Cumulus and iHeart on the ropes

So what's next for Cumulus and iHeart? With debt/equity ratios over 60 and 80 respectively (based on Friday's stock quotes), they're worth more dead (breakup value) than alive. Lenders and equity partners will suffer more than a bad haircut.

What might the impact be on the fiscally-responsible broadcasters?

bossbill said:

What might the impact be on the fiscally-responsible broadcasters?

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No impact whatsoever, unless they're looking for investment money or planning on doing an IPO.

A couple of enterprise companies I know of have reconsidered the timing of their IPO because the market is weak right now. Not a good time to be asking for money.

Even Alpha, which at one time was considered to be a very responsible company, appears to be over-leveraging itself in the Digity purchase. They're finding that it's a bit more difficult to carry out that merger than originally expected.

Also, iHeart is not a public company. The stock is OTC, which is really speculative. The fact that it's low has nothing to do with anything.

What I find interesting is how building mega-groups for radio has ultimately turned out to be a house of cards. TV is just now evolving into that same model, with Sinclair buying up TV stations at a crazy pace to become the Clear Channel of TV. Moreover, how many broadcast stations in a group become too many stations that exceed the tipping point?

Kelly A said:

Moreover, how many broadcast stations in a group become too many stations that exceed the tipping point?

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Even a company like Viacom, which seemed bulletproof a few years ago., has seen a 50% drop in stock price. Granted, it's no penny stock, but it has seen a huge drop. The key to any company, as well as any stock portfolio, is diversification. The problem with radio companies is they only own radio stations. When ad sales for radio stations drop, the stock craters. Back in the old days, insurance companies, electronics manufacturers, and car dealers like Don Lee owned radio stations. That way, they could better absorb the ups and downs of the ad market. We need to see more of that today. Unfortunately, most of those kinds of companies see radio stations or newspapers as boat anchors. But what these companies are showing is that radio needs to create new revenue streams. Those that do will survive.

Interesting to read today in Tom Taylor's newsletter that WTOP in DC, radio's #1 biller, has been laying off staff. They're faced with the same problems other major market stations have: Lower ad revenues and increasing operating costs. I expect that will remain a consistent problem for radio.

Things are not as bad as we are led to believe. The problem is that highly-leveraged companies will be affected more by small changes in revenue. To add to the problem, these highly-leveraged companies have already cut the fat, and into the bone.

I agree. Budget cuts won't help, traditional revenue won't help. Time for some fresh thinking.

Iheart and Cumulus drop IBOC on all AM's and run MDCL on 10KW AM's and above. Power and royalty savings go towards debt. Just some fresh thinking.

TheBigA said:

I agree. Budget cuts won't help, traditional revenue won't help. Time for some fresh thinking.

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The thing I found fascinating on Cumulus's 3Q call was that the new CEO said previous cost cuts under the Dickeys had cost more than a dollar in revenue for each dollar in cost savings.

When you're seeing that it seems like a serious strategic failure. Which I guess the board finally recognized.

PTBoardOp94 said:

When you're seeing that it seems like a serious strategic failure. Which I guess the board finally recognized.

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In that same conference call, she said she'd make improvements that would be cost neutral. That seems impossible to do. Plus she also talked about changing the company's culture. It's been my experience that you can't change the culture of a company without changing a lot of people, usually upper management. That becomes expensive. Which is why investors are running away with arms in the air!

I agree with you, A. The only way they can make cost-neutral revenue improvements is to fix their programming strategies and their ratings and revenue should follow. I think the new CEO probably has a year to 18 months too figure it out before bankruptcy hits.

Cumulus and IHeart should spin all their stations off to local groups! Locally owned and operated stations with live local talent and a wider variety of music would really turn the radio industry around. Consolidation has gone too far! We've got to break up the big boys and let the local folks take over! No more voicetracking, no more corporate lists, no more meddling!

blackgold said:

Cumulus and IHeart should spin all their stations off to local groups! Locally owned and operated stations with live local talent and a wider variety of music would really turn the radio industry around.

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That may be what you'd want, but it wouldn't solve radio's problems. Radio needs investment money, and that won't come from local ownership. The stations owned by the big companies are actually run by local folks. Every big company station has a big local staff. No shortage of local input. If the local GM can afford to pay local talent, the corporate office is happy to leave him alone. But if he can't, they have some options. And lots of small locally run stations draw on those syndicated options as much as the big guys. What I've seen when the big owner sells out to local folks, the local folks can't afford to pay the staff the salary and benefits they used to get from corporate. So they either take pay cuts or get replaced. That's not a good thing, is it?

