iHeart in Bankruptcy

[RoddyFreeman]

In case anyone hasn't heard, iHeart Media filed for Chapter 11 this morning. The company announced it had come to an agreement with its bondholders (the small guys), which was necessary for the reorganization.

As with Cumulus, I suppose it will be another 6-9 months before we know anything more. But when iHeart emerges from bankruptcy, their lenders and bondholders will likely own around 90% of the company initially.

 

[joebtsflk1]

Well...maybe you just frequent the Atlanta board.

 

[ThePowerCow]

So what will this mean to radio listeners?

 

[davideduardo]

So what will this mean to radio listeners?

Nothing.

Under Chapter 11, the company reorganizes its finances and gets out from under a big part of its $20 billion in debt. The stations will continue to run as normal, and afterwards the company should be quite profitable.

This is reorganization, not liquidation.

 

[RoddyFreeman]

Nothing.

Under Chapter 11, the company reorganizes its finances and gets out from under a big part of its $20 billion in debt. The stations will continue to run as normal, and afterwards the company should be quite profitable.

This is reorganization, not liquidation.

David, isn't there a question of whether the lenders will want to keep some or all of the stations after iHeart emerges from bankruptcy?

 

[TheBigA]

David, isn't there a question of whether the lenders will want to keep some or all of the stations after iHeart emerges from bankruptcy?

It would be cutting off their nose to spite their face. They'd be selling the source of the revenue they need to make money. The only stations they'd want to sell are some boat-anchor AM stations that have zero audience and cost money to operate. No one would want to buy them. They want to buy KIIS or WHTZ, the big market stations that make all the money. The whole point of radio is to deliver audience to advertisers. That's where the money is. iHeart does that better than anyone because of their multi-platform approach. Selling assets hurts them competitively against Entercom and Cumulus.

 

[RoddyFreeman]

It would be cutting off their nose to spite their face. They'd be selling the source of the revenue they need to make money. The only stations they'd want to sell are some boat-anchor AM stations that have zero audience and cost money to operate. No one would want to buy them. They want to buy KIIS or WHTZ, the big market stations that make all the money. The whole point of radio is to deliver audience to advertisers. That's where the money is. iHeart does that better than anyone because of their multi-platform approach. Selling assets hurts them competitively against Entercom and Cumulus.

You state the obvious that yes, radio companies are in the business to make money. But emerging from Chapter 11, iHeart is not likely to be owned by radio companies. I question whether the lenders will be interested in the business or want to sell to radio companies. I also wonder if potential major market owners are going to want the small markets, of which iHeart has many. The AM's would be packaged so companies that wanted the FM's would have to take them.

 

[TheBigA]

I question whether the lenders will be interested in the business or want to sell to radio companies. I also wonder if potential major market owners are going to want the small markets, of which iHeart has many. The AM's would be packaged so companies that wanted the FM's would have to take them.

That's how iHeart ended up with these boat anchors in the first place. Who would buy them? iHeart has a dozen stations in the Aloha Trust, and a few more in their Ocean State trust. Perhaps the new owners throw some more dogs in those trusts. If no one has bought them before, what is the enticement to buy them now? The stations they'd like to sell are difficult to sell in any market, and even more difficult to sell in a glutted market with Scripps and Entercom stations still for sale.

You're right about the lenders not wanting to be in the radio business. They really aren't. They're in the asset ownership business. It's a different business. They've already made it clear they want to keep current management running the radio stations. The situation, as I stated on the National Radio board, is hindered by the fact that the new company is still saddled with $10 billion in debt. Sure that's better than 20, but it makes it less attractive to potential buyers like Liberty Media.

 

[jabba17]

You're right about the lenders not wanting to be in the radio business. They really aren't. They're in the asset ownership business.

The lenders aren't in the asset ownership business, either. At least not as their first choice. They're in the money-lending, making-money-on-money business. If they wind up with hard noncash assets, that's a less-than-optimal situation for them, because now they're stuck running a business they have no expertise in (and have to buy expertise in to keep as a valuable going concern) as a best-case scenario. It also means more money tied up they can't lend and earn interest on.

Hopefully (for the lenders' sake) they'll get full value in cash for those assets, and yesterday. If not, that just means they'll have their money tied up that much longer, and may even have to liquidate the assets to a willing buyer for less than the "old", status-quo-ante full market value. Worst case they liquidate (either as a going concern or parted out) for less than what they're owed.

Unless you're a predatory lender that bakes in repos and foreclosures as part of your business plan, so you can sell the same car or house multiple times, no lender likes repo cars and REO. The same is true with the big-boy lenders. It may be the cost of doing business, but it's still a cost that nobody wants to incur.

 

[TheBigA]

Hopefully (for the lenders' sake) they'll get full value in cash for those assets, and yesterday. If not, that just means they'll have their money tied up that much longer, and may even have to liquidate the assets to a willing buyer for less than the "old", status-quo-ante full market value.

Keep in mind that every day that they own those assets, they generate cash. Somewhere in the vicinity of $1 billion a year. Now that money is going to them, not the company. So it's not a total loss to hold on for a while. But I don't expect they will. They'll just sell their part of the company to someone else. Not selling individual stations, but a portion of the company.

