The sad BANKRUPTING of Radio

The two largest radio companies in America, Cumulus and iHeart Media are BANKRUPT. This means they don’t make enough or have the money to pay their bills and cannot or will not honor their financial commitments.

In Mafia slang, they’re “deadbeats.”

Going all the way back to early British law, bankruptcy was meant to help the creditors collect what was left of a debtor’s assets. These early laws were never meant to forgive the debts of a deadbeat. In fact, the Bankruptcy Clause of the U.S. Constitution basically left it to the states to deal with deadbeats. Debtor’s prisons were common in many states in those days.

The federal government became involved and enacted permanent bankruptcy laws in 1898. These were replaced with comprehensive and more lenient bankruptcy laws in 1978, which govern bankruptcies today.

Today’s bankruptcy laws serve three purposes:

  1. to help creditors deal with an insolvent debtor,
  2. to provide a “fresh start” to debtors,
  3. to save and preserve the concern in financial stress rather than forcing liquidation.

You can say current bankruptcy laws provide more support to debtors and may even reward them for taking foolish financial risks.

We have become a forgiving people.

iHM Bankrupt

The anatomy of why iHeart Media is in the shape it’s in is because of unsustainable debt. It owes over $20 billion dollars to its creditors like banks and bondholders. Much of this debt is at very high interest rates – like 14% high. The reason the interest rates are so high is because of risk – the higher the financial risk, the higher the interest rate. iHeart Media is a bad financial risk. So to get someone to loan them money they must promise to pay high interest rates.

For iHeart Media, the former Clear Channel Communications, revenues are flat or shrinking and they can no longer pay the $1.8 billion in interest they have to come up with each year. That’s $150 million a month just in interest payments.

In 2006, Bain Capital and Thomas H. Lee Partners, both of Boston, made a call to the founder of Clear Channel Communications Lowry Mays in Texas and offered $26.7 billion to buy the company. Say what? Mr. Mays knew his company could no longer grow revenues as fast as it did just a few years before. Between 1995 and 2000 Clear Channel stock grew about 1300%. 2006 was right before the Great Recession hit and there was also increasing competition from new technologies. The timing and deal were so good he (and the shareholders) couldn’t say no.

Screen Shot 2018-03-06 at 11.56.50 AM

He said to those northeasterners, “Boys. Where do I sign?”

Bain and Lee Partners’ bet was that radio industry revenues would continue to grow and through “synergies” (corporate speak for laying people off) they could increase the cash flows or profits of Clear Channel. Increasing profits and a company with less people (expenses) would mean Clear Channel would be worth more when they sold it a few years later.

Private equity (PE) groups were attracted to radio because of its high profit margins, which they believed they could increase (remember “synergy”). It’s an industry where there’s no inventory to buy and nothing tangible to manufacture. Its biggest cost is people and how easy is it to “synergize” and lay them off? Radio was already throwing off margins in the 15-30% range and if they could increase those margins to 40-50%, what could possibly go wrong?

Bain and Lee Partners, like most PE companies, operate pretty much the same way. They come to you with a nice offer to buy the company, tell you nothing is going to change and that they’ll let you run the company and they’ll be hands off. They put together what is called a “leveraged buyout” (LBO) to purchase the company.

Think of a LBO like buying a house. You put money down and take out a mortgage to borrow the rest of the sale price. That mortgage or debt is then attached to you, the purchaser (the way it should be). You’re the debtor and you promise to pay the money back.

In a “leveraged buyout,” the private equity company, the purchaser, puts some money down and borrows the rest of the money to complete the sale. The difference is the debt is attached to the company being acquired, the seller. It’s that company’s responsibility to repay the debt, not the purchasing PE company.

The private equity company assumes little financial risk, but receives huge financial rewards. They may act as the sales agent in the transaction, collecting fees from the sale, similar to a real estate agent’s commission. They may also charge the company an annual “management fee” for their “expert” advice.

A few years later, after extracting all the money or “equity” they can from a company, they sell it, again, acting as the sales agent. And with favorable tax laws they get a tax break from the government on the money they make from the sales.

In the end, the acquired company is left with little remaining equity and a large and possibly unsustainable debt.

Without the meddling of PE companies, Clear Channel or iHeart Media could have been the greatest of media stories and companies of all time – the modern day “Tiffany” as CBS was once called.

An iHeart Media sycophant recently said to me on Facebook, “If I Heart Media didn’t have the interest payments it would be making money.” How stupid is this comment?

