Interview Date: February 11, 2001
Interview Location: Sun Valley, ID USA
Interviewer: Liz Burke
Collection: Hauser Collection
BURKE: Good afternoon. This is Sunday afternoon, February 11. We're in Sun Valley, Idaho. I'm interviewing Tim David of Daniels & Associates. He is an executive vice president and has over twenty years of experience in the cable business.
First, we're going to have Tim David tell us a little bit about the group that's here, the Sawtooth International Cable is having their 20th meeting here, and perhaps you can fill us in.
DAVID: You're being very generous by calling us international. Our organization is made up of cable TV executives who have gotten together for the last twenty years. We ski different places each year, but we always come back to Sun Valley every two or three years, the place where we first skied together. There's alternately between 12 of us who do this every year and sometimes as many as 30. We've been to some pretty neat places, Telluride, Crested Butte, Park City, Vail, and of course Sun Valley. We meet the second week of February each year.
In the past, we did a lot of crazy things. In fact, some of the guys were so crazy that we had something called the "Porcelain Throne Award". One member of our group threw up 19 years ago, in a porcelain toilet. So we initiated a rotating trophy for the person that did the craziest thing each year – the most outlandish thing. One person went to a restaurant one night after a hayride, was so tired (he had been drinking a little bit) that he curled up in the corner. He just got up from the table, excused himself, said he was very tired and left his wife and went to the corner of the restaurant, curled up in a fetal position and went to sleep. Another guy put another gentleman's wife on his lap. They began getting fresh (they also had a bit to drink) and their chair tipped over in the middle of a restaurant, to the amusement of everyone but his wife. His wife let him know what he did wrong the next morning when he sobered up. He's never done it again. We've had the award given out for people who have missed Sawtooth events. We put one fellow on probation one year and gave him the Porcelain Throne Award for that. Another person got it for singing all the lyrics of "A Boy Named Sue" after he'd had something to drink, quite a bit to drink actually, on one of our hayrides. So we gave it out for silly things like that. However, the last couple of years we've gotten boring. We just don't do silly things anymore, don't have too much to drink, don't do goofy things. We just behave ourselves. That's a function of age, I guess. But it's been a lot of fun. We've met a lot of people and made a lot of friends over the last 20 years, and it's all been cable TV related.
BURKE: On that note, maybe we should turn the clock back 20 years. You've been in finance longer than that, but somehow you got interested in cable television finance, which back in the 70's was fairly rare.
DAVID: I used to be a banker at the Union Commerce Bank in Cleveland, Ohio. We were one of about seven financial institutions in the country that made cable TV loans at that time. That was in the late 70's. I made my first loan in about 1977. There weren't many banks that understood cable. It was considered to be an improbable business. The networks were trying to put cable TV out of business, and quite correctly they saw us as a threat. Even AT&T, which owned basically all the microwave systems in the country, made life as difficult as they possibly could. That's why it took the industry so long to get off the ground.
The first cable system was built in the early 50's. The industry really went nowhere until about 1980 when the satellite went up and Ted Turner took us to a new level. So for about 30 years of its existence, the industry made little progress. It wasn't because intrinsically cable wasn't a good idea. It was because many vested interests and politically powerful competitors tried hard to make us fail. However, our elected representatives understood that for every one person who owned a network affiliate TV station, there were lots and lots of voters who watched cable TV. So they viewed cable as a populist issue and gradually, cable not only survived, but was able to successfully emerge.
In the late 70's, if an operator wanted to offer pay TV – and the pay services back then were very primitive – they had two choices. One way was to bicycle tapes. In other words, a pay TV provider – many of the original ones aren't even around – would produce tapes of movies and then mail these tapes out to operators who would show them for a couple of weeks and then mail them back. It was very common in Alaska because there was no other way to get programming. So there the tapes were put on a ship and carried up to Alaska – or plane, shown and then sent back. Bicycling tapes was one way to get pay TV. There was no satellite programming at the time.
The other way was microwave systems. If a pay TV operator, such as HBO, owned or leased enough land line microwave systems, they could transmit the signals across the country. That's really what, I think, broke cable lose in the late 70's. As I think everybody's aware, TCI, Viacom, Comcast - all the major cable companies – were on the ropes. It was really their ability to sell pay TV and produce incremental cash flow that saved them.
There was a fellow at our bank named Bruce Poston, who actually was our cable pioneer. He left the bank, and I inherited his cable portfolio and began making cable loans. Our standard rate was 3% over prime, plus we took a back end kicker. We actually weren't allowed to take equity so we called it a back end fee. When it came time to pay us off, in addition to paying off the principal and the interest which was accruing at 3% over prime, a borrower had to pay us a fee based on the number of subscribers they had at that time. It was anywhere between $35 - $50 per subscriber.
