Bankruptcy now an admitted liklihood for Citadel

[Element9]

Don't disagree wholely with your observations, A and you make some valid points; however, I cannot concede Suleman's "innocence" in this debacle. His hands are all over this textbook case of ineptitude. Engineering the deal with a Reverse Morris Trust was almost too slick. Brighter men that I know how this stuff works, but when Warren Buffet and Charlie Munger say they don't completely understand some of the deal making that goes on, warning signals are set off for an average mook like me.

From those within Citadel, there's debate as to who was behind the ABC purchase. Some knowledgeable sources say Ted Forstmann wanted to be king of the radio hill while others say Suleman convinced Forstmann that buying ABC Radio would give Citadel extensive synergies and revenue producing opportunities in the coming era. After Citadel went into a nosedive, Suleman would tell anybody willing to listen that it was "all Teddy's idea." Suleman is widely viewed as a corporate ferret who aspires to be a weasel. The Citadel mess has shown the man behind the curtain to be a fraud.

Regarding Citadel's lack of understanding the Disney-ABC relationship prior to the sale, one can only ask what happened to the due diligence? Apparently, it was severly lacking. Suleman and Fortsmann were so driven to buy ABC that David Field-Entercom goaded them into paying more than it was worth. As you've noted in previous posts, Suleman negotiated the ABC purchase price down, but this did little to alleviate the eventual stress that was put on Citadel, which prior to the ABC Radio purchase was a reasonably successful small to medium market operator with strong EBITDA. (Speaking of "previous posts," I believe our friend SirRoxalot made the correct call about a year ago when he analyzed the situation and concluded that the path for CTDB lead straight to bankruptcy.)

Forstmann isn't the po' boy of this mess that some publications make him out to be. He may have lost some cash (understatement intended) but made a bundle taking the company public. Hard to feel sorry for Forstmann and Farid and others at the top, especially at this time of year when so many former employees of a once solid company will be having a Blue Christmas.

It will be interesting indeed to read and review the potential forthcoming lawsuits from shareholders who believe they were torched by the company. Small consolation for some, but just compensation for others.

 

[TheBigA]

Don't disagree wholely with your observations, A and you make some valid points; however, I cannot concede Suleman's "innocence" in this debacle. His hands are all over this textbook case of ineptitude.

I'm not saying he's innocent. But Forstmann Little was the majority owner. They hired him, and had a plan when he was hired. So this is not a matter of guilt or innocence. Read "Barbarians At the Gate: The Fall of RJR Nabisco." This is very similar. The key part here appears that Forstmann Little is now out of the picture. That changes the whole dynamic.

Regarding Citadel's lack of understanding the Disney-ABC relationship prior to the sale, one can only ask what happened to the due diligence? Apparently, it was severly lacking.

That depends. Remember that Farid was the one who first did in-depth accounting of ABC Radio, and went back to them and said the package was overvalued. He was able to negotiate it down, and he got a nice bonus for his work. What he didn't take into account was how quickly the value was dropping, and that it would all crash before the loan was paid off. I don't think anyone could have expected that, especially in 2006.

 

[TheBigA]

(Speaking of "previous posts," I believe our friend SirRoxalot made the correct call about a year ago when he analyzed the situation and concluded that the path for CTDB lead straight to bankruptcy.)

If you re-read his posts, they were more about wishful thinking. He'd always say that the bankruptcy would lead to a fire sale, where broadcasters who knew radio would return and run the stations properly. It's pretty clear that's not going to happen here. My point has been, and continues to be, that bankruptcy is bad for the employees, for the company, and for the industry as a whole. The only people who benefit from bankruptcy are the creditors, who get actual tangible property rather than paper promises. If you go to a bank now and say you want a loan to buy a radio station, they won't care that you're getting it for a good price, or you have a good business plan. The industry is now tainted with bankruptcy, and it will be almost impossible to get approved.

 

[gr8oldies]

What's more Rox's wishful thinking was that those "real broadcasters" would get stations at fire sale prices, then hire live DJs 24/7 for every station and format, let those DJs have free reign to do long talk breaks and maybe pick their own music, and we'd be doing radio in the 70s all over again. Even if you could find a lender to finance a radio station purchase, does anyone really think the bank is going to bankroll a massive increase in personnel costs? I wouldn't hold my breath at least.

 

[SirRoxalot]

What's more Rox's wishful thinking was that those "real broadcasters" would get stations at fire sale prices, then hire live DJs 24/7 for every station and format, let those DJs have free reign to do long talk breaks and maybe pick their own music, and we'd be doing radio in the 70s all over again. Even if you could find a lender to finance a radio station purchase, does anyone really think the bank is going to bankroll a massive increase in personnel costs? I wouldn't hold my breath at least.

