Private equity firms typically want to exit their investments within 5 years, usually by taking the company public after they have sold off non-core assets and fired all the employees key to running the company to make the remaining shell look profitable. The new IPO will likely fail in a year or two once the buyers realize they bought only the facade of a former company, but by then the PE vultures are long gone.
It’s the five year anniversary of Clear Channel (recently renamed iHeartMedia) going Private. The total deal was about $26 billion in financing. The TV stations were immediately sold to lower the debt. In addition to the radio stations and related subsidiaries (Premiere syndication, Katz advertising rep), the parent company owns most of Clear Channel Outdoors. If you pay attention, they’re big in outdoor billboards (especially the Jumbotron versions) and advertising inside airports. They also are in that business in Europe – which is generally less receptive to outdoor advertising. Instead, Clear Channel has deals to build shelters at transit stops and in return is allowed to put advertising on them.
Clear Channel has made no progress in paying down its $20 billion in debt in five years – the best they can manage is to delay and extend the payments. There are three things happening at the moment which suggest to me that the two Private equity firms have decided to kill iHeart and salvage what they can, then default on the debt.
First, they have been firing sales people and program directors for the past week. Estimates published by others are that as many as 1/3 of the employees are being fired by year end. Firing sales people generally affects future revenue, but if you’re not interested in the future, that doesn’t matter.
Secondly, and more convincing is a deal has been announced that Clear Channel is selling off all (90+%) of its antennas. It’s a horrible deal. Clear Channel currently earns $11 million a year renting space on those antenna towers to others (mostly to wireless phone operators). They are getting $400 million, but then they lose the $11 million a year, will have to pay $15 million in rent to use those towers and lose all potential new revenue from new tower tenants, a booming business.
The third item is still at the rumor stage – that IHeart is going to divest the European assets of Clear Channel Outdoors into a Real estate Investment Trust (REIT) and might do the same in the United States.
Strip away the towers and Clear Channel Outdoors assets and what you have left is real debt and intangible assets (FCC licenses) for a business that just had a 3% year over year decline in revenue in the middle of an economic upturn and a key election.
Because Clear Channel Outdoors has some publicly traded stock and bonds, this forces Clear Channel to give the SEC financial reports that would not be available if the “private” ownership was fully privately owned.
http://www.nasdaq.com/symbol/cco/real-time
Latest 10-Q
CCO has tangible assets of around $2 billion and long term debt of about $5 billion. When Clear Channel was close to failing, they had CCO issue more debt, then loan the proceeds to the mother ship, screwing the CCO stockholders. The mother ship currently owes CCO $875 million. CCO lost $125 million in the first 9 months of 2014 (remember this is not the radio business) Shareholder equity is now a negative -$132 million, assuming that the mother ship doesn’t default on its $875 million in loans. Gross margins on the non-American operations are small due to the high operating expenses.
Even if the Private Equity firms pull a rabbit out of the hat through clever accounting, big change is coming, and none of it is good.