So we made cable loans, and the management of our bank had no idea what we were doing. They didn't like cable loans, and frequently didn't like the people we were doing business with. But we were successful. We collected fees - $200,000 - $300,000, sometimes more. We produced huge fee income for the bank, and our senior people had little understanding what was going on. We got away with charging so much because there were so few banks that would loan money to the cable business. There were half a dozen, maybe seven banks that actually would make cable loans. So we were one of those people. That's how I got involved in the industry.
I got to know the guys at Daniels because they had an investment banking group, and they'd come to us on behalf of their clients, looking for financing. Also, it was kind of annoying to me because I would loan money, establish a good relationship with somebody and a Daniels broker would come along and sell them. So Daniels kept taking my accounts from me. So when they came to me and said, "Would you like to come for a job interview?", I thought that this was great. I could join these guys instead of fighting them. And that's how I got to know the guys at Daniels.
I came out in the summer of 1979 for a job interview, got an offer from Steve Halsted, and came to work in the investment banking group at Daniels. My job, initially, was similar to what I did with the bank – that is, getting financing for cable operators. However, I was working for them instead of lending money to them. Because I had been a banker for years, I knew exactly what bankers were looking for when they made cable loans. So I knew exactly how my clients should prepare themselves before asking for a loan. It was actually great training being a banker and then later on, looking for bank loans for operators.
My first customer, and really my best client for years, was Craig McCaw, who operated in the Pacific northwest. I came to see Craig just shortly after joining Daniels. I came to Daniels in September and first called on Craig in October. I remember Steve Halsted and I went to see Craig. His mother owned part of the company, as did his three brothers. They were all on the Board. So Steve and I went to pitch the McCaw family, to hire us to raise financing for them. Steve had long hair, maybe shoulder-length. It was kind of fashionable in 1979 for men to dress that way. But I was a conservative guy from the Midwest, so I, of course, did not have long hair. So we went into the meeting, and I thought Steve did well presenting our case. I thought I did very poorly. It was my first call, my first customer. But at the end of the meeting, Craig McCaw pulled me aside and said, "My mother likes you better than Steve." I said, "Why is that?" He said, "Because you have short hair and he doesn't." So we got along great. They hired us and we put together a very attractive package for Craig. He had been personally guaranteeing his loans, and we got him off the personal guarantees. We got him more money. We got him the ability to finance the acquisition of some cable systems in Alaska that were important to his expansion plans.
But the biggest thing we did for Craig was to teach him that borrowing money from a bank would always be a function of cash flow. At that time, five times cash flow was the industry standard. As soon as Craig understood what he had to do to qualify for more money, he began to focus on cash flow. Up to that time, I don't think he had a good understanding of what banks were looking for. But he caught on very quickly. Then, of course, he completed numerous acquisitions. Later, we introduced him to Affiliated Publications, the publisher of the Boston Globe newspaper. They bought 45% of Craig's company for $12 million. That was really all Craig needed. Affiliated was a blue chip, old line, East Coast company. Craig and his people used Affiliated very cleverly as a lever to get more debt and buy more cable systems.
So over the next 3 – 4 years, I think I did 18 deals with Craig. It was almost like every couple of months, I'd get a call from Craig saying, "I got another deal for you. Let's go. I want to buy this," or "I need more money," or "I need equity" – do this or do that. So it was a good relationship. It was a lot of fun.
In 1987, one of Craig's officers, Ed Hopper, convinced him it was time to sell the cable operation. So Craig listed his properties with us. By that time, he had over 400,000 subscribers. If you turn the clock back just seven years or so when I had first worked with Craig, back then he had about 10,000 subscribers. So that's how fast he had grown in such a short time. That was virtually all by acquisition. The tax laws were, and still are, very advantageous to operators who acquire cable TV systems.
There were two advantages that were built into the tax code that, even to this day, I'm not sure the IRS quite understands. One is that when you buy a cable TV system, you can write the assets up far beyond their original cost. Then you can depreciate those assets and you can create paper losses. So you might buy a cable system where the owner paid $100,000 for his assets. But you might be able to write those up as $500,000 - $600,000. It's called writing up to fair market value. You can also allocate part of the purchase price against the franchise and then amortize the franchise over its remaining life. So both of those things – the ability to aggressively depreciate equipment and amortize franchises – create huge, artificial losses which shelter income from taxes.
The other thing buyers can do is write off interest expenses. So guys like Craig would borrow as much money as they could. In fact, Bob Magness, the man who built TCI, had a motto: don't pay taxes, pay interest. I don't think TCI paid taxes for a long time. In the meantime, they built an enormous amount of wealth. This was very common and cable operators still do this. In fact it's done in a lot of industries. But cable seems uniquely qualified to be able to avoid taxes this way.
So guys like Craig and Bob Magness and others in the early '80's grew very rapidly by borrowing money and buying companies, writing up their assets as much as they could and simultaneously amortizing their franchises. So effectively, the government subsidized them. Even today, I'm not sure the government understands the benefit they gave cable operators.
So we did a lot of work for Craig and were really helpful in his becoming large and successful. In '88 we brokered his cable systems and Craig reallocated his wealth to cellular business, where he became a billionaire before he was 40. I think by the time he was 37 or 38 he had made his first billion dollars in cellular.
