Cumulus wants to nix the WLUP/WKQX deal

My guess is Merlin and Cumulus reach a deal of some sort whereby Merlin agrees to defer the due date of the "Put" payment until the earlier of (a) some date in mid to late 2018 or (b) Cumulus' exit from bankruptcy. In the interim, Cumulus would have to make LMA-like payments of some kind. Essentially, Merlin would be providing seller financing on a short-term basis.

Without WLUP and WKQX, Cumulus might as well exit the Chicago market entirely. WLS-F has always been a relatively weak biller while WLS-A is a shell of its former, glorious self.

By the way, if Merlin and Cumulus were to go their separate ways, I think there would be other buyers for the two Merlin stations. I bet Hubbard wouldn't mind picking up an additional FM station. Ditto for Weigel. Sinclair might be interested in both stations. Univision might be an interested party under such a scenario, too.

MarkW said:

My guess is Merlin and Cumulus reach a deal of some sort whereby Merlin agrees to defer the due date of the "Put" payment until the earlier of (a) some date in mid to late 2018 or (b) Cumulus' exit from bankruptcy. In the interim, Cumulus would have to make LMA-like payments of some kind. Essentially, Merlin would be providing seller financing on a short-term basis.

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That seems like the reasonable approach. I'd say that's what the judge would say as well, especially since Merlin moved up their "put."

I doubt very much Cumulus would leave a Top 10 market. They had the opportunity to exit Houston, where they only own one station, and chose to stay.

The difference with Houston is KRBE is a market leader and strong biller. Nonetheless, you might be correct.

I was right when the late-to-the-party trade press were clueless:

http://mailchi.mp/tomtaylornow/tom-taylor-now-123257?e=e45d006836

Headline:
Cumulus bails on its pact to buy Chicago’s WKQX/101.1 and WLUP/97.9 from Merlin Media.

Mary Berner claims Cumulus lost $5.1 million on its WKQX and WLUP LMA's during calendar year 2017, which means broadcast cash flow from these two properties was insufficient to cover LMA fees.

The LMA fees for the two stations on a combined basis were only about $7 million annually, so that gives an indication of just how poorly these stations must be performing from a billing standpoint!!!

I have trouble seeing Cumulus standing pat with just WLS-A & WLS-F, two stations with old demos and crappy billing. My guess is they'll put these two stations up for sale.

Bottom line - it looks like Merlin Media is going to need to find another buyer for WLUP & WKQX, and it would not surprise me at all if WLS-A & WLS-F were placed on the market, too (albeit not necessarily during Chapter 11 proceedings).

..and while I was right all along about Cumulus wanting to reject the Merlin deal as originally conceived, the one part of this that surprises me if Cumulus' apparent desire to want to walk away cold turkey. I did not realize the cash flow from WLUP and WKQX was so dreadful. On a combined basis, those two stations must only be billing about $10 million to $12 million annually.

EMF as the new buyer?

Add to this Cumulus is going to seek an early as possible nullification of its contracts with the Chicago Bulls and White Sox at its next hearing Feb. 1, according to Radio Insight. Perhaps an outright sale of WLS AM/FM is next?

Now I have no idea about the legalese of radio contracts, but would Cumulus be able to move WKQX to 94.7, assuming they hold anything in their Chicago cluster? Last time I saw the Chicago revenue numbers, WKQX was the highest biller of their cluster, the employee of the year at a dying business I suppose.

MarkW said:

Bottom line - it looks like Merlin Media is going to need to find another buyer for WLUP & WKQX, and it would not surprise me at all if WLS-A & WLS-F were placed on the market, too (albeit not necessarily during Chapter 11 proceedings).

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It depends. The company still needs an outlet in market #3 for its national sales. With all the agencies based in Chicago, they will need some kind of physical presence there. They have the same problem in LA with KABC and KLOS. The common thing among all four is they're former ABC stations. So no, I think they will retain WLS AM/FM.

The problem with the Merlin deal is the contract. We're now seeing some of the inner workings of Cumulus under Lew Dickey. When you buy or LMA a station, you not only have the cost of that station, but you assume a lot of agreements. So while the LMA fees may have been $7 million annually, there are all the other costs, which were probably higher than WLS. That's the problem here.

As for the sports agreements, that's another discussion. As you look around the country, several companies have sought to diversify the programming on the aging AM talk stations. WOR-AM in New York has the Mets. Baseball is helping this station get over the aging demos of conservative talk. However, when the team plays badly, the station suffers as well. That's the problem with the White Sox. Compare WLS ratings with The Score during the summer. WLS gets a 1.5, and The Score gets a 4.9. That's all you need to know. WLS doesn't need to pay the White Sox to get bad ratings. They can do that with conservative talk. So that's why they want to end this deal.

Overall what one can see when one looks at all of the contracts the company wants to cancel, there are lots of long-standing agreements, some of which the company assumed when it bought other assets. As I wrote on another board, this bankruptcy is different from the Citadel bankruptcy. When that company went bankrupt, it didn't cancel a lot of the contracts it had. I clearly remember the Citadel contract with the Buffalo Bills, which is now being canceled under this bankruptcy. When Cumulus bought Citadel, it bought a bankrupt company that had not been completely fixed by its bankruptcy. So it was no wonder that this company is heading down the same road.

Excellent perspective, BigA.

One interesting aspect to all of this is Cumulus seems to be talking out of both sides of its mouth. On the one hand, Cumulus in its BK petitions showed its unsecured claims to Merlin is being barely over $100,000 and having nothing to do with the Put and Call Agreement.

