Is the Collapse of iHeartMedia Coming?

As reported in Medialife Magazine by Court Stroud

Industry giant is struggling under massive debt and losing gobs of money

At first glance, iHeartMedia looks like the model 21st century media conglomerate, truly a colossus with interests across media: owner of 858 radio stations; Clear Channel Outdoor, one of the world’s largest outdoor companies; Premier Networks, the top U.S. radio network; and iHeartRadio, among the nation’s top digital music services.

The radio giant has a dynamic leader, Bob Pittman, the man who created MTV and widely regarded as one of the most charismatic men in media.

And it has glam, lots of glam. Look no further than the iHeartRadio Music Festival and other live events that draw thousands upon thousands of celebrants and endless media excitement.

But for all that glam, iHeart is a deeply troubled company. In fact, iHeartMedia is teetering on collapse. It’s not a question of whether it collapses but when, and it’s likely to come sooner rather than later. It could be within months.

What’s going to sink iHeart is its huge debt, some $21 billion. That’s more than the entire radio industry generates in ad dollars in a given year, and it’s a debt iHeart appears to have zero prospects of paying off.

As of June 3, 2015, its stock was valued at $7.50; yesterday it closed at $1.01.

iHeart’s creditors are taking the company to court, irate over how it’s managed, and at some point they’re sure to succeed in forcing a change in management and perhaps pushing the company into bankruptcy. iHeart could well be broken up and sold off in pieces.

iHeart’s woes go back to 2008 and a leveraged buyout valued at $27 billion, one of the largest LBOs in history. The deal was put together by private equity titans Thomas H. Lee Partners and Bain Capital, once headed by former Republican presidential candidate Mitt Romney.

The LBO has proved a disaster, on a scale with the Time Warner-AOL merger of 2000.

CEO Bob Pittman

Consider these numbers. In 2007, the company, then called Clear Channel, reported a net income of $939 million. In the years since the LBO, the company has reported losses of between $220 million and $4 billion per year. For 2015, it reported a loss of $738 million.

What went wrong?

The deal was done at the height of the market, and if the price was hefty, the belief was that iHeartRadio sales would soar, more than covering the cost of the debt. The company invested heavily in building out the network.

It was a bad gamble.

iHeartRadio has not seen anywhere near the hoped-for growth. As it turned out, for all the promise of digital media, it simply doesn’t generate the volume of dollars of traditional media, be it radio or TV or print. Advertisers spend less, and sellers make less.

Saddled with that huge debt, the company has tightened purse strings on core properties.

Yet it spends lavishly elsewhere, as if the strategy had worked and the company is in the pink of financial health.

Operating from sexy new offices in midtown Manhattan, the company hands out big salaries to lure talent and entertains lavishly, renting out private clubs for posh parties, and flying in ad buyers for big events like NYC’s Jingle Ball and the iHeartRadio Festival in Las Vegas, very much in the Pittman style.

In the meantime, the company has gone to great lengths to make its revenues look stronger than they were, according to one former top executive. One practice was to do quick-cash trade deals, swapping ad inventory for goods and services the company was then able to book as revenue within that quarter. The practice is perfectly legal but frowned upon as a sleight of hand that cheapens the value of inventory.

“They’ll do anything to show revenue growth because they believe that solves the debt problem,” says this former executive.

iHeart’s ills could not come at a worse time for radio.

Cumulus, the No. 2 radio company, is struggling to work through its own debt problems and could itself slide into bankruptcy. And CBS Radio was just put on the block in what’s seen as a major vote of no confidence in radio’s future by CBS Chairman Les Moonves.

One could well imagine a scenario in which all three companies are broken up and their stations all put on the market at one time, in what would prove a major disruption for the industry.

What happens next?

Glam slam: Demi Lovato performing at the 2015 iHeart Radio Music Festival.

iHeart recently hired Moelis & Co as a financial adviser with the apparent hope of redoing its debt and continuing as it has. But that would require approval of the current debt holders, which is unlikely.

Another possible scenario? The company remains intact but management is forced out and a new team is brought in to restructure to company.

A third scenario—and the most likely—is that the company is forced into bankruptcy and broken up.

A breakup makes sense because of the sheer value of the many divisions under the iHeart umbrella. Troubled as it may be, iHeart enjoys a wealth of assets. Just what their actual value might be in a sell-off would depend on a lot of factors.

Here’s a look at some of them:

• Premiere Networks: The top-ranked radio network in the country syndicates programs to over 5,000 affiliates, reaching over 190 million listeners each week. The talent contracts alone hold huge value.
• Total Traffic & Weather (TTWN): The leader in traffic, transit and weather info, reaching more than 200 million monthly listeners in over 200 markets in the U.S., Canada and Mexico. TTWN kicks out cash.
• Katz Media Group: With 15 regional offices, KMG is the top media rep firm, representing more than 4,000 radio and 500 TV stations. While Katz is closely tied to iHeartMedia, it could certainly fare well on its own in the event of a breakup.
• Clear Channel Outdoor: A huge money-making machine for iHeart, this division operations in 30 countries on four continents and ranks among the top three out-of-home companies in the U.S.
• iHeartRadio: iHeartRadio transmits over 850 station websites and has a social footprint touching nearly 80 million people. While it hasn’t produced the revenues the company had hoped, it’s a major property with lots of value.
• iHeartMedia: With 858 stations, it enjoys a wealth of assets and talent, but how much it would fetch whole or broken up is a big question mark, with CBS Radio already on the block and the possibility of Cumulus being broken up.

But no matter what any of these assets might fetch, the breakup of iHeartMedia would be a good thing—good for radio, good for the employees and good for all the divisions.

The various business units would stand a strong chance of ending up in the hands of capable operators with the know-how and resources to maximize their true value.

Advertisers and media buyers would certainly benefit.

Perhaps the bigger question is this: Who will lose?

The answer is lots of people—from investors who put up their savings to employees whose lives were disrupted in the turmoil. But the full tally of losses may not be known for years. That’s the way these things play out.