BURKE: Probably a lot of people don't know that he started in cable.
DAVID: Other than Bill Daniels, he was the boldest entrepreneur I ever met.
BURKE: Can you talk a little more about the growth of Daniels because you also probably saw an impressive growth in the cable industry as well as the firm you were working for.
DAVID: Daniels, today, is not the Daniels of twenty years ago. Back then, it was a very informal organization, primarily brokerage related. It was very sales oriented. Our brokers typically came from companies like Xerox or IBM. They were usually salesmen from other sales oriented firms. That was the skill set of people we had.
Our brokers were all extroverts who had great personalities and loved to party and entertain. At the same time, our clients loved this kind of treatment. I guess you could say we were one big extended happy family.
The industry was informal and extremely entrepreneurial, lots of entrepreneurs who loved taking chances, loved being their own bosses, didn't mind failing, very informal kind of guys. The guys that originally came to Sawtooth 20 years ago were pretty much like that.
Today it's very different. Today the industry has gotten very sophisticated, and so all the people we hire at Daniels have MBA's or something very close to it. We might have one or two guys without MBA's, but it's pretty unusual. They're all very quantitative people. They love to work with numbers, love to work with financial projections. We do stock market comparables, we follow cable stocks and other stocks that are relevant to us and make metrics available to our clients. So we've gotten largely away from the kind of "salesy", good old boy kind of approach to very much a numbers approach.
BURKE: Is there an analogy that maybe Daniels grew up or grew as the cable industry grew up?
BURKE: Obviously when you joined, it was probably something like a teenager.
DAVID: Maybe an early teenager, maybe an adolescent actually. One thing that never changed was Bill's energy level. Even in '79 and '80, Bill was doing other things besides cable TV brokerage. He was becoming more active as an operator. He founded a company called Prime Sports that was actually originally called Box Seat. As I think everybody knows, we bought and owned cable TV systems at Daniels. Bill was very active in that. So Bill was beginning to move out of the brokerage area when I got there, although he still did deals from time to time.
I'd like to talk about the things that have not changed - our company had what I would call a rudder that always kept us on track. There are three things to talk about. One was Bill's commitment to excellence. I hate to borrow a term from the Oakland Raiders, but just like Al Davis is committed to excellence, Bill was too. Everything that Bill did had to be first class.
BURKE: He was highly respected.
DAVID: To use his terminology, "Always first class". Everything he did -whether it be a sales presentation we made or a deal we did for a client or maybe a box we sat in while we watched the Denver Nuggets or the Denver Broncos had to be the best. When Bill entertained people in Las Vegas, you could always count on Bill Daniels having the best seat in the house. Way down in front, right next to the stage. Everything he did always had to go first class. That was a very important value he impressed on us.
Another thing that was extremely important was integrity. Bill was one of the most honest people I've ever met in my life. I don't want to say the most honest because I might be leaving somebody out who was also very ethical. But clearly, Bill was way up there in terms of his honesty, his integrity, his commitment to his word. When Bill gave you his word, his oral word, it was better than most people's written word. So Bill always impressed that on us how important it was to him that we conduct business with complete integrity.
I'll tell you a Bill Daniels story. If you have it already in one of your histories, just stop me. When Bill was tinkering with other stuff besides cable, one of the things he did was to start a basketball team in the American Basketball Association. It was called the Utah Stars. The ABA was popular in the late '70s, lasted for a few years and then went bankrupt in the middle of one season. So Bill's basketball team ... actually the ABA didn't go bankrupt, but several of the teams did. Bill's team went bankrupt, I think, in '77 in mid-season. Bill didn't really have any assets, didn't really have any outside wealth and couldn't save the team. So he put it into bankruptcy. It was extremely hard on him to do that. He went to court, and I think he owed about $700,000, give or take a little bit, that he couldn't pay. A lot of that was to season ticket owners, people who had paid for a full year of tickets but because the team went belly-up in mid-season only got a chance to watch half the games. So Bill owed them money and players and vendors and so forth. So the bankruptcy court, as they usually do in these cases, reduced his debt to $.10 - $.20 on the dollar and then gave him seven years or so to pay it off with a modest amount of interest. Bill agreed to that. As I said, that was very hard on him.
In the early '80s, Bill sold some cable systems that were previously thought to be worthless. I think Bill walked away with about $30 million. He gave a lot of that to his employees as he always did. Then he went back to Salt Lake, back to the bankruptcy judge, asked that the case be reopened, explained to the judge that he wanted to pay off everybody 100 cents on the dollar, with interest. So the judge reopened the case, and they got a list of all the people who had lost money due to the Utah Stars bankruptcy, and Bill voluntarily paid them off in full with 8% interest for all the time they had to wait. It cost him about $1 - $1.5 million to do that. That was just Bill's idea of integrity. Bill always beat that into our heads. I'm sorry I had to digress for a second. I had to tell that story.
