Oak Hill Capital Invests in In-Flight Phones

As advertised, Oak Hill Capital Partners is starting to make contrarian investments that have some general partners scratching their heads.

Last month, the New York-based firm agreed to buy GTE Airfone from the telecommunications parent company for an undisclosed amount. GTE Airfone operates in-flight payphones on commercial airlines. GTE had been looking to shed the division for some time, and Oak Hill now believes it has found a cheap diamond in the rough, a partner at the firm said.

Chase Securities will act as a lead lender on the deal, which is expected to close this quarter. Several financial buyers who looked at the corporate orphan said they did not place bids on the business.

“We looked at it but we were concerned with the next generation technology issues,” said a GP who invests in telecommunications companies, referring to the possibility that cellular or some new technology might replace the system by the time Oak Hill is ready to exit the investment.

GPs also mentioned that GTE Airfone’s management team was not staying on after the transition.

Oak Hill, however, is comfortable with these issues. Some of that ease is based on the company’s long-term contracts with airlines such as Continental Airlines and Delta Airlines, and that GTE Airfone generates steady cash flow.

A partner at Oak Hill, who declined to be identified, said he believes no new technology is about to replace the in-flight telephone. Airfone products work in a relatively simple way in which calls are transmitted from the plane to a ground switchboard via radio waves.

“It’s inconceivable that anyone can create a satellite system and offer minutes for less money,” he said, adding that the F.A.A. would never allow ground-based cellular service for flights because it could impact navigational readings.

The partner said Oak Hill plans to increase sales in two ways. The company likely will reduce the $3 per minute price that customers now pay to make phone calls, and it will market services to the in-flight crew, who currently do not use the phone, such as data transfer to the ground through the in-flight phone.

Oak Hill has hired Howard Cohen as the company’s chief executive officer. Cohen formerly was CEO of Sidus Systems and Peak Technologies Group, both publicly traded technology integraters.

This marks Oak Hill’s second investment since the group wrapped its $1.55 billion debut fund, after holding a first closing on $1.277 billion in February. The firm last quarter invested $100 million of equity in a $400 million joint venture with MeriStar Hospitality, an overleveraged real estate investment trust, to acquire hotels.