Investor’ Donnybrook Breaks Out As Yankees, Rattner Clear Bench

Leo Hindery, the cable veteran and chief executive of George

Steinbrenner’s new sports station, was on a conference call, oozing his special

brand of confidence and boardroom bonhomie. It was Sept. 10, and he was

announcing the culmination of months of negotiation: the formation of the YES

network, born out of the burgeoning YankeeNets sports empire.

“TheNewYork Yankees are the most legendary team in professional

sports,” Mr. Hinderysaid.Then, clarifying a key point about how this new cable

station might prevail, he said, “It is our intention that the YES network be

part of the basic package available to all subscribers.”

There it was: a network ready to broadcast 125 Yankee games next

year, a new C.E.O., a plan for success and even office space at the Chrysler

Tower. All that was needed was for the network’s two main investors, Goldman

Sachs Inc. and Steven Rattner’s Quadrangle Group, to close on their joint $300

million investment.

That seemed to be the easy part: “With this deal, you could say

yes on the phone,” Mr. Rattner was quoted in the next day’s New York Times .

Yet one week later, after everything else in New York had

changed, the YES deal did, too. On Sept. 17, Yankee president Randy Levine

received a call from Mr. Rattner, Quadrangle’s founder and high-profile

principal partner, saying Quadrangle and co-investorAmos Hostetter were

withdrawing their $160 million contribution to the deal. Goldman Sachs then

quickly stepped in, and the deal closed a week later.

But what had happened to Mr. Rattner, the former New York Times reporter, intimate of the

Gores and Clintons and onetime protégé of Lazard Freres legend Felix Rohatyn?

He was an all-star investment banker if ever there was one-the dean of media

and cable investment bankers. Along with three partners from his old firm, Mr.

Rattner had recently reinvented himself as a private equity investor, and they

seemed to be a perfect fit for the Yankees.

Looking back, however, there were hints as early as August-and

certainly as the negotiations dragged on into September-that something was

wrong. According to Mr. Rattner, it was this: He and his partner, Peter

Ezersky, had concluded that Mr. Hindery for one, and the Yankees in particular,

were asking too much of them given the heft of their investment. They objected

to the salary they were paying Mr. Hindery, his expensive and top-heavy

administrative team, the governance structure that had been established and

what they claimed was an escalating rights fee the network would pay the

YankeeNets.

“While no single change caused us to leave, cumulatively they

made the deal significantly less economically appealing,” Mr. Rattner said in a

statement. “Combined with an unwieldy and difficult governance situation, the

deal became uninteresting.”

To which Mr. Hindery, never one to hedge, responded: “I have all

the respect for Steve Rattner, who has never run a business in his life. All of

these items were budgeted in July, including my own compensation. There are no

surprises here. This is just a guy who does not want to do a deal.”

Asked to reply, a Quadrangle spokesman said: “All the parties,

including Leo, have agreed to limit our comments. We prefer to respect that

legally binding agreement.”

In the clubby little cable industry, it rarely comes to this.

Certainly, Mr. Rattner, Mr. Hindery and Mr. Hostetter have been doing deals

together for 15 years.

But these are high-profile dealmakers in tough economic times. In

this milieu, china doesn’t just crack, it shatters. And so it seems it has

here.

The

finance deal for the YES network dates to May, when Goldman Sachs media

banker Joe Ravitch began discussions with Mr. Levine. The Yankees had finally

cut the cord with their 12-year partner, Cablevision’s MSG network.They needed

a new partner.

From the start, Goldman had a C.E.O. in mind: Leo Hindery.

Goldman bankers had worked closely with Mr. Hindery at his various stops as a

top executive at TCI, AT&T Broadband and, most recently, Global Crossing.

Mr. Hindery had become famous in selling John Malone’s TCI to AT&T for $70

billion. He was a dealmaker to the bone and, Mr. Ravitch said, always made

money for his shareholders. Besides, he was the perfect Steinbrenner guy:

brassy, in his office by 5 a.m., a world-class race-car driver.

In early June, in a suite at the Regency Hotel, Mr. Ravitch

introduced Mr. Hindery to Mr. Steinbrenner. Sharing Catholic-school upbringings

and baseball buddies, they hit it off. Goldman bankers felt sure they had a

deal.