BURKE: I'd say that really has a profound impact on the whole industry because other people looked up to him as an example.
DAVID: Till the day he died, people knew about that. So that was the integrity. The last thing was Bill's generosity which is legendary. Every time Bill sold a major asset of his, like a cable system, he always put aside money for the employees. It was anywhere between 30% - 40%, sometimes more. He just gave it away to the employees. He didn't have to, but he just would call his chief people in and say, "Look, I've sold this thing. I walked away with $15 million, and I want to give away $7 million or $5 million to the employees. You figure out how to fairly distribute it." So every time we sold anything, or Bill sold anything, it was happy days at Daniels because you knew a paycheck was coming.
I wanted to highlight these values, because they meant so much to the development of our firm. We've had some rough years at Daniels, some good years, some bad years. But those values were always there, and they're still there today. Last year we had our best year ever. We did about $20 billion in transactions which made us the 15th largest investment banking company in North America. We just had a great year and made a lot of dough. Bill would have been proud because of that, and also because the people running the company continued to operate the way Bill had always operated. We took a large part of the profits and gave it to the employees. Even people that were clerical, the secretaries or administrative associates as they're titled, walked away with bonuses, on average in excess of their annual paychecks. So some person who might have been making $50,000 a year, as a rule, got a bonus of over $50,000. This is our version of the "trickle-down" theory. Everybody got a huge paycheck. We shared the wealth, typical Bill Daniels style. So that's why Daniels is the greatest place in the world to work.
BURKE: Great story. I'm sure people are beating down the door to work there, and if they hear this tape, you'll have a lot of job applications.
DAVID: Well, good. I hope we do. We can always use good people.
BURKE: So the industry, as a whole, had a lot of peaks and valleys. How did that affect you in the brokerage and finance and business aspect?
DAVID: In this business, it's always feast or famine. It's like going out hunting. Sometimes you come back with something, sometimes you don't. It's so cyclical. That's just the way it is. You learn to make hay while the sun shines, and when it doesn't shine, you do the best you can.
The last three or four years, represented the strongest bull market I've ever seen. That's when a lot of people sold at very good prices. But up until that time, the prices really were pretty constant at around 9 to 10 times cash flow. That's kind of what the average deal was. Smaller properties or properties in need of rebuild would be less than that but usually not a whole lot less. Maybe they'd be down to 6 or 7 times cash flow. The really great ones, instead of being 9 or 10 times, might be 11 or 12 times cash flow. Those multiples were very constant for the whole twenty years I've been in the industry, with the exception of ''98 and '99 when they moved up and where the averages became more like 12 or 13 times cash flow.
As far as I know, the only year Daniels lost money was 1991, the year when rereg was passed despite George Bush's veto. That year the company lost a little bit of money. I remember that year because Bill Daniels had to personally borrow money to keep the company afloat. And that year he wrote out a check personally for $2,500 for all the secretaries for a Christmas bonus, explaining that he couldn't give them any more than that, but he was going to give them that much money to do their Christmas shopping. Other than that, we've been at least break-even or profitable every year.
BURKE: Sounds like you had a great mentor and you're working for a company that's leaving quite a legacy.
DAVID: Yes, Bill left quite a legacy. As I'm sure you know from other people you've spoken with, Liz, he was a very flamboyant person.
BURKE: Everyone remembered him.
DAVID: He deprived himself of nothing in the way of any material pleasure, his cars, Lear jet, just everything. But the thing that really made him great were those three things that I mentioned: his commitment to excellence, rock solid integrity, but most of all, his incredible generosity.
After he died, many people close to him like Brian Deevy, the chairman of our company, took it very hard. I remember asking Brian about a month after he died, "Do you find yourself thinking about Bill quite a bit?" He said, "Yes, I think about him all the time. There's just nobody else like him. We'll never see another guy like him." And that's true.
BURKE: Very unique.
DAVID: Yes, very unique.
BURKE: Well, you've had a lot of experience with other cable systems. It seems to me you were more involved in the Pacific northwest. You did some deals in Alaska. What was that like in comparison to some of the other areas of the country? Actually before we get into the northwest, let's have a few more Bill Daniels stories because it seems like we can look forward to hearing about him when his book is published at some point.
DAVID: I'll tell you one. One of Bill's hobbies was doing things other than cable TV. Everything he did in cable always made money. But outside of cable, he would invest in goofy stuff that often did not make money. He backed a boxer named Ron Lyle. He actually got Ron Lyle out of prison and then had a falling out with him. Then he backed an Indianapolis race car one year, which didn't win and cost Bill money.
I didn't know about this personally, but I understood there was some guy that approached Bill with a novel idea for a parking lot. He invented a parking lot shaped like a Ferris wheel. The wheel would turn until it was loaded with cars. That way it wouldn't take up too much space. Bill invested money in that. That went belly-up. I've already talked about the Utah Stars.
