CorpGov.com, March 30, 2020 interview: "INTERVIEW: HC2 Holdings CEO Philip Falcone Invests in Over-the-Air TV Revival" [Corporate governance publication interviews chairman of HC2 and DBM as model of effective management]

Source: CorpGov.com, March 30, 2020 interview

INTERVIEW: HC2 Holdings CEO Philip Falcone Invests in Over-the-Air TV Revival

March 30, 2020

Philip Falcone, Chairman, President and CEO of HC2 Holdings, Inc.

The combination of nationwide quarantines and the threat of unemployment make it clearer than ever: Americans want at-home entertainment but are less willing to shell out hundreds of dollars a month for bundled cable and satellite TV packages. Instead, a $25 antenna can give consumers free access to high-definition broadcasts of major networks including Comcast Corporation’s NBC, Fox Corporation’s Fox, The Walt Disney Company’s ABC, ViacomCBS Inc.’s CBS, and more. As households cut the cord and instead create customized packages – with broadcast as the cornerstone – there is an opportunity to offer more channels available by antenna.

In an interview with CorpGov, Philip Falcone, Chairman and CEO of HC2 Holdings, Inc., explained his view on the future of over-the-air TV and how the company’s HC2 Broadcasting division plans to capitalize on it. HC2 Broadcasting has secured licenses around the country, offering content providers access to as many as 40 million viewers. Mr. Falcone explained that as more consumers adopt a hybrid model of broadcast and over-the-top options like Netflix, Inc., HC2 Broadcasting can build momentum. He also explained his views on corporate governance, including steps HC2 took to establish a robust framework before an activist investor recently put pressure on the company. The full interview is below:

CorpGov: What are your thoughts on good corporate governance and how do you apply them to HC2?

Mr. Falcone: Well I think to begin with, in this day and age, and as you think about running a company, it is incredibly important and our Board takes it very seriously. And I think what people have to realize is this company doesn’t have a long history. This was a shell company that we essentially stepped in, acquired, raised money and we’ve done this in the last four to five years and you’re going to have fits and starts with certain things. But, clearly it is of utmost importance for us as a firm to take this and take corporate governance very seriously, and we are very hard at work to make certain enhancements and to further strengthen the Board and do what is necessary, as is evidenced by our announcement in early February appointing Julie Springer from TransUnion to our Board.

CorpGov: When it comes to these portfolio companies, you are a director on some of their boards. How does that work? Do you have a say in some of their governance?

Mr. Falcone: Yes. The thing about it is when we look to acquire various companies and subsidiaries, you’re partnering with a management team that you believe has the wherewithal to really run the business, grow the business, and then you appoint a Board. In certain situations I am on the board, in others I am not because it’s not necessary. I am not on the Board and have not been on the board of Global Marine or Insurance. But there are certain other situations where I take a more active role. I am on the board of DBM, I am on the board of Broadcasting and I’m also the CEO of Broadcasting. So, it depends on the situation, but we typically like to give the management team the flexibility to do what they do best and support them accordingly.

CorpGov: Is there anything you can say about HC2’s Board itself that is reflective of your philosophy on corporate governance?

Mr. Falcone: We do have an independent Board. We believe when you’re public, it’s important to have an independent Board. As I just mentioned, we recently added a new director to our Board, which we believe will enhance and improve our governance. At the end of the day, it’s about the Board’s reputation and they make sure that we’re crossing the T’s and dotting the I’s on everything that we do. And that’s the most important thing. I always tell people, listen, give me and tell me the issues first. Tell me the problems first. Because if I don’t hear them, I can’t fix them or I can’t help fix them. And I don’t want to hear what you think I want to hear, which is really important.

I have a very good relationship with the Board, they’re smart guys, they cross the T’s, they dot the I’s and they pay attention to what is happening at not only the holding company, but also the subsidiaries.

CorpGov: What made you like the idea of structuring this as a holding company – because your background, of course, was at Harbinger, which has a hedge fund structure. Was permanent capital a part of it?

Mr. Falcone: Yes. Because when you look at my history, I have, and I probably should have, structured my fund as more of a quasi-private equity fund because back in the day I tended to take concentrated positions in situations that could be quite volatile and would take some time to work themselves out. And when I went through 2008 when I had $26 billion under management and I had $10 to $10.5 billion of redemptions in one year, I had to sell things that probably were not ready to be sold. And that’s when I realized that this annual redemption policy was just not long enough and not conducive to how I think and how I like to invest. Because these things take time. So, I looked at the permanent capital vehicle as a solution.

CorpGov: Let’s talk about some recent news. From the Global Marine sale you’re going to have $160 million. This is mainly going to be used to reduce debt. What opportunities does that open up? What are you planning to do going forward?

