Audacy bankruptcy could occur by month's end

[TheBigA]

They also probably wouldn't sell any of the CBS stations due to the tax ramifications.

Seems to me they already sold a couple of former CBS stations, such as the single station in Palm Springs.

 

[tall_guy1]

Why would you even want that?

I wouldn't, but a possibility.

 

[MarkW]

They are not going to do a mass liquidation and they are not going to do death by a thousand cuts by selling a ton of assets piecemeal.

Only select assets would be sold, if any.

I can see Audacy getting rid of a few of the clusters outside the Top 50, but not much within that range. They also probably wouldn't sell any of the CBS stations due to the tax ramifications. I have an idea on which markets could be targets, but I agree with DavidEduardo that it doesn't do any good to sell one station, it needs to be an entire cluster, and that's going to take some bucks.

I agree that a scalpel and not an ax would be used relative to any prospective divestitures.

Why would there be adverse tax ramifications? Is there that much of a risk sale proceeds would exceed cost basis? Even if that were to occur, the P&L should have offsetting losses elsewhere.

 

[Kent]

Seems to me they already sold a couple of former CBS stations, such as the single station in Palm Springs.

I think he means the ex-CBS stations with legacy properties in the cluster.

Why would there be adverse tax ramifications?

Since the CBS/Entercom merger was a Reverse Morris Trust, the capital gains taxes on the longtime CBS and Group W stations would be astronomical if they were sold. Unless those taxes on the legacy CBS stations were paid in the Westinghouse deal, they have the same base they had when CBS and Group W bought them, which is a ton lower than what they’re worth today. Can’t remember if the Westinghouse/CBS deal in 1995/96 was a stock-for-stock merger or an outright sale. I believe, though, that it was the former, which would mean the deals on the properties would be tax-free.

 

[TheBigA]

Since the CBS/Entercom merger was a Reverse Morris Trust, the capital gains taxes on the longtime CBS and Group W stations would be astronomical if they were sold.

Cumulus was able to sell off several former ABC stations, also purchased using RMT.

 

[davideduardo]

Seems to me they already sold a couple of former CBS stations, such as the single station in Palm Springs.

And that was an almost valueless property which some thought was an excuse to have meetings in the market when it was snowing in NYC.

I think the discussion is about the heritage CBS stations that have been under their umbrella since they went on the air. But Audacy could sell stations that were acquired more recently with far less tax consequence, particularly if they are in markets where they do not have critical cluster mass.

Just speculating and guessing. One of the issues is how capital gains would be calculated when the company's losses far exceed the gain.

 

[MarkW]

I think he means the ex-CBS stations with legacy properties in the cluster.



Since the CBS/Entercom merger was a Reverse Morris Trust, the capital gains taxes on the longtime CBS and Group W stations would be astronomical if they were sold. Unless those taxes on the legacy CBS stations were paid in the Westinghouse deal, they have the same base they had when CBS and Group W bought them, which is a ton lower than what they’re worth today. Can’t remember if the Westinghouse/CBS deal in 1995/96 was a stock-for-stock merger or an outright sale. I believe, though, that it was the former, which would mean the deals on the properties would be tax-free.

Great info; thank you!

The Reverse Morris Trust tax considerations would be of no continuing effect if Audacy were to reorganize in Chapter 11, I'm guessing?

Also of note, debt forgiveness granted on an out of court basis would be taxable. Prepetition debt discharged in Chapter 11 is not taxable.

 

[exdjted]

I think he means the ex-CBS stations with legacy properties in the cluster.



Since the CBS/Entercom merger was a Reverse Morris Trust, the capital gains taxes on the longtime CBS and Group W stations would be astronomical if they were sold. Unless those taxes on the legacy CBS stations were paid in the Westinghouse deal, they have the same base they had when CBS and Group W bought them, which is a ton lower than what they’re worth today. Can’t remember if the Westinghouse/CBS deal in 1995/96 was a stock-for-stock merger or an outright sale. I believe, though, that it was the former, which would mean the deals on the properties would be tax-free.

Thanks Kent. I should have been more clear in my post. That is what I was referring to.

 

[Kent]

The Reverse Morris Trust tax considerations would be of no continuing effect if Audacy were to reorganize in Chapter 11, I'm guessing?

I don’t know exactly what would happen with the tax bases of the stations if a Chapter 11 bankruptcy reorganization happened. My assumption is that the bases would be adjusted upward, at least if the ownership structure changed substantially (which it likely would). As The Big A mentions, Cumulus, post bankruptcy, sold several of the legacy ABC stations. I don't know what it paid in capital gains on those properties, but I wouldn’t think it would’ve sold them if it would've had to pay based on ABC's base. I suppose, though, if Cumulus had had a substantial enough capital loss on its books, it might’ve figured it could cancel out the gains on the ex-ABC properties. I don’t know its tax history well enough to be able to say exactly what the thinking there was.

 

[101tm]

There’s no reason to believe Audacy will fire sale any of their stations. IF they can get a decent price for a station, that’s a short term capital infusion and permanently eliminates a revenue stream. The company isn’t in trouble because the stations aren’t doing well.

There may be some asset swaps, but the company really needs the revenue stream more than the one time shot from a sale.

 

[Larry]

I guess i am also wondering if the stations would actually sell for significantly more than their value when acquired from CBS and be subject to capital gains taxes. AM station values have cratered and in the midst of the current advertising slump and heightened competitive audio market I would think value of FM stations have stagnated if not decreased.

 

[TheBigA]

I would think value of FM stations have stagnated if not decreased.

I think the accountants have already handled that.

 

[CTListener]

What can bring advertising back to legacy media like radio? When does the "slump" bottom out and become a static, normal state? And will radio be able to survive in the "new normal"?

