ChannelFlipper said:
I think you are missing my point. Debt is attractive to owners because it is generally cheaper than equity.
The owners of a company, the shareholders, generally don't favor issuing additional shares, as that dilutes their equity.
That is why most companies, when given a choice, will maximize the debt they can carry before taking on more equity.
A company does not "take on" equity. "Equity" means "ownership position." If there are 100 shares in a company, then each one represents a 1% equity position in the company. If 100 more shares are issued, each share is now worth 0.5% of the company, a dilution in the equity of an existing shareholder.
What that "maximum" amount is often is judgmental based on the risk tolerance of management. Other times it is judgmental subject to the risk tolerance of those external to management, such as existing senior lenders or equity investors.
Or the existing lenders have put in place covenants as part of their loans that restrict further debt...
Knowing how the play the game is not the same as playing it well. That's why there are so many different management styles.
In the case of radio, executives saw that through consolidation, cost reduction and synergies of various markets and properties, they could squeeze increasing profit margins out each radio station, thereby justifying ever increasing valuations. But those increased valuations could not go on forever because there are only so much costs and efficiencies to be obtained, no matter how many stations one consolidates, and those who were last to find out were left holding the (devalued) bag when the bubble inevitably burst.
Generalizing, Your Honor.
First, out of 12 to 13 thosuands commercial stations, only a small percentage were part of large scale consolidation... the Clear Channels and Cumulus' of the business.
In the larger markets, many buyers thought that to be cought with only one FM in a market would make sales relatively difficult. So they paid prices above standard multiples, based on future revenue projections. Most of the companies did not acquire unmanagable debt, but t he ones that were risky were hurt by the economy and the changes in media usage of the late 2000's
In most cases, no bubble burst as most stations were not part of consolidation, or were just part of a local owner buying another station in their smaller market or nearby.
Few are actually over-leveraged. In fact, one company built with creative financing, Cumulus, has grown through the period.
Any time major market participants in any market are overlevered like those in radio, the industry as a whole is bound to suffer because management has to make ever increasing payments to it creditors while dealing with substantially lower revenue.
Lower revenues are not the product of under or over leveraging. They are the product of the economy. Radio was not unique in having some players severely punished by the economy.
Radio has lost major existing talent due to lay-offs, does not have a pipeline of talent due to voice-tracking and massive syndication, and has foolishly put what remains of its existing R&D into HD radio, a concept the public has rejected in droves.
Technology has made voicetracking possible, and it would have happened with or without leveraged deals or consolidation. The PPM has caused a reevaluation of the role of talent today, so that's not a leverage issue, either.
And HD affects only about 12% of stations nationally, and was for the most part a one-time, pre-recession expenditure... and in large markets, a small one to boot. More is spent in a given few months on internet than overall has been spent on HD.
