At the heart of the matter is the declining value of Clear Channel and the increasing reluctance of the lending banks to finance against challenged financial projections. For the second time this year, Clear Channel will resort to litigation to complete the sale of its broadcast assets to increasingly reticent lenders and buyers. Clear Channel recently reduced the sale price of its 56 TV stations by 8% to $1.1 billion (or 14 times cash flow), to force Providence Equity Partners to complete the purchase. The deal paints a portrait of the volatility facing potential sellers, buyers and bankers, says Lehman Brothers analyst Anthony DiClemente.
Clear Channel and its radio private equity buyers, Thomas Lee Partners and Bain Capital, said late Wednesday they will use the same legal tactics against their funding banks (including CitiGroup, Morgan Stanley, Wachovia Corp., Credit Suisse Group, Deutsche Bank AG and Royal Bank of Scotland). The banks want more onerous terms on the falling value of their loans in the $19.4 billion deal (which includes $7.8 billion of debt). Clear Channel is insisting that the privatization will occur by a final June 12 deadline. If it falls through, the private equity buyers pay a $600 million break-up fee and the banks avoid absorbing $2 billion-plus in losses and loans they cannot pass on to a devastated credit market. Clear Channel would likely sell or spin off its radio and outdoor businesses separately.
Pure-play radio stocks are trading at about nine times earnings, which is where analysts value Clear Channel's core radio business--about $27 a share. Eventually, the equity buyers and banks could seek to reduce the proposed $39.20-a-share leveraged buyout (at 14 times earnings) to about $32 a share, pointing to the radio group's single-digit revenue declines in recent months and flat revenue projections for 2008. The perceived heightened risk attached to Clear Channel since the radio sale was announced in late 2006 underscores a similarly serious challenge awaiting some TV station owners, whose future values and money flow are declining and have become difficult to predict.
There have been mixed results in high-profile efforts to take other radio groups private amid the recently approved controversial Sirius and XM satellite radio merger, as well as a steady flow of proposed TV station sales (involving the likes of Fox, NBC, Media General, Young Broadcasting and Landmark Communications). The sale of nine Fox stations to private equity firm Oak Hill Partners for $1.1 billion underscores that TV stations have been holding their solid value in challenging times. But that's about to change--especially for pure-play TV station affiliates and radio station owners.
DiClemente contends that the harried pace of a record $1.9 trillion in mostly completed private equity deals announced between 2007 and 2005 is waning for industries such as broadcasting, where formerly stable free cash flow and valuations are more volatile, testing investors' ability to make a timely return. The credit crisis has severely reduced financial-sponsored bank deals to $33 billion so far this year, or one-fourth of what it was during the same period in 2005. The high volume of seemingly overpriced TV stations for sale with virtually no buyers will push multiples below 10 times earnings. As broadcast fundamentals decline, the industry's credit risk rises. Some leveraged loans backing buyouts are already "under water," DiClemente said.
Some small and medium-sized market stations--and even fourth, fifth or sixth stations in large markets--will see valuations fall as they become more financially strained trying to find a digital payoff. Although local news and marketing ties are valuable in a virtual world driven by personal user relevance, most broadcasters haven't figured out how to leverage their once-exclusive local connections.
According to the State of the News Media report published this week by the Project for Excellence in Journalism, both local television and radio suffer from inefficient comparative metrics that could otherwise facilitate monetizing their content and advertising on new-media platforms. TV stations are increasingly losing local audience and advertising dollars to aggressive competitors in cable, the Internet, and online publishing. TV stations' traditional economics have been turned inside out. Stations now compete with the broadcast networks that once paid them cash compensation to carry their branded programs. The ratings estimates used to set ad pricing do not provide the accountability or interactive consumer loop that is attracting advertisers to the Internet.
There is no telling how many television stations will be adversely impacted by next year's bad news trifecta: negative growth in an ad recession without quadrennial politics and Olympics, learning to survive and profit in a digital world, and stemming the continuing loss of ad dollars and viewers to online video streaming. Television stations are expected to see their share of domestic TV home usage drop even more precipitously after February 2009, when all viewers will be required to purchase some means of digital conversion to continue watching grassroots broadcasters. Today, the Big 3 broadcast networks' owned TV stations command 15% of U.S. TV homes, compared with 5% for Fox and the WB, 5% for network-affiliated TV stations and a whopping 48% for ad-supported cable, the report states.
Like their radio brethren, television station groups and their corporate parents have endured major devaluation during the ongoing stock market carnage. The advertising recession, which began in local markets in the fourth quarter of 2007, is dramatically pressuring stations' quarterly revenues and earnings. Many of the major broadcast groups--from those owned by NBC, CBS, ABC and Fox to Hearst and Belo--are getting no credit from Wall Street for having a firm grasp on the digital change. Overall, television stations are vulnerable to the same finance and valuation issues and questions plaguing Clear Channel.
What valuations and financial projections will hold against dramatically changing and declining business fundamentals? Who will buy even the best-managed media assets if they are unsure of their stature in a rapidly expanding media spectrum? What banks and other financial institutions will continue to provide funding if they cannot share the loan risk with a ravaged credit market? How many TV stations could fail if they are unable to meet the covenants of their existing lending deals due to economic hard times?
Bottom line: There could be a lot more than a Clear Channel deal at stake in these uncertain times.