Yet in yesterday's filing, Cumulus asserts the $50 million price tag exceeds the Fair Market Value of WLUP & WKQX! This would suggest Merlin has an Unsecured Claim in connection with Cumulus' failure to honor the Put and Call Agreement (and of course, Merlin did indeed previously file pleadings to that effect).

If these two stations are only generating $12 million in annual revenue on a combined basis, the fair market value on an Income Approach basis might very well be only in the low $30's to low $40's.

I would have to believe a Class B signal from high atop the John Hancock or Willis Tower has significant intrinsic stick value, too. So maybe the Income Approach isn't the best indicator of value here. I'm not sure.

Does all intellectual property associated with WLUP and WKQX revert to Merlin, assuming the Bankruptcy Judge approves rejection of the contracts? I presume the answer is "Yes," but I've been unable to take the time to independently verify this. If I am correct on that point, Cumulus would be unable to migrate either of those two brands to 94.7 MHz.

I could certainly envision a scenario where Merlin sells one of its two sticks to EMF and the other to Hubbard (unless Hubbard would be interested in both).

There will be buyers for the Merlin and Cumulus signals, albeit perhaps at disappointing prices. Sinclair, Hubbard, Weigel and EMF would be all be potential buyers, one would think. Gotta throw Salem's name into the ring, too. Univision has a massive debt load, so I have trouble picturing them making a deal. I assume Emmis is content with its St. Louis, Indy and Austin, TX clusters and is not looking to get back into the major market game.

MarkW said:

One interesting aspect to all of this is Cumulus seems to be talking out of both sides of its mouth. On the one hand, Cumulus in its BK petitions showed its unsecured claims to Merlin is being barely over $100,000 and having nothing to do with the Put and Call Agreement.

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I think the timing has something to do with that. The original filing came before Merlin's "put." Merlin's "put" came before it's actual deadline. So I don't think Cumulus expected that "put" when it happened. Then Merlin sued. But now that the details are public, it makes sense to cancel the agreement. The purchase price exceeds the value. This puts Merlin in a bad place, because whoever buys the stations probably won't just pick up the Cumulus LMA. Merlin needs someone to continue to operate the stations starting at the end of January.

The real bad news here is it seems as though all four stations are currently in the same office.

I wonder if Merlin might consider operating the stations themselves rather than sell.

At the end of the RadioInk story, they spoke with Merlin owner Randy Michaels:

"We asked Michaels if this would lead to him getting the Merlin stations back and his answer was “yes.”"

I wonder what the Merlin Marlin would do with these stations under their ownership again, if that's the route they take. They've already operated the Loop and WKQX, albeit on the 87.7 signal, so there's some familiarity with the stations. The stations seem at least a little profitable when you don't figure in the LMA payments, but perhaps they'll want to find something more lucrative to pay down the monstrous debts they racked up with the failed FM News experiments.

That said, I think we all know a female-friendly News format probably isn't in the cards.

My guess is they'll keep the current formats in place and operate them as inexpensively as possible until both stations can be sold. Will be interesting to see how many staffers get laid off. Will also be interesting to see which salespeople Cumulus chooses to keep.

Will Marv keep his job with Cumulus? Will Merlin honor Mancow's contract?

https://radioinsight.com/headlines/122539/randy-michaels-explains-will-happen-wkqx-wlup/

Looks like you're right there, Mark.

At least for a while, WLUP & WKQX will continue to operate from the Cumulus studios.

Who pays the receptionist? The sales staff? Promotions Dept. personnel? The engineer(s) ? Might some human resources be shared between the two companies for the time being? Who will actually be in charge of WLUP & WKQX going forward - I'm guessing it won't be Marv. Will Randy be running the two stations directly?

Plenty of unanswered questions at this point!

MarkW said:

Plenty of unanswered questions at this point!

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Not really. I'm sure it's all spelled out in the agreement Randy referenced: "There is an agreement in place to allow Merlin to operate the stations from Cumulus new Chicago studios at the NBC Tower."

The office, the studios, the receptionist, the sales staff, etc are all owned by Cumulus, so they pay all of them. The difference is instead of Cumulus paying Merlin, Merlin now pays Cumulus. They will pay a fee for using Cumulus studios and office staff. My understanding is that Merlin, as a company, really doesn't exist anymore. No stations or employees. I expect that Randy will be running the stations directly. And as Randy says, the two companies have been talking. Cumulus already has paid about $20 million in LMA fees towards owning the stations. In six months, when they emerge from bankruptcy, they'll make another offer.

Not everyone is Cumulus

TheBigA said:

Not really. I'm sure it's all spelled out in the agreement Randy referenced: "There is an agreement in place to allow Merlin to operate the stations from Cumulus new Chicago studios at the NBC Tower."

The office, the studios, the receptionist, the sales staff, etc are all owned by Cumulus, so they pay all of them. SNIPPED......

There are several full time employees of Merlin embedded within the staff at Cumulus. Because this is a LMA, Merlin needs to maintain defacto control of the stations. This includes having full time employees of the licensee available to retain/regain control of the signal in the event of a variance from the FCC rules or Merlin operating policies.

My understanding is those employees are in Engineering. Which is the usual and customary place to have the means of establishing or re-taking control of the signal on orders of the licensee. I've been on both sides of such an arrangement.

My guess is the stations will operate from the NBC tower for an extended period of time under a sub-lease agreement where Merlin would pay Cumulus for the studio space until they move...or a new deal is negotiated as part of the BK proceeding.

RR

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Just announced that Cumulus will continue to operate the Merlin stations...at least for now:

https://radioink.com/2018/02/01/cumulus-will-continue-running-merlin-stations-now/

Seems like a practical and logical decision to me.