Borrowing money and paying for the use of that money with interest is how the economic system works. And the system works well if people aren’t rewarded by lenient bankruptcy laws that support debtors who make foolish investments.

According to Bloomberg Intelligence, debt payments are $1.8 billion annually for iHeart Media. Its operating cash flow is $1.6 billion to $1.7 billion, meaning even without the debt they’d still be underwater.

Prior to Bain and Lee Partners paying $24 billion dollars for a 70% share of the then Clear Channel, the company had $18.8 billion in assets and just $5.2 billion in debt.

Screen Shot 2018-03-06 at 11.53.01 AM

With iHeart Media stock trading at less than fifty cents a share these days, its market cap (total value of the companies outstanding shares) is about $44 million dollars. Most of its equity is gone.

As my go to economics professor, Dr. Woodrow “Woody” Forrest told me, “Wow. They’re bankrupt.”


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  11 comments for “The sad BANKRUPTING of Radio

  1. Gary Jones
    March 6, 2018 at 5:40 pm

    Everything sounds the same programming. Bad deals and bad management. Good riddance.

    • March 6, 2018 at 5:44 pm

      Gary, because they can’t afford to do radio any longer.

      • Gary Jones
        March 6, 2018 at 5:51 pm

        Too much debt. We need to go back to the day where a small owner would have only a few stations and produce local programming of interest to the community. That’s why the FCC issues them a license, for the public good and interest. Sad what’s happened today to radio.

  2. March 6, 2018 at 6:27 pm

    The only part I disagree with you on Gary is when you say “According to Bloomberg Intelligence, debt payments are $1.8 billion annually for iHeart Media. Its operating cash flow is $1.6 billion to $1.7 billion, meaning even without the debt they’d still be underwater.”

    Not true. If their debt falls to around $5 billion as contemplated post-bankruptcy, their debt payment would be in the order of $750 million annually. Now factor back in their EBITDA of $1.6 Billion to $1.7 Billion and they are POSITIVE $900 million to $1 Billion annually. Companies can do something with that.

    Savvy media investors like John Malone (Charter Communications, SiriusXM) are looking to buy into the new iHeart. They aren’t fools. They see value.

    And as for the blame for all of this…PE firms for sure. But equally guilty are the guys who sold out their local “calling” for the money back in the day and who now still think their declining businesses are worth multiples of 6x-8x EBITDA. Radio can’t go back to the pre-Clear Channel consolidation days when it was fun on a programming level. But it has always had to evolve.

    With iHeart and Cumulus cleaning up their balance sheets, maybe the industry has a chance to do that again. It needs to.

  3. March 6, 2018 at 6:28 pm

    Sorry…meant to say “Darryl”, not Gary. 🙂

  4. Mike Williams
    March 6, 2018 at 8:56 pm

    Do you think they will get from under the debt any time soon?

    • May 14, 2018 at 6:56 pm

      Once the courts bless a reorg plan with the creditors, the balance sheet will have somewhere between $5 billion to $10 billion in debt, depending on the terms and conditions of the approved plan. With about $1.5 billion-$1.7 billion of annual EBITDA, that would place their leverage at about 4-5.5x. That would compare with other big companies like Entercom and given them room to operate and invest. I suspect they would also look to trim their station portfolio to improve operating metrics and raise cash to further reduce debt load.

  5. March 6, 2018 at 10:22 pm

    Good Blog Darryl, you and I know first hand. What angle do you see Liberty Media wanting to buy at least a percentage of iHeart? I can somewhat see the angle with sirius xm bailing them out.

    • May 14, 2018 at 7:00 pm

      The broadcast radio platform retains something neither satellite nor digital radio can provide: reach. Using radio’s megaphone (to borrow an associate’s favorite phrase) to drive digital services is a sensible strategy. And with the right debt load, even in today’s stressed revenue environment for radio, broadcast station groups produce excellent cash flow margins. SiriusXM would also gain access to iHeart’s pretty large streaming platform.

  6. Mark Bianchi
    March 7, 2018 at 12:30 am

    So sad to see a once great company go down the tubes. I still have too many friends that work there who will be affected.

    One correction: Cumulus is no longer the #2 radio company in the US. It is now Entercom, after the merger with CBS Radio. Entercom is doing quite well, I am happy to report!

  7. Art Versnick
    March 7, 2018 at 1:43 am

    …furthermore, where will all the new talent come from? You know, the people who made radio. Sad times for sure.

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