Numbers were crunched, and the network was valued at $800

million. Goldman was set to invest $300 million for a 40 percent minority stake

through a series of its private equity funds.

But as Mr. Ravitch was working his end, New Jersey Net co-owner

and YankeeNet board member Ray Chambers had entered into discussions with Mr.

Rattner and Quadrangle.

For Mr. Rattner and his three partners-Mr. Ezersky, Joshua

Steiner and David Tanner-the timing was perfect. They would be closing their

first billion-dollar fund in July. High-profile investors included Mike Ovitz,

Harvey Weinstein (who is in talks with the Yankees about joining the YES

board), and cable titans Amos Hostetter and Comcast chief executive Brian

Roberts (both advisory board members). The YES investment would be their

biggest to date, at $150 million, but the potential, they thought, was infinite.

In mid-June, the YankeeNet board was convened at its offices in

Rockefeller Center. James Murdoch, son of Rupert, was there, as well as Mr.

Steinbrenner, Mr. Chambers, and Mr. Chambers’ partner and co-owner of the Nets,

Lewis Katz. Goldman Sachs and Mr. Ravitch made their case, highlighting Mr.

Hindery’s role as C.E.O. Only he, they contended, could cut a deal with

Cablevision’s Chuck Dolan to put the network on basic cable service, a key to

its success.

Mr. Rattner and Mr. Ezersky then spoke. Mr. Rattner’s cable guy

was Mr. Hostetter, who was conferenced in from his Boston offices. An

influential AT&T board member, he is the founder of Continental

Cablevision, an original cable franchise, and widely recognized as one of the

cable industry’s visionaries. 

At the outset, it became clear that they were not in favor of Mr.

Hindery, people at the meeting said. Quadrangle partners were well aware of Mr.

Hindery’s volatile history at AT&T and Global Crossing-both high-profile

jobs with short tenures and a trail of less-than-fond memories. They also saw

the $800 million network as too small for Mr. Hindery’s appetites. Their plan

was to close the deal first, make Mr. Hostetter chairman and then find a C.E.O.

The board, impressed with both presentations, pitched another

idea to Mr. Rattner and Mr. Ravitch: We like you both; figure out how to split

the deal.

Immediately, Mr. Hindery’s salary came up. YankeeNet chairman

Harvey Schiller got $2 million; Mr. Hindery wanted $500,000, plus $250,000 for

his expenses and his private plane, according to YankeeNet officials. (Mr.

Rattner contends that Mr. Hindery initially offered to decline a salary, which

Mr. Hindery denies.) In addition, he wanted a large administrative staff, some

with salaries of $400,000.

Mr. Rattner and his team blanched. While a $500,000 salary is not

beyond the pale for a TV executive, especially a cable bigwig of Mr. Hindery’s

stature, the network was, in Quadrangle’s eyes, a start-up, in one of the worst

advertising climates in a decade.

Then there was the fee to be paid to YankeeNets for broadcast

rights, which Quadrangle partners say was increased from the initial amount.

YankeeNet officials say the Yankees fee was always $52 million, while the fee

for the Nets has yet to be decided. But, when added to administrative costs of

some $40 million, it meant $100 million in costs from opening day in March-and

this before even reaching an agreement with the cable companies over carriage,

or meeting with any advertisers.

Tempers flared. Did Mr.

Hindery really need a plane to fly to the Bronx, Quadrangle partners queried?

Mr. Hindery is a world-class executive, Goldman bankers countered.

“Leo is a rock star,” said Mr. Ravitch. “This is what you do when

you hire a guy of this caliber.”

On several occasions, Quadrangle came close to pulling out. By

then, it had gotten personal. Goldman bankers, meanwhile, attached a provision

that would prevent Quadrangle from firing Mr. Hindery.

But that wasn’t the final straw. In mid-August, Mr. Rattner and

his team were told that Mr. Hindery, who already had reduced his stake from $35

million to $15 million for personal financial reasons, had secretly sold off $5

million of it to prospective board member Bill Bresnan. Mr. Hindery denies that

he attempted to sell any such stake. Both sides, especially his Goldman

backers, weren’t happy about Mr. Hindery’s first downsizing. For him to offload

the rest would be a deal breaker.