 

[RoddyFreeman]

That's how iHeart ended up with these boat anchors in the first place. Who would buy them? iHeart has a dozen stations in the Aloha Trust, and a few more in their Ocean State trust. Perhaps the new owners throw some more dogs in those trusts. If no one has bought them before, what is the enticement to buy them now? The stations they'd like to sell are difficult to sell in any market, and even more difficult to sell in a glutted market with Scripps and Entercom stations still for sale.

You're right about the lenders not wanting to be in the radio business. They really aren't. They're in the asset ownership business. It's a different business. They've already made it clear they want to keep current management running the radio stations. The situation, as I stated on the National Radio board, is hindered by the fact that the new company is still saddled with $10 billion in debt. Sure that's better than 20, but it makes it less attractive to potential buyers like Liberty Media.

Your points sound logical . . . and are optimistic if you work for iHeart. I don't feel it's going to be that easy. I also would not be surprised if Liberty Media ended up in the mix. We won't know what's going to happen for several months at the earliest. Time will tell.

 

[TheBigA]

I also would not be surprised if Liberty Media ended up in the mix. We won't know what's going to happen for several months at the earliest. Time will tell.

I think the Liberty discussions are taking place. But their original offer was based on the company ending up with only $5 billion of debt. Now with $10 billion, their original 1.16 Billion offer for 40% of the company is a bit small. Even if Liberty ends up with a piece, it will have to get approval. That could be difficult if the DOJ wins the AT&T case.

 

[nightmanager]

So what will this mean to radio listeners?

Perhaps a LOT of filler ads for their bankruptcy attorneys? It's one way to pay those pesky legal bills! /snark

Of course they won't do this.... or will they?

 

[TheBigA]

Perhaps a LOT of filler ads for their bankruptcy attorneys? It's one way to pay those pesky legal bills! /snark

Of course they won't do this.... or will they?

Haha...lawyers don't take trade. They want cash.

 

[Kelly A]

Haha...lawyers don't take trade. They want cash.

Plus retainer fees...

 

[Kelly A]

Hopefully (for the lenders' sake) they'll get full value in cash for those assets, and yesterday. If not, that just means they'll have their money tied up that much longer, and may even have to liquidate the assets to a willing buyer for less than the "old", status-quo-ante full market value. Worst case they liquidate (either as a going concern or parted out) for less than what they're owed.

But that's the thing; radio properties (except for some AM stations) are the most valuable being run well than as assets. Technically you need a federally-issued license to operate the station which in itself has no value, so what else is there? Maybe a little bit of owned land and some pretty much worthless equipment.

Starting in 1996, Clear Channel and other groups were making crazy stock and cash deals on stations across the country. It was a feeding frenzy, because lenders (banks), private equity, drank the; if we own the lions share of radio markets across the country, we own the lion share of any growth in that media accordingly-Koolaid. Then the recession came along, and 'poof'! Now individual properties are part of a group portfolio purchased in the feeding frenzy, are now worth pennies on the dollar because growth of new audience and advertising went negative, not the anticipated double digit annual growth.

Unless you're a predatory lender that bakes in repos and foreclosures as part of your business plan, so you can sell the same car or house multiple times, no lender likes repo cars and REO. The same is true with the big-boy lenders. It may be the cost of doing business, but it's still a cost that nobody wants to incur.

Having to eat $10B is a bitter pill, no matter what sort of lender you are. Now comes the battle to see who is going to get pennies on the dollar, and who will be left sucking wind.

 

[kf4rca]

I'd like to see what their top execs are pulling down.

 

[RoddyFreeman]

But that's the thing; radio properties (except for some AM stations) are the most valuable being run well than as assets. Technically you need a federally-issued license to operate the station which in itself has no value, so what else is there? Maybe a little bit of owned land and some pretty much worthless equipment.

Starting in 1996, Clear Channel and other groups were making crazy stock and cash deals on stations across the country. It was a feeding frenzy, because lenders (banks), private equity, drank the; if we own the lions share of radio markets across the country, we own the lion share of any growth in that media accordingly-Koolaid. Then the recession came along, and 'poof'! Now individual properties are part of a group portfolio purchased in the feeding frenzy, are now worth pennies on the dollar because growth of new audience and advertising went negative, not the anticipated double digit annual growth.

Having to eat $10B is a bitter pill, no matter what sort of lender you are. Now comes the battle to see who is going to get pennies on the dollar, and who will be left sucking wind.

Yes, buying every station in sight is part of what caused this. But a bigger reason for iHeart's massive debt is the sale to two venture capital firms, Thomas Lee and Bain. These firms and others of the same ilk finance their purchases of companies with very little of their own money, and sell debt to finance the rest. Then they collect massive fees along the way from the companies they acquire. Bain is involved in the Toys R Us liquidation announced last week.

 

[TheBigA]

But a bigger reason for iHeart's massive debt is the sale to two venture capital firms, Thomas Lee and Bain.

Don't shed any tears for Bain & Lee:

https://www.bloomberg.com/news/arti...o-break-even-on-investment-in-bankrupt-iheart

 

[Kelly A]

These firms and others of the same ilk finance their purchases of companies with very little of their own money, and sell debt to finance the rest. Then they collect massive fees along the way from the companies they acquire.

Sure, if you want business financing these days, Private Equity and hedge funds are the few options, and usually a matter of dancing with the devil you think will cause the less harm in the long run.
And guess what? If you have a 401K plan at work, or hold other forms of investments, chances are you've helped fund deals like this.