Mr. Falcone: Well, just to give you a little bit of history, we had a large amount of debt prior to the end of 2018. And the objective was to refinance at lower rates, very similar to what we did at HRG when we built that entity out where we started at, I believe, 10 5/8 and then it got into single digits, and that was the objective here. And it was unfortunate with our timing – and I take responsibility for that – we went out at the wrong time and were faced with very, very difficult market conditions. In fact, in December of 2018, which is right around when we priced our deal, there were no high yield deals done, and that was the first time that occurred since 2008. That being said, it is what it is, and we didn’t get the rate that we had hoped we would get.

That put some pressure on the company and I have been unbelievably diligent on focusing on not only reducing our cost of capital, but just eliminating the debt. That has been my top priority, that has been the concern of the shareholder base, and I took that to heart and have been spending night and day on reducing that debt and hopefully eliminating that debt over time. It has been the single most important thing for us and will continue to be the single most important thing for us going forward. We want to continue reducing it. It will, I think, give people comfort that we not only hear them, but we will be expanding our flexibility. Getting the Global Marine deal done was a big step in the right direction of where we want to continue to be going. And as you can see by our announcement regarding entering into advanced discussions to sell our Continental Insurance subsidiary and retaining an advisor to explore strategic options on our Construction subsidiary DBM Global, we are not done yet.

CorpGov: Let’s dig into Broadcast. It’s interesting because actually at The Wall Street Journal I covered the media industry and so was looking at the shift to over-the-top several years ago. But the story here is a shift to over-the-air TV. What’s driving this shift?

Mr. Falcone: The industry is changing every single day and the industry is changing for a number of reasons because technology’s changing. And what I mean by that is you no longer have to have the 5’ antenna on your roof to get a quality over-the-air signal. You can now buy a $25 antenna that you can put in your window and get HD quality viewing from all the local over-the-air television stations. So I think, first and foremost, that’s been the one big change, that any one of the broadcasting networks, especially the big networks, those are free. You can get that signal over-the-air. You do not need cable television to watch CBS, ABC, NBC, and Fox. And that’s typically the cornerstone of people’s viewing habits. So I think people are looking at it and saying, okay, do I want to watch the 600 or 700 television channels on cable TV and spend $200 a month? Or do I want to choose what specific OTT channels are available that I want to watch and combine it with what is free over-the-air? And there’s a massive movement to that kind of hybrid viewing approach.

CorpGov: For example, I might have broadband Internet but not cable, and then I’ll subscribe to, say, HBO GO, and that’s my package. I’ve got the four big broadcast networks and I like watching Game of Thrones. So that’s all I watch. That’s all I’m going to get. Is that the combination?

Mr. Falcone: Yes, that’s the combination. It’s the hybrid. And as I think about over-the-air, I’ve explained to people this is not an either/or, this is an “in addition to”; it’s complementary because it’s free, the signal is fantastic, and there’s technology advancement today where you can take the signal that you are getting in your home and transmit via Wi-Fi to your iPad, and as you go outside your house, you can still view those programs that you are picking up over-the-air in your home.

CorpGov: Even on your phone if you’re away from home?

Mr. Falcone: Yes. See, that’s the incredible thing is the education around that. There’s a couple of companies out there where you buy a $150 box that you connect to the antenna and it runs through a server, and I could travel to California and still watch the stations that I’m picking up over-the-air in New York on my iPad in California.

CorpGov: Some sports get blacked out, unless you’re in getting a local broadcast signal. Could this allow viewers to follow their home team when they’re out of town?

Mr. Falcone: Absolutely. And this is an education process and as people see this, this is what is driving the move to OTA. And I think the important thing is to understand is that broadband is broadband. You want the Internet, you will have your OTT apps, whether it’s Netflix or ESPN or Disney Plus, but you don’t need to pay for cable TV. And the thing about over-the-air is that obviously antenna technology has changed dramatically. You have DVR capabilities over-the-air now that you didn’t have. If there’s a Major League Baseball game on Fox, and it’s on a Saturday afternoon and you’re going to be traveling on a Saturday, you can DVR that over-the-air so you can watch it when you have time. So those things are driving the move to over-the-air, and it’s not stopping. Again, it’s not an either / or. It’s an “in addition to”, and it’s complementary to whatever OTT apps you want to watch.

CorpGov: What is HC2 Broadcasting doing to capitalize on this trend and what you offer?