“Did we like the fact that Leo went from 35 to 15? No,” said Mr.

Ravitch. In the end, however, Goldmans saw the $15 million as “a significant

amount. Our interests are aligned.”

His $15 million stake would ensure, bankers hoped, that Mr.

Hindery would fulfill his three-year contract. Nevertheless, Quadrangle bankers

became more wary of Mr. Hindery’s commitment.

At one point, the talks became so nasty that Mr. Hindery came

close to walking away, Mr. Hindery confirms. As he saw it, the Quandrangle

partners seemed to be pushing him to do it-a charge they deny. First they made

Mr. Hostetter chairman; then they attacked his salary, expenses and staff. They

were, in effect, saying they didn’t trust him.

“It had just become needlessly petty, which was unfortunate,”

said Mr. Hindery.

Last on Quadrangle’s complaint list was the YankeeNet insistence

on having Bill Bresnan as the sole independent board director. Mr. Bresnan is a

longtime cable investor and an old friend of Mr. Steinbrenner and Mr. Hindery.

In mid-September, Mr. Rattner and partners also learned that Mr. Bresnan-who is

also a Quadrangle investor-was the father-in-law of Yankee general manager

Brian Cashman.

On Sunday night, Sept. 16, with the deal set to close on Tuesday,

Mr. Rattner called Mr. Levine: Taken with everything else, especially Mr.

Hindery’s attempt to lessen his stake, the Bresnan-Cashman link had tipped the

scale. Quadrangle would have to pull out.

Mr. Steinbrenner, the most forceful advocate for Mr. Bresnan, was

reported to be livid. A believer in the power of institutions, he had always

favored Goldman Sachs as sole investor. But he’d agreed to Quadrangle to

appease his new partner, Mr. Chambers.

He knew little about them. Indeed, after an early meeting,

according to one source close to the deal, Mr. Steinbrenner had commented,

“They’re nice guys, but as far as I can see, they’re just four kids with a lot

of money sitting in an office at Rockefeller Center. I don’t know what they can

do for me.”

A Quadrangle spokesman noted that the firm’s principals have

nearly 60 years of Wall Street, media and communications experience.

Mr. Steinbrenner did not respond to calls for comment.

Neither Mr. Steinbrenner nor Mr. Hindery would budge on Mr.

Bresnan. In their eyes, the Quadrangle partners were looking for an excuse to

get out of the deal.

“It’s not as if we parachuted his name in. There were 100 drafts

where he was named as the independent director,” said Mr. Hindery.

He added: “Bill Bresnan is my

partner and my friend; I’ve known him for 15 years. He is Brian Cashman’s

father-in-law through four grandchildren; I mean, come on.”

Mr. Rattner said, “Bill Bresnan is a wonderful man and would be a

terrific director of any company.”

On Monday, Sept.  17, Mr.

Rattner faxed his investors, who had already sent in funds, informing them that

Quadrangle was out.

For YankeeNet officials, it was a relief.

“From Day 1, Quadrangle felt uncomfortable that they were not the

dominant partner,” said one. “It was clear, too, that they didn’t want Leo

Hindery to be C.E.O. They thought they could surround Leo, and you can’t run a

company that way. At the end of the day, no one lost any sleep over it.”

The Goldman bankers, meanwhile, say their enthusiasm is as great

as ever.

“Remember, all this was right after the World Trade Center

attacks,” said Mr. Ravitch. “For us to double the size of our investment when

we couldn’t get to our offices was a sign of how much we love the deal.”

As for Mr. Rattner and Quadrangle, the bottom line seems clear:

Without greater control, the deal truly wasn’t worthwhile.

Mr. Hindery, meanwhile, is ready to get going. With an office

full of executives working on programming and ad-related issues, he now has to

clear that all-important hurdle: getting Time Warner and Cablevision executives

to add the YES network to their basic cable package-the source of viewers and

ad dollars.

Meanwhile, by opening day

2002, he has to pony up about $28 million to Mr. Steinbrenner, as YES’s right’s

fee. That’s some 180 days away.