GOOD GRIEF. I'm not even involved in this discussion, and you're posting ABSOLUTE BULLCRAP about what I've said. Find me ANY post where I've EVER advocated that stations "hire live DJs 24/7 for every station and format, let those DJs have free reign to do long talk breaks and maybe pick their own music". YOU'RE the one who interpreted my statements that way, and I've already disputed your deliberate misreading of my posts and use of hyperbole on multiple threads.

Citadel's bankruptcy is a foregone conclusion now. NOBODY knows what will happen to the stations - whether clusters will be sold off, or what further cuts may or may not take place. Even Farid's postion is no sure thing over the long run. One thing is for sure - a LOT of people are going to lose a lot of money. Stockholders are screwed. Most of the investors will get pennies on the dollar for their loans. The stations aren't worth the price that Farid paid - and weren't even after he "negotiated it down".

As far as the idea that bankruptcy is bad for everyone, so is crushing debt that sucks every dollar out of a company. The best hope for Citadel employees is that whoever is in charge operates the station to maximize audiences, which maximizes revenue. Many of the personnel cuts have actually cost the company money. Yes they reduced costs, but they reduced revenue even more.

 

[TheBigA]

The stations aren't worth the price that Farid paid - and weren't even after he "negotiated it down".

That's an insulting comment about the stations and the people who work at them. The fact is that SOME of the stations were worth the price, and some were not. But when you buy a package, you get things you don't want. That's how it goes. But the lenders had a chance to comment on the price of the stations. If they felt they were overvalued, they could have refused the loan. When you buy a house, the lender does his own appraisal, and decides if the price is fair. If it's not, they tell the buyer no. If that didn't happen here, and the lenders are taking a hit, it's the lender's fault.

The stockholders all were given a chance to vote on the purchase of ABC. Those who voted no sold their stock at that time, and that accounted for the huge drop in stock price after the sale was approved. Those who stuck it out knew what the situation was. But they were given a chance to vote on the deal, the specifics of the deal were laid out in a very lengthy and detailed mailing, and they knew what they were getting into.

The employees also knew that changes were going to come. Some ABC employees left very early in the process. Some waited until they were asked to leave. But change in ownership usually results in changes for employees. That shouldn't be news to anyone.

We are all responsible for our own situations, and we should do what's best for ourselves. That applies to owners, lenders, stockholders, employees, and the general public.

 

[SirRoxalot]

If the stations are/were worth what Citadel paid, WHY ARE THEY FACING BANKRUPTCY?

There were plenty of people that thought it was a bad deal at the time. The fact that a lot of stockholders dumped Citadel stock indicates that they thought so too. As far as the banks are concerned, it's been pretty well established over the last couple of years that bankers would approve almost ANY deal because they were interested in earning big fees and bonuses, and expected to sell the debt to some other sucker - and make MORE money on THAT sale.

You obviously don't like me, but don't let that cloud your thinking, Bub.

 

[TheBigA]

If the stations are/were worth what Citadel paid, WHY ARE THEY FACING BANKRUPTCY?

The stations aren't facing bankruptcy. The parent company is. Two different things. The Citadel bankruptcy has nothing to do with the value of the stations. If the company had deeper pockets, it wouldn't be facing this situation.

You obviously don't like me, but don't let that cloud your thinking, Bub.

Huh? What does that have to do with anything?

 

[davideduardo]

If the stations are/were worth what Citadel paid, WHY ARE THEY FACING BANKRUPTCY?

Look at it this way.

I'm going to use an LA real estate analogy, so this may seem "overvalued" by Cleveland or Rochester or Buffalo metric... and that is my purpose.

Let's say that in late 2006 I bought a 2200 sq. foot. town home in a foothills community and I paid $1.1 million for it. Since all properties of similar characteristics cost about $1.1 million, that is what this particular town home was worth in late 2006.

In late 2006, we were four to six months away from the "official" start of the recession.

Today, that property may be worth $700,000. I don't know, because except for bank owned properties, nothing else is selling. Since similar properties are in the $700,000 range, that is what the property is worth today.

Anyone who bought a property in late 2006 paid using the same metrics as my case. Everyone is about 30% under water today.

The issue comes when the property in my example is financed for $1 million. I would owe more than the thing is worth today. And if my income is off, I can't pay it off. I can't sell it without having a $300 k or more debt created, so I am stuck. If I can't pay the mortgage payments, someone will come with papers and evict me.