I think what people who are watching the radio business from the sidelines don't understand, is how the value of broadcast properties changed significantly over a year, not unlike the housing bubble and people who had huge mortgages on what amounted to over-paying for their home. I'll use my situation as an example: Apart from my day job, I've been a major shareholder in a group of small market radio stations, three FM's and an AM. We purchased a Class C FM, Class A FM and Class D AM (thrown in with the Class C) in what amounted to a distress sale. The other FM was built from a Construction Permit. One of the original stations we sold to CC who moved-in the station to a larger market. Before the economy tanked in 2008, the "stick" value of all these properties were around $5M, including cash flow multiples being used at the time, maybe $6.5-7M. What are they worth now? Downhill with a tail wind, about $1.5M. Fortunately for us, there is little debt associated with the stations, as we used the sale of the one FM to pay down debt. But still, even with little debt it's a bitter pill to have the overall value of your business drop that far because your options to grow your business are also stunted in the process.

The same goes for mega groups, but their debt from acquisitions are scaled accordingly. Several of those properties having been AM stations, who's valuation(s) have dropped even more with the dying-off (in some cases, literally) of their listener base. Now add in the division and volatility of spot revenue, plus reduced options for restructuring debt because lenders tightened everything down, and you have a perfect storm of badness. It has little to do with whether the stations are playing whatever music or talk programming. The good news for someone who wants to get into the radio biz, is there are a lot of mom-and-pop stations going at fire sale prices. The bad news is, and always the risk, taking on that debt with an uncertain future. Just playing what you think is the best music or "super-serving" your local community isn't enough anymore. Not by a long shot.

Kelly A said:

Just playing what you think is the best music or "super-serving" your local community isn't enough anymore. Not by a long shot.

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Exactly. This isn't a programming problem, and it won't be solved by programming.

The other comment I often read about this is people saying companies "over paid" for stations. The fact is they paid market value at the time. In retrospect, that may have been too much, but it was market value. Nobody overpays, but everything was overvalued before 2008.

These companies are also stuck with some salaries that were based on pre-2008 numbers, so some employees are getting over paid. How would you feel, as an employee, if your company said they need to scale down your salary to meet the current economy? That's another aspect of this financial situation. A lot of those pre-2008 contracts are ending, and those contract employees are being told that their new deal won't be as lucrative as the previous one. Not the kind of news you want to hear.

They did overpay. Anytime you pay 15-20 times cash flow for a business without the likelihood for a very significant change in revenues/expenses, you've overpaid. They overpaid because they wanted critical mass and hoping to cut operating expenses. Unfortunately, after a couple of ownership turns, it becomes more difficult to cut more fat because there is no more fat.

You might pay 12 times cash flow for something relatively safe, like an apartment building. But radio stations are not apartment buildings.

bossbill said:

They overpaid because they wanted critical mass and hoping to cut operating expenses.

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I've been reading that line for 15 years, and the fact is they never actually cut their operating expenses to the degree most anticipated. Perhaps that's the problem. They still have quite a bit of local talent, and that talent isn't complaining about their salaries. I know a DJ who got paid 3 times what he was making with one company to go to iHeart.

The other thing is that a lot of the stations they supposedly "overpaid" are actually making a ton of money. If you do a market by market analysis of the stations they paid the most for, those are the ones that are still showing up at the top of the ratings and revenue lists. The problem is the FCC rules at the time required them to buy a bunch of AM stations, and a lot of them are still sitting in the Aloha Trust, waiting to be donated.

Tom Taylor's newsletter had this quote today from the CEO of Entercom about the prospect of Cumulus selling stations:

“The problem Cumulus has...is that they have a low [tax] basis on their assets. It’s hard to see how they sell their way out of this issue.” By “low basis” – and that situation is shared by CBS and some other biggies – Field means they’d face unattractive tax consequences if they sold off stations to generate cash. Bottom line – the prospect of shopping at the Cumulus Store “does not seem to fit very well.”

That's something I hadn't thought of. David may be correct, the tax penalties of selling off properties on top of the valuation changes in those properties could be a huge problem, not just for Cumulus, but for many of the large group owners. That would probably apply to Entercom too.

I normally ignore most of what Jerry Del Colliano writes. He lost his objectivity a long time ago. But his column today made me think for a moment.

He writes "Cumulus Considers Going Private."

That's an interesting theory. When the stock price was going south a few months ago, I though the same thing for a minute. Buy back all the stock at a low point, and re-launch at a better time.

What would that cost? The stock today is 24 cents. That puts the market capitalization at around $54 million. That's pocket change for Crestview. Their bottled water bill is more than that. It wouldn't surprise me to see the stock price go even lower, Crestview steps in, buys back all the stock, takes the company private, and then start rebuilding the company in a completely different way.

That's basically what Clear Channel did with iHeart. It hasn't been as successful as it could have been, but they created something out of nothing. That's what Cumulus has to do to get out of this hole. They have to create some new value where it doesn't exist. Dickey was sort of doing that with Nash, buying Country Weekly, starting a record label, starting a film unit. But none of them will turn this company around. They need a tech idea that will reinvigorate this aging industry. There are a few ways to do it using existing Cumulus assets, once again looking at the Clear Channel model. That's the key. Lew Dickey himself said it in the Q2 conference call.