By Geraldine Fabrikant The New York Times April 29, 2009
It is too soon to say who will be the biggest loser among media companies in this recession. But Clear Channel Communications is vying for the title.
Clear Channel, the nation's largest radio station operator and an outdoor billboard company, last year became the biggest leveraged buyout ever in the media business, after it was taken private by Thomas H. Lee Partners and Bain Capital.
Now its revenues are plunging and so is its cash flow, making it harder to meet the payments on the billions in debt accumulated in the process of buying out its public investors. If it violates some of its loan agreements, those interest payments rise sharply.
Scott Sperling, a president of Thomas H. Lee Partners, offered reassuring words about the company's future in an interview on CNBC in mid-April.
"We do not have any expectation of an imminent blowup," he said, adding that the company still had "a lot of levers it can pull to continue to generate reasonable cash flow."
But days later, Clear Channel announced that revenue plummeted 23 percent in the first quarter and cash flow fell by 47 percent.
On Wednesday, the company announced it was laying off 590 employees after cutting 1,850 employees in January, for an overall staff reduction of 12 percent since the acquisition.
Bishop Cheen, who follows corporate bonds for Wachovia, wrote recently that Clear Channel was on track to become the biggest default among media companies and therefore the biggest workout ever in the industry.
The company's options may be limited. Many financially pressed concerns have been able to persuade creditors to exchange debt for equity and thus avoid a default and a bankruptcy filing. At Clear Channel, getting creditors to go along with such a plan could be tough because the original deal was fraught with so much ill will, including an unusual court fight.
"Before the 2008 purchase closed, there was a battle between the banks and private equity funds, who went to court to force the banks to complete the deal," said Neil Begley, a Moody's debt analyst. "While the equity holders would prefer an out-of-court restructuring, in this case they may not be able to come to terms with the banks."
The company has $16 billion of bank debt, on which it pays variable rates, and $6 billion more of junior debt. The holders of the junior debt and the equity holders would absorb the first loss in the event of a bankruptcy, so the banks have some protection and less incentive to negotiate.
As advertiser spending plunges week by week, the likelihood grows that Clear Channel will fall out of compliance with one of its loan covenants by year's end and be in technical default, several analysts said. The covenant requires that debt not exceed 9.5 times its cash flow. Lately, Clear Channel has been adding to its debt even as its cash flow is shrinking.
Media companies of all types are suffering from the recession while consumer appetites are shifting in the digital revolution. Those laden with debt may buckle, with the biggest so far being the Tribune Company, thrown into bankruptcy after Sam Zell borrowed heavily to pay $8.2 billion for the company and assume $5 billion more of its existing debt. When Bain and Thomas H. Lee finally completed the Clear Channel acquisition in July after two years of struggle, they paid $18 billion and assumed $5 billion in outstanding debt. Today, there are few buyers for broadcast assets. Should the market rebound, the company could be worth about $12 billion, Mr. Begley of Moody's said.
Mr. Cheen estimates its market value today at less than $6.3 billion. "The market has gone from irrational exuberance to excessive awfulness," he said.
Though many companies acquired by private equity firms at the end of the bubble are in trouble, critics say the Clear Channel deal was ill advised from the start. The acquirers raised their bids several times to win over the previous shareholders even as the economy weakened.
"Most investors in Clear Channel were thrilled that the private equity guys took radio off their hands," recalled Michael Nathanson, a media analyst at Sanford C. Bernstein & Company. "Many had deep concerns because the industry was not growing during a period of economic expansion. So what would happen when things slowed down?
"This has been an industry facing secular challenges since 2002. Dollars were moving away from local market, and radio was losing share of dollars to the Internet."
Within months of closing the deal, the company announced a plan to cut costs. Dismissing 9 percent of its workers, or 1,850 people, would cut $350 million in annual costs, it said in January. A month later, under pressure to free up more cash, Clear Channel drew down a remaining $1.6 billion credit line.
Meanwhile, the sons of Clear Channel's founder, L. Lowry Mays, have taken pay cuts. Mark Mays serves as chief executive and Randall Mays as chief financial officer. (The family made hundreds of millions of dollars when the company was sold and retains an ownership stake.)
With an estimated $1.4 billion in cash on hand, the company appears to have enough to manage through the next few years as long as it does not violate its bank agreements, Mr. Begley of Moody's said. The company has to pay $1.3 billion in interest annually on its debt, and it and analysts project that it needs more than $1.5 billion in cash flow this year.
Some analysts say it may not have been possible to foresee the economic collapse that has put so much pressure on Clear Channel. Still, critics wondered if there were ever a viable exit strategy.
"In radio they were the biggest in the industry, so there was no likely strategic buyer," Mr. Nathanson of Sanford Bernstein said. "We were more optimistic about their outdoor advertising business because there was a chance to sell it to a foreign buyer."
A public offering was unlikely because the stocks had languished for years, he said.
Bain and Thomas H. Lee put up $450 million each for the deal. Their investors put up an additional $2.1 billion. Each firm receives an annual management fee of about $6.7 million, and each earned about $43 million in so-called transaction fees for their roles as bankers in the deal. They passed on two-thirds of those fees to their investors.
Other radio companies are suffering, Citadel Broadcasting and Cox Radio included. Cox, though, has avoided layoffs so far. Its senior debt is four times cash flow, compared with nine times at Clear Channel.
Marci Ryvicker, an equity analyst at Wachovia who follows the radio industry, said, "If you have the opportunity and capital structure to take market share from your peers, you will be one of the surviving radio companies."
http://www.nytimes.com/2009/04/30/business/media/30clear.html?_r=2&ref=media
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