Was I wrong to buy the property for $1.1 million? After all, that was a good, fair price in 2006.

Now, apply that to Citadel.

 

[SirRoxalot]

Look, Citadel is predominantly a RADIO company. Its assets - and its encumbrances - are primarily based on the purchase of RADIO stations.

Obviously, individual stations are not facing bankruptcy because they are OWNED by CITADEL, a corporate entity that is on the verge of bankruptcy. There were plenty of people at the time of the purchase that questioned the price - including other bidders. Even the re-negotiated price was considered to be too high by many - including a lot of people that sold their stock at the time.

To address your illustration, David, you weren't wrong to pay $1.1-million for that property IF your income would allow you to pay the mortgage, and IF you intended to live in it, or hold for the long term. If, however, you acquired the property with a mortgage that was beyond your means with the intent of reselling it at a profit in the short term, or expected a major pay raise to finance your purchase, you were playing the market and got burned when it plunged.

People who own a property for the long haul may be underwater currently, but the property values will eventually come back to their favor. The losers are the people who really couldn't afford their purchase, and fell for bankers marketing loans with balloon payments and adjustable rates. I feel sorry for home buyers, who can be relatively innocent when confronted with the "expertise" of lenders. Professionals running major broadcasting companies, and who have based their career on their accounting wizardly, are supposed to know better.

Apply THAT to Citadel.

 

[davideduardo]

To address your illustration, David, you weren't wrong to pay $1.1-million for that property IF your income would allow you to pay the mortgage, and IF you intended to live in it, or hold for the long term. If, however, you acquired the property with a mortgage that was beyond your means with the intent of reselling it at a profit in the short term, or expected a major pay raise to finance your purchase, you were playing the market and got burned when it plunged.

Citadel purchased the Disney ABC stations with the idea that they could improve the operations and that the earnings would cover the debt service. Just as my hypothetical purchase assumed that my income would remain stable or perhaps grow at the same rate as in prior years.

The economy changed both Citadel's and my hypothetical purchaser's assumptions. Yet at the time of purchase, there was the definite feeling that were the moment not seized, then the price would further escalate. And there were few opportunities to get into such desirable markets at any price.

People who own a property for the long haul may be underwater currently, but the property values will eventually come back to their favor.

That is an unreasonable assumption. The economy has reset at a different level. It may take a decade to get some of the most depressed market values back in real estate. Considering that most Americans don't live in the same house for 10 years, there is going to be a loss somewhere.

The losers are the people who really couldn't afford their purchase, and fell for bankers marketing loans with balloon payments and adjustable rates.

Totally untrue. Anyone in LA with a motrage for 80% or more of value is under water. If any part of their income comes from incentives, investments, bonuses, etc., they may no longer be able to pay even a standard mortgage that they thought was easily affordable two years ago. And since the property is no longer worth even the mortgage value, they are subject to forclosure.

I feel sorry for home buyers, who can be relatively innocent when confronted with the "expertise" of lenders. Professionals running major broadcasting companies, and who have based their career on their accounting wizardly, are supposed to know better.

The CEO of Cemex, one of the world's largest cement and building materials companies, commented recently in regards to his company and its near-bankruptcy experiences in the last 18 months. He said that, were managers to factor in events that might occur once every 70 or 80 years if ever, no company woud expand, build new facilities, create new products or do anything except what they had been doing. Risk and using other people's money are fundamental to business.

So, there is no such thing as "knowing better" as following conventional advice would have deprived us of things ranging from FedEx to Microsoft.

Apply THAT to Citadel.

They were the victims of timing... and the economy.

 

[vsa]

So, there is no such thing as "knowing better" as following conventional advice would have deprived us of things ranging from FedEx to Microsoft.

Apply THAT to Citadel.

They were the victims of timing... and the economy.

When A. Jerrold Perenchio announced his desire to retire as Univision was sold for $11 billion, I told you that I thought he knew it was a good time to get out. I salute Mr. Perenchio on his almost too late sense of market timing - something the folks at Citadel sorely lacked.

...at the time of purchase, there was the definite feeling that were the moment not seized, then the price would further escalate. And there were few opportunities to get into such desirable markets at any price.

That's a pretty good definition of a bubble.

 

[RBB05]

[/quote]

They were the victims of timing... and the economy.
[/quote]

Perhaps, but they were victims of their own ineptness also. The programming for their LA properties is dreadful. The promotions for the stations, whatever there is, is dreadful. I can only assume NY and the other markets are no better.

