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'Blank Check’ Pops IPO

Communications Equity Associates chief J. Patrick “Rick” Michaels has taken to the public markets, raising about $24 million to acquire an interest in a large media company.

Michaels started CEA Acquisition Corp. in February, commencing an initial public offering on Feb. 19. According to the prospectus, CEA issued 4.5 million shares of common stock, including 500,000 shares for underwriter over-allotments at $6 per share.

Each share also included two warrants to purchase additional common shares priced at $5 each, exercisable by Feb. 12, 2005, or by the time CEA Acquisition makes a purchase, whichever comes later.

The stock, traded on the over-the-counter bulletin board under the symbol “CEAC,” was recently priced at $4.75 per share. EarlyBird Capital Inc. was lead underwriter for the offering.


According to the prospectus, CEA Acquisition is looking to invest in a media company — either in radio, broadcast television, or cable television — and to acquire at least a 25% stake in that company.

CEA Acquisition has yet to identify any specific targets.

CEA Acquisition is headed by Michaels, its chairman and CEO, and vice chairman Don Russell. Other company officers include executive vice president Robert Moreyra (formerly principal and executive vice president of Atlantic American Corporate Group) and chief financial officer Brad Gordon. Gordon is also CFO of Communications Equity, a position he has held since 1981.

Russell said that he is looking for companies that are well-managed and need access to capital through the equity markets, but are not large enough to do so.

Russell gave as an example a telecommunications company with $40 million in cash flow and $100 million in debt. Through a private-market valuation, that telecom company may be valued at five times cash flow or $200 million. Minus the debt, the company is worth $100 million.

If that company chose to do a deal with CEA Acquisition, it would receive 19.6 million shares of CEA stock (currently worth about $100 million), access to CEA’s cash (about $20 million) and the ability to use the stock as a deal currency for future deals.

“Our company becomes their IPO,” Russell said.


About 15 of these so-called “blank check” funds — because investors are basically writing a blank check to management — were created in the early 1990s. Late last year, a blank check fund called Millstream Acquisition Co. was formed and purchased a Florida healthcare company (NationsHealth Holdings) in a similar deal.

Russell said that CEA Acquisition would focus mainly on privately held companies, and would not invest in media assets that are already publicly traded. He added that CEA would primarily look at companies with private-market valuations of between $75 million and $200 million.

While this seems to be a departure for CEA — in the past, it had primarily been involved in brokering deals between cable companies — it’s not all that different.

The firm has been involved for years in raising private equity, through the $150 million CEA Capital Partners and $250 million Seaport Capital Partners funds.

Russell, who has been with CEA since 1978 (he was CEA’s first non-owner employee), calls it a logical next step.

“We saw a real opportunity, a great way to make a bunch of money for investors,” Russell said. “This is truly a win-win proposition for everyone involved. We have a reputation and a 20-year track record of returning handsome returns to investors.”

CEA had been one of the premier cable brokers in the industry, and still has about 50 employees devoted to that end of the business. But the cable-systems deal market has been drying up over the past few years — CEA once had 200 employees devoted to cable deals, Russell said.

“The [cable systems] deal market is certainly lacking strength,” Russell said. “It’s not what it used to be.”


So far, investors are mostly private hedge funds with some high-wealth individuals mixed in. Russell said that some of those private individuals are well-known names in the cable industry, but declined to identify them.

Investors will be able to vote on an acquisition and their money will be placed in a trust until a target is identified. Russell said that CEA is looking at several different opportunities, but can’t identify any of them until a deal is struck.

But he said that while CEA is open to anything, a cable systems deal is probably not in the near future.

“There are always opportunities,” Russell said. “But is it [a cable system deal] the most likely scenario? It is not highly likely.”