And also Bill put money in the USFL, United States Football League. One of Bill's guys, Tony Acone, approached Bill and I think got Bill excited. Though in fairness to Tony, I'm not sure if that was Tony's idea or not, but I think it was. So Bill invested some money in the USFL, got some Hollywood people to invest with him, the actor Lee Majors was one of Bill's investors and I think there were others. They initially had a team in Phoenix. Then they learned that there was an opening in LA for a team so they quickly moved the team to Los Angeles before the season began. The name of the team was the LA Express. I remember one of the bumper stickers read, "LA Express – Jump On". As everybody knows, the USFL turned out to be a real disaster. It lost money from its inception.
Bill initially put a couple of million dollars into it, and then borrowed money to keep it afloat. Ultimately, he incurred debts in excess of $10 million. It just kept losing money like crazy. For years, his personal advisors, Bob Nagle, Tom Marinkovich, John Saeman, kept saying, "Bill, you've got to get out of this investment. It's terrible. It's not working. We've got to bail out." For years, Bill refused. Then finally one day Bill caved in and said, "Okay, you guys are just driving me nuts. It's easier to sell it than it is to keep listening to you tell me what a fool I am to have invested in this thing."
So they located some guy in Los Angeles, some real estate investor ... I'm telling you this story third hand as Bob Nagle told it to me. This guy was willing to buy the team and assume all debts plus give the owners $1 million in cash. So they sold the team. This buyer had a very novel approach as to what he was going to do with the team and how he was going to make money. As Bob Nagle tells the story, they were at the closing and were sitting at this guy's desk. I guess the guy really was very pushy, very aggressive. In the contract it specified that he pay Bill and his investors $1 million in certified funds.
Bob Nagle happened to notice that on the gentleman's desk were personal checks totaling $1 million, but not certified checks. So Bob leaned over to Bill and said, "I hate to be a pain in the neck. I know I'm an attorney and attorneys always cause trouble, but this guy doesn't plan to pay you with certified funds like the contract says. He's got personal checks on his desk. What do you want to do about it?" Bill said, "The contract says certified funds. Certified funds is what we're going to get." So Nagle got the buyer's attention, "Excuse me, sir. Excuse me, sir. You're supposed to pay us in certified funds and the check here is a personal check. That's not really what you're supposed to do." The buyer came unglued. He started screaming at him, abusing him, berating him, telling him how much he hated lawyers, how lawyers had screwed up deals and made everybody's life difficult.
So wisely, Bill, who I don't think was afraid of a thing in his life, just sat there and didn't say anything. He let this guy finish. Just like a big balloon, ultimately he was out of air, out of energy. After just screaming and yelling and being verbally abusive to Bob, he calmed down. When he was done, Bill looked at him and said, "I don't like lawyers either because I'm an entrepreneur, just like you are. Tell you what, let's just settle this man to man. You owe me $1 million. The contract says it's in certified funds. So here's what we'll do. I'll flip you for it." So he pulled out a quarter and said, "I'll flip you for the $1 million. If you win, you can have the team free and we'll all walk out of here right now. But if we win, we get $2 million but, damn it, we want it in certified funds."
So the guy was just silent for the longest time and then said, "Okay. Come back tomorrow. I'll give you certified funds." They came back the next day and sure enough, the guy had a $1 million certified check for Bill. Bill was willing to risk $1 million on the flip of a coin, just as a matter of principle.
BURKE: He often knew how to settle a deal.
DAVID: Yes. I think Bill knew the guy would cave in. He was pretty good at reading people. So in his mind there was never much risk. It was just kind of a game he played.
BURKE: Exactly. That's how deals are done.
DAVID: That's how deals are done. So that's a Bill Daniels story.
BURKE: Probably not the first deal that was done with the flip of a coin.
DAVID: Probably not.
BURKE: Nor will it be the last.
DAVID: That's right.
BURKE: Well, you have really survived a lot of changes in the industry, and probably worked for one of the greatest places to work.
DAVID: Absolutely. You couldn't ask for a nicer place to work.
BURKE: And in the industry, you probably met all types because you were dealing with a highly entrepreneurial population, many of them financing this on their own. The original deals, it seemed like, in the beginning were very highly leveraged which probably made them difficult to finance. Was that a problem for you with your banker's perspective, or did you just fit the mold and go on with the cable industry?
DAVID: Actually cable always was a very good business. If you look at the bankruptcies of cable companies, it was very, very small. Cable TV, in hindsight, was virtually a risk-free investment.
BURKE: That says a lot.
DAVID: On the other hand, if you or I were to start our own business today, the odds we'd still be in business in 5 years would be about 1 in 10. In other words, the failure of new businesses is about 90%. Cable is, I think, less than 1%. The reason is that cable had a monopoly. We don't like to talk about that and didn't like to say it. But in effect, there was nobody else doing what we were doing. We were bringing television to people who couldn't get it any other way. So for years and years, we did that. It actually was never that hard for decent cable operators to get financing because their business was fundamentally sound. It really was a great business.