Mr. Falcone: So how you have to think about it is to capitalize on it, you must have the ability to distribute programming. There are 209 DMAs across the country. And in every one of those DMAs, there are 35 licenses to operate television stations. So, for every television station you have to have a license, and every DMA is different. But the way we looked at it is that we wanted to build a distribution platform over the air because we believe that as people cut the cord, the cable networks have essentially no alternative to distribute their product other than the Internet once cable goes away. So now each cable network is maybe one of 600 on cable TV. Once they lose a set of eyeballs, they have to hope that somebody searches for them on the Internet and the competition on the Internet is infinite in number. So they must have eyeballs. They essentially need to look for alternative platforms. We are an alternative platform where we could now sign on any cable network, and we’re signing up various sizable companies that want us to distribute their content over-the-air into the homes. There are now 40 million people in the United States, according to Nielsen, that are watching over-the-air TV.

CorpGov: I’m curious about the trajectory of OTA over time. When cable became popular in the 1980s, what happened to OTA?

Mr. Falcone: Oh, it dropped dramatically. I think it was 10 million. It dropped precipitously.

CorpGov: How does the current 40 million OTA viewership compare with historical levels going further back in time?

Mr. Falcone: Well, back in the 70s when people didn’t have cable, the over-the-air market was the only way you could watch television. And then cable came along and you not only had better reception, but you had content that you couldn’t watch over-the-air. There was this massive growth and movement towards cable. And now it’s kind of flipping back the other way because of the technology change. And that’s primarily the key. You no longer need to have the 5’ antenna on your roof, 40 feet in the air.

CorpGov: Can TV networks stick to cable and satellite but also move to broadcast for distribution?

Mr. Falcone: Yeah, they could do both, depending on what their deal is. But you could theoretically absolutely do both. The question is, is it ad-based on Roku, because nobody’s going to pay for it if they can get it over-the-air. But a lot of these content producers, they have massive amounts of content, so they could have both a subscription model and an alternative model that’s free-over-the air.

CorpGov: How do the economics work for HC2 Broadcasting?

Mr. Falcone: It’s strictly ad-based. This is back to basics. For a 30 second commercial, you pay X. Depending on your coverage and your impressions. As the content improves, there will be more people watching it, the ratings will be higher. That’s the whole thesis behind it.

We also looked at it as, for example, if you had only one station or two stations in Tulsa for instance, or Milwaukee or some of the smaller markets, you’re not going to attract quality content providers. Nobody wants just one city. Everybody wants national coverage. So the way we looked at it is our strategy of building a distribution platform would only work if we were able to get fully, or close to, nationwide.

That was the thesis behind our acquisition spree. We went from city, or from DMA to DMA, plugged holes, figured out where we weren’t, where we wanted coverage, where we needed coverage. That was the first order of business for us, to make sure we had the capacity and the geographic coverage. Then we could go to any content provider and say, “Oh, by the way, you can come onto our network and we can get you in front of 40 million people.” And that’s what we’ve built.

CorpGov: Let’s say you go to a Bravo, right? You go to Bravo and say, okay, we can get you this over-the-air distribution. Help me understand the mechanics of how that works out.

Mr. Falcone: Well, we distribute everything through a hub. So, when you’re looking at broadcast over-the-air television, there’s a number of signals that your over-the-air antenna picks up. One of the key issues is educating people to “What you saw yesterday on channel 42 will no longer be aired, it’s now something new,” and as people are flipping through their channels, they’ll see that. The education will happen over time. But the key is how you market to people to get over-the-air viewers to know that the content is now on channel 42 or channel 39.

When you buy an antenna and just put it up in your window, you’re going to pick up whoever is broadcasting over-the-air. How it works today is every television station, in order to broadcast, must have an FCC license and there are 35 licenses in every market. However, with one television station, you can essentially deliver four to five different streams of programming. And if you have an over-the-air television, you will see a dot one, dot two, dot three. For instance, for channel 7 in New York City, over-the-air is ABC. How ABC does it, they have 7.1, which is their main content, which is the cable channel, which is the main channel. That’s called your prime channel. If they have other content, they can broadcast it on 7.2, 7.3 and 7.4 under one license.

CorpGov: Will my TV automatically show those “dot” channels?

Mr. Falcone: It’ll automatically pick up those dot two, dot three, dot four signals. Every now and then, you recalibrate your TV and it picks up any new signals.

CorpGov: How can you let people know the channels are there? Run advertising?

Mr. Falcone: The beauty of it is when you know that ABC, CBS, NBC, and Fox and Ion and the other majors are there, you will automatically be picked up as well. It’s re-scanning your channels. So on day one, your over-the-air antenna will pick up whatever’s being broadcast – ABC, NBC, Fox, and everybody else, you’ll also see religious programming, you’ll see PBS, and then you’ll see us, we’ll be there. It automatically gets picked up, if we broadcast. But the key is, if ESPN (to use a hypothetical) all of a sudden went over-the-air? You’d have a lot more people watching over-the-air.

