In the accounting business, one of the obligations of auditors is to evaluate whether the business has the resources and income to sustain itself as a business in the future. When the auditor feels the obligation to issue a going concern warning, things are in bad shape.
This warning may be less that anything has changed at iHeart Media (formerly Clear Channel), but rather the standards have changed. In 2014, the Financial Accounting Standards Board (FASB), the non-governmental organization (NGO) that sets the standards upon which audits are based, added a requirement that companies include a going concern statement in quarterly reports. This change was to make US standards more consistent with international norms.
Sears was the first big company to issue a quarterly going concern warning
The fundamental principle of accounting is that a business is a going concern and will continue to operate in the future. If not, the assets of the company in a forced liquidation are likely worth a lot less.
In the case of iheart, the vast majority of the assets are “intangible”, meaning they have no physical presence – real estate, buildings, furniture, transmitters, vehicles, etc. What iheart owns is permission from the FCC to operate radio stations and the resulting income streams. $4 billion in assets is “goodwill”, which is essentially that Clear Channel overpaid during the bidding war in the late 1990s with the idea that the existing business relationships with advertisers will drive future income even in the absence of a tangible asset like a long term contract.
In the event of a forced sale, there is no other radio company that has the resources or legal ability to absorb 800 radio stations. The FCC has been expressing interest in relaxing the rule to permit foreign owners to own US radio stations.
Iheart also owns most of Clear Channel Outdoors, the billboard company, which does have substantial physical assets – but the parent has loaded up CCOH with debt and transferred the proceeds to the parent to avoid being crushed by the $20 billion in long term debt still outstanding from the 2009 transaction that made Clear Channel into a private company. CCOH has $5 billion in long term debt, resulting in a negative owner’s equity of close to a negative $1 billion. Close to $2 billion of their assets are intangible and close to another $billion is IOUs owed by iHeart
“Owners” of iheartmedia common stock have a negative owners equity of almost $11 billion, close to -$100 per share, of which 2/3 is held by the two private equity firms that put together the original deal. As of Friday, IHRT stock closed at $2.75 a share, and IHRT had a loss per share of more than $3 a share. I have no idea what people think they are buying.
In December, the so-called “board of directors” (controlled by the two PE firms) authorized 400 million shares a new non-voting class D common stock and 250 million shares of “blank check” preferred stock, without any limitations (interest rate, convertibility, priority over other owners, etc). Since an IPO seems unlikely, the logical reason one might do that is preparation for a debt for equity swap as part of a financial reorganization. Without the $1.8 billion in interest expense, the Preferred stock equity might be worth something. But the people owning the current class A common stock are along for the ride – the board of directors is not there to protect them.