BURKE: That's good to hear. With respect to the last few years, there's been a heavy consolidation of fewer players. When you started, there were probably a multitude of players. How did you get to the operators? What was your entrée and what were some of the deals that you were involved with?
DAVID: We just do everything that brokers do to try to get themselves known. We would advertise quite a bit. We always had a very active advertising program. There is a fellow at Daniels named Bob Russo who has been with the company almost as long as I've been with the company.
BURKE: He's very well known too.
DAVID: Bob runs our marketing effort, always has run it. We also attend conventions. We have parties. We do extensive calling on operators. Most of the business we actually get, though, Liz, is repeat business. It's very much a relationship business. So if we work for an operator, an operator likes us, or maybe we sell an operator a property, and an operator thinks that we really know what we're doing, we'll get a lot of repeat business. An example is Craig McCaw – Craig liked the way we did business, we got deal after deal from him. My guess is we've done twenty deals with Craig in the last twenty years. Almost all of those were in the first few years when he was still relatively small. After he sold the cable business, he went to Wall Street and used other people to raise financing.
There's a company in Pennsylvania, Tele-Media, owned by two partners named Bob Tudek and Everett Mundy. Tele-Media is another example of a company that we've just done deal after deal with, a lot of repeat business. We do everything to make ourselves known. We do a lot of cold calling. In the early days, I would spend time on the phone all the time just calling people out of the blue and saying, "Hi, here I am. Can I help you? How are things going?" Usually I found cable operators pretty friendly, pretty willing to talk.
BURKE: Did you feel like you were dealing with a fairly unique group in a fairly interesting business?
DAVID: At the time, I think I didn't understand how unique it was because I was new to the investment banking business. But it was very unique. It was a fertile place to be a broker. In our business, you want work in an industry where there are lots of entrepreneurs – number one. Number two, you want a cash flow business that has recurring revenue and recurring cash flow. Third, you want a business that's relatively uniform so you can understand it and you can predict it. Pretty soon, people will regard you as an expert in the industry. And finally, the fourth characteristic we look for is industries where there are many buyers and many sellers. If you find an industry with those four characteristics, you're pretty lucky. Cable had all four characteristics in spades. I don't think we realized how fortunate we were, but it really was the place to be at the time.
BURKE: Right place, right time.
DAVID: Right place right time.
BURKE: Let's talk a little bit about cable product in the growth of cable. Cable started out pretty small and it tended to get bigger and bigger as more programming was available and people developed their systems and people needed financing to develop their systems. What kind of growth did you see with your business in relation to that?
DAVID: It grew at the same rate. We're very much tied to the industry's fortunes. As I mentioned earlier, the industry stagnated until the late '70s. The cable industry really did struggle quite a bit. It really wasn't until pay TV became available that cable began to get interesting. Then when Ted Turner announced he was going to put Turner Broadcasting – I think it was Channel 17 at the time – on the satellite, that was a major breakthrough. Then CNN and HBO went up on the satellite. Then we had ESPN shortly after that. So we went from having a dearth of channels in the '70s to, in the early '80's, having more and more channels unique to cable. Also, the courts began siding with us and not the broadcasters. Finally, Congress passed legislation that was quite favorable to us. They actually deregulated the cable business in the mid or early 80's.
BURKE: The first time.
DAVID: The first time. And that was a huge step forward. We just seemed to always win court battles. When it came to must carry, there was a fellow in Washington State who successfully fought the must carry rules which meant we no longer had to carry every single channel in town. It just seemed like from about 1979 to about 1990, every few months something good would happen to the industry. We always had more product to sell. The equipment was getting better, more reliable, more channels were available, people were becoming more sophisticated, rates continued to go up, court decisions continued to go our way. I would say the '80's were clearly the Golden Age of cable. As the industry grew up and operators got wealthier and wealthier, we had bigger properties to sell so we prospered accordingly.
BURKE: Now of course as they grew, they needed equipment, they needed rebuilds, they needed money. Were you involved in that process?
DAVID: We were involved in raising money for them. We raised a lot of financing for cable operators. Actually I think one of Bill's biggest contributions to the industry is that he really did make it legitimate by bringing the media companies into cable. The media players who entered the business in the late '70's or early '80's, almost all came through Bill. Not all of them, but most of them did.
BURKE: Can you give me a few examples?
DAVID: Sure. A company that's now part of Time Warner, used to be ATC, was really started by Bill. Bill started that as a private company and took it public. Monty Rifkin, who had been Bill's financial person, ran ATC for years. Then it was bought by Time, Inc. So that's how Time got into the business. Newhouse, Times Mirror, The Chicago Tribune, Sammons, Buford Television all entered the business through us. Affiliated Publications, as I talked about earlier, came into the business through us.
BURKE: Now how did that specifically help the cable operators?