CorpGov: So if you’ve got like a big one, people would figure out the whole idea, the notion, of there being other channels besides four of them there, right?

Mr. Falcone: Yes. As you flip the channels up or down, you’re not going to stay in that range, you’re just going to see what’s available. In New York, there are only 35 licenses, but I can pick up 68 channels.

CorpGov: How do you monetize the distribution you now own?

Mr. Falcone: What we’re doing is we’re very focused on being the distribution platform. We’re similar to the power company in certain ways where, “OK, we have the tower, who wants to lease space on it?”

CorpGov: And you let them work out the advertising themselves?

Mr. Falcone: Yes, or we have the capability of doing a revenue share with them saying, “Instead of paying us X dollars per month to just lease the capacity, we’ll do a revenue share deal. We’ll give you the station at a lower price, and you can let us sell the advertising, and we’ll split it.” There’s a number of different models that you can incorporate.

CorpGov: Do you view yourself as competition to cable?

Mr. Falcone: No, we cannot compete, it’s not our objective to compete. We are a platform for those who have content to get in front of the 40 million people who are watching over-the-air television. But keep in mind when I say “in addition to”, if you’re an over-the-air television household, you don’t have cable TV. So those are households that essentially, in many cases, the only way you’re going to get in front of them is through over-the-air.

CorpGov: Advertisers have got to love that too, right? I mean, it’s an entire population they can’t reach otherwise.

Mr. Falcone: Yes – it’s back to the basic model of how the “Big Four” built their business. If you were CBS back in the day, you had your distribution across the country and you got your ratings based on your programming and you sold advertising. It’s shifting back to that and you’re even seeing a number of the big content providers build out ad-based linear TV. If you look at IMDB, IMDB is owned by Amazon. Amazon has access to a massive amount of content. They can only put so much content on Amazon Prime. And not everybody has Amazon Prime. So they’ve taken IMDB, which years and years ago was just a data company for factual data and bios on the entertainment industry. They have an ad-based, linear channel right now. Free.

CorpGov: Are there any specific pieces of content you’re airing?

Mr. Falcone: Yes. We have over 70 different networks on our stations from scripted programming to religious entities. But CBS has utilized some of our platform to help launch their new lifestyle network called DABL. They are in a few of our markets on our stations, and we expect that to grow over time, because there’s not a lot of available capacity for anybody that wants to launch a network or to distribute their content. Most of the big broadcasters are full. They don’t have any capacity to bring on any new content. We have 205 operating stations right now, including a station in every top 35 market but one. Even the big four or five, they only own between eight and 30 stations. They have their stations in certain key markets and then they have the affiliates like a TEGNA or Sinclair that when they’re affiliates, they’re broadcasting the primetime CBS network on their station.

CorpGov: When you’re out buying this spectrum, who owns it right now, who are you buying this from?

Mr. Falcone: We bought it from small independent broadcasters that had one to five stations, and the model is changing where it’s very difficult for them to make money on an individual station basis. But again, it goes back to I truly believe to get the quality content, you need nationwide coverage. And that was our objective and while we were very cost conscious, we were able to act very quickly.

Philip A. Falcone has served as a director of HC2 since January 2014, and as Chairman, President, and Chief Executive Officer of HC2 since May 2014. Mr. Falcone served as a director, Chairman of the Board and Chief Executive Officer of HRG Group, Inc. (f/k/a Harbinger Group Inc., “HRG”) from July 2009 to November 2014. From July 2009 to July 2011, Mr. Falcone also served as the President of HRG. Mr. Falcone is also the Chief Investment Officer and Chief Executive Officer of Harbinger Capital Partners LLC (“Harbinger Capital”), and is the Chief Investment Officer of other Harbinger Capital affiliated funds. Mr. Falcone co-founded the funds affiliated with Harbinger Capital in 2001. Mr. Falcone has over two decades of experience in leveraged finance, distressed debt and special situations. Prior to joining the predecessor of Harbinger Capital, Mr. Falcone served as Head of High Yield trading for Barclays Capital. From 1998 to 2000, he managed the Barclays High Yield and Distressed trading operations. Mr. Falcone held a similar position with Gleacher Natwest, Inc., from 1997 to 1998. Mr. Falcone began his career in 1985, trading high yield and distressed securities at Kidder, Peabody & Co. Mr. Falcone has been a member of the Board of Directors of Inseego Corp. (NASDAQ: INSG), a provider of intelligent wireless solutions for the worldwide mobile communications market since 1994 and has served as Chairman of the Board since May 2017 and as a member of its Audit Committee since June 2017. Mr. Falcone also serves as a director at several of HC2’s subsidiaries. Mr. Falcone received an A.B. in Economics from Harvard University.

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