Monday, April 27, 2009

What's going to happen to Clear Channel?

Rob Gorrie, Canadian, Adcentricity co-founder, and all-around good guy, posted an article on Thursday about Clear Channel's current spate of financial difficulties, which many analysts feel may drive the media giant to bankruptcy or fire sale later this year. Some of the biggest nay-sayers have pointed to Goldman Sachs's downgrade of the stock from "hold" to "sell" as the final nail in a coffin that has been in the process of shutting closed for some time.

I can't really say whether Clear Channel's current problems will be enough to kill it off. However, the whole situation has me wondering about the way that the company was taken private back in July.  After something like two years of negotiations, they were taken private by Bain Capital just as the magnitude of the credit crunch was making itself known.  But one of the chief arguments for going private, as Clear Channel would have us believe, was that it would allow them to invest more money on infrastructure and long-term projects without having to worry quite so much about meeting short-term sales goals.  Granted, I don't think the company was as worried about refinancing their billions of dollars in debt at the time (such an endeavor has become much more costly of late), but if you believe the execs at the top, a big, costly buildout has been in the plans for a while.

Any analyst worth his salt should be taking into consideration that for a long time Clear Channel has noted it expects to pay more now for the chance of bigger profits later.  That should be taken into consideration.  But of course, if the firm runs out of money and are forced to restructure before seeing the fruits of their labor there any number of things could happen...

Lamar or CBS Outdoor could step in to buy their outdoor holdings. Both companies have big investments in billboard advertising. Additioanlly, CBS Outdoor has a big presence in Times Square while Lamar has been investing in digital billboards, but neither firm has both, so an acquisition of Clear Channel assets would give either a leg up over the other. Alternatively, JC Decaux could use an acquisition to gain a much bigger billboard presence in the US.

I suspect management of the company's radio stations would be spun out into its own new entity.  Clear Channel is still the largest terrestrial radio company by far -- bigger even than the combined Sirius-XM satellite guys -- so as long as there's money in radio advertising it seems like a solid chunk of business that somebody would want to hang on to.

But on the outdoor side, it's a lot harder to say what will happen. Outdoor ad rates haven't fallen proportionally as far as other media like TV and radio have. And outdoor digital billboard rates have risen and continue to generate good returns to the point where more and more companies are deploying the things all over the place.

The bottom line is that now is not a good time to be saddled with a lot of corporate debt.  And Clear Channel -- an advertising company -- is most certainly not going to be receiving any federal bailout dollars.  But the debt issue aside, the company's assets throw off lots of cash month after month. If investors and debt holders are too short-sighted to see the long-term potential of the company's previously-stated plan, I'd guess that we'll see a break up before a bankruptcy proceeding.

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John Moezzi said...

Well written. The sum of Clear Channel's parts seem to be greater than the whole at this point. If debt concerns are that dire, (and its hard for us to really know, right?) I would expect management to strategically divest assets in order to stave off a bankruptcy filing. The more dire their debt issues - the swifter they must move in constructing deals. This will be a real test of management.

Bill Gerba said...

Hi John - that's my take - parts are greater than the whole. I actually think that splitting the company along radio/outdoor lines would leave two much stronger companies in their respective industries anyway, so I wouldn't be upset to see it happen.