity," said Suzanne H. Paciulli, a local partner of Media General Inc. and a commercial Realtor. "Anything I get back I feel I will have earned."
Cable television in Fairfax, which has been studied and debated for more than three years, will offer residents more than 100 channels of movies, sports and other programming for a monthly fee. It will also offer substantial profits to the company that wins the exclusive right to serve the county's population of more than 600,000.
Media General's five local investors argue that they have made a broad commitment to the county because they will invest a total of $2 million if Media General wins the franchise, although up to now each local partner has invested $3,000. Fairfax Telecommunications Inc., the Colorado company's local venture, claims a greater commitment because more than 200 residents have bought stock, because the local stockholders have already raised $870,000 for the franchise-seeking process and because they will retain a 51 percent share of the partnership for the first seven years of the 15-year franchise.
Media General's five local shareholders--Paciulli, builder Herbert L. Aman III, his wife Sandra B. Aman, developer Edwin W. Lynch Jr. and lawyer Richard F. Kennedy--will get a 9.5 percent stake in the company while paying in 4.75 percent of the needed funds, giving them two shares of stock for each share they buy.
Moreover, after the local partners have invested $2,030,000, the agreement requires them to invest no more funds, but they will continue to receive 9.5 percent of any new stock Media General issues.
In addition, if Media General wins the franchise United Virginia Bank has agreed to lend the $2 million to the five local investors with their Media General stock as collateral--and with Media General guaranteeing the loans. The local investors also can require Media General to buy back enough of their stock to repay the loans or, after five years, to buy them out entirely.
Herbert Aman said the financial risk of local Media General investors will increase if the firm wins the franchise because they will be personally liable for any loans they receive from United Virginia despite the Media General guarantee.
"We have to put up our stock and sign on the dotted line," he said. "Everything that we own basically is on the line . . . . I think there is a lot of risk here, and therefore the potential for high reward is great."
Aman's competitors at Fairfax Telecommunications say they are taking more of a risk because they already have invested $870,000--or an average of about $4,200 per stockholder--in the application process. Once the franchise is awarded, however, FTC's agreement with its Colorado-based partner calls for Telecommunications Inc. to furnish all the needed capital while the locals retain 51 percent of the stock.
Seven years from the date of the award, TCI would give the local investors $1.8 million for about one-quarter of their stock, leaving TCI with controlling ownership. That purchase would return to the locals their entire initial investment plus about 9 percent interest a year, while still leaving them a two-fifths share in the Fairfax cable company, which a county consultant has estimated will be worth as much as $260 million in 15 years. The locals would then have the option to require TCI to buy about half of their remaining stock at fair market value.
"If we win the franchise, it will have been a damn good investment," said FTC president L. Gary Byrd, a Fairfax engineer and former county Chamber of Commerce president. "But in no way would it be a win without risk."
Fairfax Telecommunications has paid Byrd's engineering firm more than $34,000 for engineering and consulting services related to the franchise, according to the application. The law firm of Lovett, Ford, Hennessey, Stambler and Seibert, two of whose partners own 4,500 shares of company stock (out of about 234,000 shares), also has been paid $194,000 in fees. About $20,000 has gone to the law firm of Sen. Brault, who serves as general counsel and owns 2,000 shares with his wife, said John Reel, executive vice president of Fairfax Telecommunications.
Byrd said the payments were disclosed fully to other shareholders and potential shareholders. The payments also will include $75,000 more to the Lovett, Ford law firm and $40,000 in cash or stock to Brault's law firm if FTC wins the franchise, according to accounting documents included in the company's application.
"It's a kind of fee arrangement that is entered into quite often on this kind of a venture," Brault said. "You contribute your time and expertise on a speculative venture with the knowledge that the value of your service is greater if you're successful than if you're not successful."