 

[Kent]

I guess i am also wondering if the stations would actually sell for significantly more than their value when acquired from CBS and be subject to capital gains taxes.

The tax would appear to be based on what the value of the stations were when CBS acquired them, not what they were when acquired by Entercom/Audacy from CBS. The Reverse Morris Trust was designed to prevent Viacom and CBS from paying capital gains tax on the radio stations because the legacy stations were worth so little when they first signed on. In a Reverse Morris Trust, the stockholders essentially make two votes. The first is for the target to buy the acquiring company. The second is to install the acquirer's management of the old company. Since the target buys the acquirer on paper, the tax bases of all the properties don't change.

AM station values have cratered and in the midst of the current advertising slump and heightened competitive audio market I would think value of FM stations have stagnated if not decreased.

Even with AM stations cratering in value, KDKA is worth significantly more than it was in 1920. Some of the legacy FM's signed on in the 50’s and 60’s. Their values haven't decreased to those levels and won't anytime soon.

 

[TheBigA]

What can bring advertising back to legacy media like radio? When does the "slump" bottom out and become a static, normal state? And will radio be able to survive in the "new normal"?

I don't think you can generalize. Audacy has some stations that are unaffected by the depression. WINS and WFAN are still holding their own. But the also own a bunch of boat anchors. Audacy spent a couple years trying to spread their resources around the company, and it didn't work. So they went back to the basics. The main thing they have to do is build a second revenue stream with digital, and it just seems to be very difficult for them.

 

[Kent]

When does the "slump" bottom out and become a static, normal state? And will radio be able to survive in the "new normal"?

Radio will always be around. The question is whether what we currently use will be the form. Every form of technology, at some point, sunsets and is replaced by something new. The content and music we enjoy will always be available. It just might be replaced with personalized streaming stations and on demand entertainment.

Most of us still enjoy and have some love for the medium, or we wouldn’t be here talking about it. I don’t think the death knell for traditional radio, at least on FM, has sounded yet, but the medium continues to evolve.

 

[davideduardo]

The tax would appear to be based on what the value of the stations were when CBS acquired them, not what they were when acquired by Entercom/Audacy from CBS. The Reverse Morris Trust was designed to prevent Viacom and CBS from paying capital gains tax on the radio stations because the legacy stations were worth so little when they first signed on. In a Reverse Morris Trust, the stockholders essentially make two votes. The first is for the target to buy the acquiring company. The second is to install the acquirer's management of the old company. Since the target buys the acquirer on paper, the tax bases of all the properties don't change.



Even with AM stations cratering in value, KDKA is worth significantly more than it was in 1920. Some of the legacy FM's signed on in the 50’s and 60’s. Their values haven't decreased to those levels and won't anytime soon.

Remember, up until the early to mid-90's, they could only own 7 stations in each band, so most of the portfolio has 90's prices, most of which are under water.

 

[Daryl Lynn L.A.]

Remember, up until the early to mid-90's, they could only own 7 stations in each band, so most of the portfolio has 90's prices, most of which are under water.

First of all, I apologize for not understanding all of this, but I’m trying to learn as fast as I can.
When you say the stations in the portfolio are “under water”, you mean that Audacy owes more on the stations than they are worth? Like when a home is under water due to its large mortgage?

Also, I’m thinking of the Audacy station in L.A., KRTH 101, which has been #1 for about 5 months now. Every time the ratings are posted here, KRTH is on top. So, wouldn’t they be able to charge very good ad rates? And, KNX Newsradio 1070, which millions of commuters listen to for freeway traffic updates? And, KCBS 740, Newsradio, which has excellent reporting?

So , at least some of these stations should have good revenue streams, correct?

Finally, Elon Musk is in the news because he may buy back the debt on X / Twitter because the company has lost income. Can Audacy do the same thing?
Thank you all for your patience in helping me learn about this. - D.

 

[Kelly A]

First of all, I apologize for not understanding all of this, but I’m trying to learn as fast as I can.
When you say the stations in the portfolio are “under water”, you mean that Audacy owes more on the stations than they are worth? Like when a home is under water due to its large mortgage?

Think of it this way: Back in the 90's large groups were buying stations based on the station or group's cashflow times a multiple which assumed that cashflow created by those purchases would grow through the upcoming five or ten years. In some cases, larger groups like Entercom/Audacy, Cumulus, and Clear Channel were paying X10 cash flow for growing their groups. Then the Recession of 2008 hit, and the growth of social media, Wall Street, banks, and other forms of lending determined that broadcast radio had less of a future than expected. Valuation for stations plummeted, and with that value drop amounted to a drop in asset values. Many of the gobble-up acquisitions included once-profitable AM stations, that shortly after were losing ground because of no new listeners, aka became negative growth. In other words; you roll up the overall drop in broadcast station values starting in 2008, combined with the negative views on the future of traditional broadcasting and lack of lending to traditional broadcast companies, and you have a situation where large groups are underwater from what was paid for these stations, and the pessimism about the future of broadcasting in general.

Finally, Elon Musk is in the news because he may buy back the debt on X / Twitter because the company has lost income. Can Audacy do the same thing?

Elon and his personal fortune from Tesla, SpaceX and other ventures, is one hundred times more than every broadcast and cable company valuation in the country. So no, apples and bowling ball comparison.

 

[TheBigA]

I don’t think the death knell for traditional radio, at least on FM, has sounded yet, but the medium continues to evolve.

The frustrating part is that some users keep wanting what they remember, while at the same time they're not willing to give up their phones and iPads. They can't understand what happened to the 80s, and they're holding it in their hands.