DAVID: It gave them legitimacy and it gave them financing, two things they hadn't had before. Even the cable operators in the '70s would occasionally ridicule themselves for being in an industry having questionable prospects. All of a sudden, here were major media companies pouring millions of dollars into the business. These companies were extremely well-funded. They were not push-overs for the networks either. So all of a sudden there was wave after wave of major media people, and the network's stranglehold on television became a thing of the past.
BURKE: With that came financing and that was also the time of bond raising and the Drexel junk bonds. Did that affect your market in Denver?
DAVID: It actually didn't affect cable that much. Cable was pretty legitimate by then. That was primarily the late '80's. I don't know if Mike Milliken did any junk financing specifically for cable. He did some for Craig McCaw, primarily in Craig's cellular business. That was after Craig got out of the cable business.
BURKE: So it didn't affect your business a whole lot.
DAVID: Not a whole lot.
DAVID: There was actually a lot of financing available for cable by the late '80s.
BURKE: You know, a theme that we can return to is where the industry was 20 years ago and where it is today. Do you have any thoughts on where it's going?
DAVID: That's a good question. As I think I mentioned earlier, the cable business has always really been funded by the video side of the business. I've been around for 20 years, and I've seen a lot of non-video services come and go. Typically, they've not been attractive. Basic cable has provided most of the cash flow, pay TV a little bit more, and the more exotic forms of pay TV like pay-per-view have also provided some cash flow.
But now, there is a major push which I think is going to be a little bit different - that is to get us in the data business. So internet access, for example, is something more and more people are talking about. It so happens that cable has a huge advantage when it comes to internet access because their pipe is so big. I'm not sure how profitable that product is right now. I tend to think it probably isn't yet profitable for cable systems. But I think you'll see more data, more internet access, that kind of thing.
When it comes to telephone, I'm probably a little bit skeptical only because if cable does get into the telephony business in a big way, they're going to find themselves dealing mostly with residential telephony users. The fact is, most telephone companies actually lose money on the residential business. They make it on the business side. So I know cable is pushing into the telephone business. Between you and me, I'm skeptical. I think what you'll see is more of the same, bigger cable systems, more video product, more channels. Then you will see cable quite active in the data business. One of these days, you and I will probably hook up our computers to a cable modem and get internet access that way.
There was a business on the Internet side that still actually does exist, called DSL, started by the telephone companies. DSL was the internet industry's answer to the enormous speed which cable could provide for internet access. DSL has not really fared very well. It has floundered. It's a pretty good product, but for a variety of reasons, it just has never gotten off the ground.
BURKE: The roll-out's been tough.
DAVID: The roll-out's been tough and a lot of DSL providers have had real financial difficulties.
BURKE: Of course, cable has the opportunity to go into the same markets where they already are.
BURKE: In terms of infrastructure, do you see that cable operators are again going to be borrowing money, raising equity? Is that on the horizon?
DAVID: Well, they've done that all the time. I think you'll see more of the same. Cable has been a good industry to loan money to because the cash flow is so predictable. I think, in fact, it's kind of incredible how constant the ratios have been in terms of what cable operators can borrow based on their cash flow. As I said before, cable systems have typically traded for around 9 to 10 times cash flow. They've been able to get bank financing to the extent of about five times cash flow. When they go in the junk bond market, for those sorts of instruments, they can usually borrow seven to eight times cash flow. Those ratios really have not changed very much at all throughout the years. So I think you'll see a continuation of that.
BURKE: It actually continues to be a very viable business.
DAVID: Very viable business. One thing that has changed, pretty dramatically, is that it was at one time extremely decentralized. Now the largest seven companies in the industry control maybe 80% of the industry. That is relatively new. That phenomenon wasn't true even as recently as two or three years ago, but it is today. And you'll probably see more of the same – more consolidation, fewer operators.
BURKE: So does that change the way you think you'll be doing business and what your job will be?
DAVID: We wonder if we're going to have a job after the industry's consolidated into one company. But it just doesn't seem to really put us out of business because even though you have very large operators controlling very large segments of the business, they're still active in trading cable systems or occasionally active in shedding systems. Others are active in buying systems. When I first came to Daniels 22 years ago, I thought that I might have a career of five years because I thought, at some point, this is all going to consolidate, and I'll have to do something else. Yet, last year we had our best year ever.
BURKE: Still busy.
DAVID: My five year prediction wasn't very accurate.
BURKE: We've talked a lot about the cable industry. You've mentioned a few key people to you. Are there other people, fond memories that really have influenced you or have been important to your viewpoint?
DAVID: Craig McCaw clearly was a pioneer, in terms of his aggressiveness, insight, his ability to immediately understand what the industry was all about. Many people didn't do that. But Craig did it quickly and went on to become very wealthy in a very short period of time.