 

[davideduardo]

Perhaps, but they were victims of their own ineptness also. The programming for their LA properties is dreadful. The promotions for the stations, whatever there is, is dreadful. I can only assume NY and the other markets are no better.

For a 5kw AM KABC does not do badly, and KLOS in the last year has moved well into the usual top 10 in the sales demos. For a single AM and single FM in a cluster predominant market, the LA stations do very well. SF has the legendary KGO. NY has well performing properties... and like every group owner, there will always be a few that are in need of repair.

 

[SirRoxalot]

Anyone who watched the cot-com bust, or Enron debacle knows that it hasn't been 80 years since an artificially-created bubble burst. When you see values accelerating like they did after 1996, it doesn't take a genius to discern that you're dealing with a bubble, not a real run-up in value.

Farid and others played the bubble game, and got caught when it burst. There were a LOT of people who thought that the ABC purchase was much too expensive for a company primarily built of mid and small market stations. Go back and look at the financial reporting at the time of Citadel's ABC purchase, then tell me that "there is no such thing as 'knowing better'".

 

[davideduardo]

Anyone who watched the cot-com bust, or Enron debacle knows that it hasn't been 80 years since an artificially-created bubble burst. When you see values accelerating like they did after 1996, it doesn't take a genius to discern that you're dealing with a bubble, not a real run-up in value.

The dot-bomb affected only one sector, and is not listed in most lists of recessions. The 2001 recession, which measured a 0.3 reduction in GNP, and was 14the deepest recession out of 14 since the Great Depression. In other words, irrelevant.

The Enron situation was the collapse of one mismanaged company, and not a recession.

The current recession is world-wide, and has affected the GNP of hundreds of countries, from Mexico to Singapore. Given the fact that companies ranging from the (former) largest auto company in the world to thousands of small businesses from a men's accessory shop in suburban Quito (my daughter's) to shops on main street USA have gone under, we can say that nobody could predict this recession or its extent. So blaming Citadel management and its lenders and backers when nobody else called this... even Warren Buffett did not see it coming... is disingenuous at best and mean spirited at the worst.

 

[TheBigA]

There were a LOT of people who thought that the ABC purchase was much too expensive for a company primarily built of mid and small market stations.

I disagree. Even critics of the deal felt that ABC was the best run radio company left. They had highly valued properties in major markets. Their network was flush with cash. The image was a Rolls Royce. The problem was not that Citadel spent too much, but that Citadel BORROWED too much. David bought Golliath. There's a reason why that's not always a good idea. The company was properly valued at the time. Citadel should not have borrowed so much. It also didn't help that Paul Harvey died with no successor, and Sean Hannity left for Clear Channel. Those two things alone were enough to cause them to miss their covenant.

 

[SirRoxalot]

Please explain the difference between "the ABC purchase was much too expensive for a company primarily built of mid and small market stations" and "The problem was not that Citadel spent too much, but that Citadel BORROWED too much."

It almost sounds like you agree that Citadel's purchase of the ABC stations was unwise.

And, Mr. Eduardo, you still haven't explained the dramatic increase in the values of stations from 1996 to 2006. The bubble was obvious to many observers - including a lot of the people who sold stations.

 

[TheBigA]

It almost sounds like you agree that Citadel's purchase of the ABC stations was unwise.

Not exactly. Don't you understand the difference between spending and borrowing?

You say they overspent, and bought stations that were overvalued. They aren't filing for Chapter 11 because the stations were overvalued. That's not the issue. They don't have enough cash on hand to meet their covenants.

My view on that, and I believe we've talked about this before, was I expected that Citadel had more access to the resources of Forstmann Little. Farid was also a Director there from 2002 to 2007, and two of the Forstmanns are still on the Citadel board. I would have thought he could have drawn on their billions in order to meet his covenants. Something obviously went wrong there, and left Citadel without a sugar daddy. We'll learn more when the lawsuits are filed.

 

[davideduardo]

And, Mr. Eduardo, you still haven't explained the dramatic increase in the values of stations from 1996 to 2006. The bubble was obvious to many observers - including a lot of the people who sold stations.

Station prices had been increasing in the decade prior to consolidation, with FM multiples going into the 12 to 15 times leading cash flow up above 15 times. This was quite natural, since pricing of anything has to do with supply and demand.

In 1996 radio was a growth industry. Consolidators felt that operating multiple stations in market offered many advantages... the same ones broadcasters in quite a few other countries had discovered decades before.

Most sellers had made a decision to not expand and there were two choices at the time... buy or sell. So the people who sold were most happy to be getting prices that were in excess of what they would have gotten five or ten years before, and the buyers thhought they had obtained viable clusters in the markets they were after.