And others were clients I've had throughout the years. I've had some great clients. I had, as I talked about earlier, Bob Tudek of Tele-Media. I remember when I received a job offer from Daniels. I called two of my clients and asked them what they thought about Bill and asked their advice about joining Daniels. Bob was one of those two people. I said, "Bob, I have a chance to go to a company in Denver called Daniels. I'm going to be a commissioned broker, and if it works out, I can make a lot of money and have a lot of fun and have a nice career. But if I don't produce, I'm going to be out on my ear because either you have to produce or you're just gone. So it's a high-risk deal, and I could end up losing everything. I can do that or I can continue to work for a bank and have a great deal of security so I'm kind of torn. Should I take the job with security or take the job with a great deal of risk?"
Bob said to me, "There are only two things in life, Tim, that give you security. One is your net worth. The other one is your wits, your brains. Everything else is an illusion. So don't think that just because you work for a bank, you have security. It isn't there." So I thought about Bob's advice, and I'm not sure I would give quite that same advice to people today. But anyway, based on Bob's advice, I came to Daniels and never looked back. Bob Tudek is a great guy.
I met some great people in the Pacific northwest. Many here at Sawtooth are very good friends – Jim Hirshfield, Gene Twiner, Ed Hewson, people like that who have just been great throughout the years. There's an operator in the northwest named John Wetzel, one of the finest gentlemen I've ever met. He's a very honest and decent person.
When I was a banker in Cleveland, the last loan I made was to John Rigas. At that time he was struggling to get bank financing. I was able to loan him money to buy the system in Dunkirk/Fredonia, New York, two little towns along Lake Erie. That was the last deal I did, and then within two months, I was gone. John never forgot about that. Even to this day, John will say, "Oh, yeah, you're the guy that loaned me that money back then when I needed it." John is one of the nicest people you'll ever meet. He has great integrity, is very willing to pour back money into his community. There are just a lot of great people. I can't tell you all the great people I've met, really nice people.
BURKE: Well, in closing, are there any thoughts or insights into cable or particular things that you'd like to mention that you think have been really important to you?
DAVID: I think the one thing I'd like to leave you with is just the notion of how lucky I think I am to have been in this industry. I entered it at the beginning of what I would call the Golden Years. I started in the late '70's and came to Daniels in '79. So I've been in the best industry you could be in. I've worked for the best company in the industry, and in my opinion, the best employer. I just look back and can't believe all the great things that have happened to me. I think this has been a great place to be with people who are a lot of fun.
Again, I've talked a lot about Bill. I could probably go on and on for the longest time about Bill. But he was clearly one of the best guys you could ever hope to work for.
BURKE: I'd just like to thank you for your time when you could be skiing. It's still light out there.
DAVID: Thank you very much. We'll have to do some more tomorrow.
BURKE: We'll look forward to seeing you back at The Cable Center in Denver which will be in your back yard.
DAVID: Great, Liz. We'll do it. Take care.
BURKE: Any more Bill Daniel's stories?
DAVID: His divorce went through in the early '80's. He was still very active in dating different women. He would be very generous to gals after he broke up with them. So breaking up from Bill could have been one of the more profitable things you ever did. He was known to buy his ex-girlfriends very expensive gifts and be very generous to them. He was always a sucker for pretty women. He'd be the first one to tell you that. He liked to be around them, and they found it very easy to twist him around their little finger.
Bill had a friend who helped him get the Denver cable franchise, a guy named Bob Lee. Bob has passed away about two years ago. He and Bob were very close. Bob was Bill's political advisor for years and years. Bob was very active in the Republican party in Colorado. Then as Bob got older, he just got to be a very close personal friend of Bill's. Bill would confide a lot in him, in terms of his personal life. Bob always thought that Bill was really a dummy when it came to women.
I think in about the late '80's, maybe almost 1990, one of the Denver newspapers – the Rocky Mountain News – did a story on Bill. The theme of the story is "What is it like to work for Bill Daniels?" They wanted to talk to all of Bill's long-time employees. I had been there about ten years by then, so I was considered a long-time employee, as was Bob Lee, and a handful of others. So we met privately with reporters from the Rocky Mountain News and told Bill Daniels stories, and so forth. I did all the politically correct things in my interview. I said, "I was glad to be there, wonderful place, blah, blah, blah" I said all the things Bill would have been proud to hear. When it came to Bob Lee's interview, however, they asked Bob Lee about Bill Daniels. Bob said, "I'll tell you one thing – he's a dumb SOB when it comes to women," and they printed it! That was in the Sunday edition of the Rocky Mountain News.
When Bob read his comments the next morning, he just about fell out of the chair at the kitchen table, wondering what he was going to do. So he spent all day worrying about it and thinking about and thinking what he was going to tell Bill when he came into work Monday morning, couldn't sleep that night. He concocted this very strange explanation. So finally early Monday morning rolled around, and Bob walked into Bill's office. He said, "Hey, you know – about that interview yesterday, I'm really sorry. They took that out of context. I really didn't mean to say that." Bill said, "Oh, about the dumb SOB thing? Just forget it. You and I both know it's true." So that was the end of the story. That was the end of the whole thing. Nothing happened to Bob because Bill knew it was true.
BURKE: It was true.
DAVID: That's it.
BURKE: Thanks Tim.