Two Small Groups Go Under

[TheBigA]

In the last 24 hours, two small radio groups, Broadcast Media Partners of Houston and Mapleton Communications in California, have been taken over by their lenders. In the case of Mapleton, the lenders spent $4 million to take over 99% controlling interest in the company, which owns 28 stations. For BMP, apparently their debt had gone unpaid for two years, so creditors simply swooped in while the CEO was out of town.

It's popular to focus on the big companies, and assume that this debt issue is only a problem for the "C" companies. But here we see a couple of small, locally run companies running into trouble with their creditors. And it wasn't for a lot of money. I thought it was interesting that the BMP creditors waited 2 years before foreclosure. As I've said, smaller companies have fewer choices when it comes to the credit crunch.

 

[PTBoardOp94]

I don't think anyone would say that all small groups are in good financial shape. But nearly all of the "Big Cs" (except for Cox, perhaps) are in poor shape

 

[TheBigA]

My point is the big ones have more choices, and are a much bigger pill for these investment companies to swallow. Whereas you can buy controlling interest of a small company for next to nothing.

 

[SirRoxalot]

So, what you're saying is that the banks ARE willing to take over the operation of radio stations - especially if they're not getting at least the interest on the loans.

This may be an indication that some investors think that radio has hit bottom, and they may be thinking that now's the time to "buy low". That's not necessarily good news for those who are seriously overextended. Most groups have written down the value of their properties and taken huge losses on the books. That means that they don't have the collateral value that they had when they borrowed huge sums of money to overpay for properties.

The banks, hedge funds, and other who hold the debt have to decide how they're most likely to recoup their investment. Do they leave radio stations in the hands of the current owners, many of whom demonstrably failed to deliver on promises to improve management, programming, and revenue, even before the recession? This requires them to believe that the current management team can deliver on a new set of promises.

The alternative is to take over the groups, sell the stations for a fraction of what they're owed, and invest that money in other ventures that have a better looking growth curve. Look at it simply: you bought a house for $500K, at the top of the housing market. Now that house is worth $100K, needs a lot of repairs, and the neighborhood has deteriorated to the point where it will be a long time before that house is worth more than $100K. The tenants can afford to pay rent on $100K house, not a $500K house. Meanwhile, you can buy a house in a much more desireable neighborhood for $100K. It's not as big, but it has more land around it, and plenty of room for expansion. Renters will pay premium rents, and their business is growing.

So, what are you going to do with your $100K. Let it ride, or put it where it has a chance to grow faster?

For people in radio, and for the listeners, new owners mean less debt, which means more money for programming, promotions, and competing with other stations. Increased competition improves everything, for everybody. If we've learned one thing, it's that overconsolidation is bad for everybody.

 

[gr8oldies]

Well, certainly as we speak, the creditors are bringing in busloads of broadcasting school graduates to apply for all the DJ jobs they're going to create.

 

[TheBigA]

So, what you're saying is that the banks ARE willing to take over the operation of radio stations - especially if they're not getting at least the interest on the loans.

In neither one of these cases are banks involved. These are outside investors. These are more dangerous than banks.

This may be an indication that some investors think that radio has hit bottom, and they may be thinking that now's the time to "buy low".

These are very specific actions made by investors that already had a large amount of money invested. In both cases, investment groups that held the notes came in and took control of the operation. These are not outsiders.

The alternative is to take over the groups, sell the stations for a fraction of what they're owed, and invest that money in other ventures that have a better looking growth curve.

Who would buy them? No one’s buying. So no, that’s not the plan. If they were going to sell, they could have done that without a take-over. The difference between an investment group and a bank is an investment group isn’t publicly traded. So they don’t have to meet quarterly P&L figures. They can simply sit on some of their investments and ride out the storm. THAT is what’s going on. Specifically at Mapleton. BMP is a different situation. They had been in default for two years.

The problem from an employee point of view is that costs will be cut even further under this kind of operation. The first step will be an across the board salary cut. The next step is a line-by-line cost analysis, to determine what cuts can be made in operations. It’s kind of bankruptcy without actual bankruptcy, and the investment group is the judge.

For people in radio, and for the listeners, new owners mean less debt, which means more money for programming, promotions, and competing with other stations. Increased competition improves everything, for everybody. If we've learned one thing, it's that overconsolidation is bad for everybody.

Boy are you idealistic. The wolves are now in the hen house. The accountants are now in charge. They will NOT be spending more on anything. The debt hasn’t been removed. It’s imply been changed from debt into equity. These are the people who’ve been pressuring the CEOs to cut costs. Now the filter has been removed.

Competition is bad for profits. Competition costs money. What hurt the radio companies was when their stations had to compete with the internet and other new technologies. Until that happened, everything was fine. I expect these people will look for ways to consolidate their radio stations with other technologies. That is the next step. There is money in new technology. Not in old technology. So don’t look for them to go back to old methodologies.

 

[TheBigA]

Interesting...as I go through the State boards, I read more examples of small groups either shutting down or selling out. Two small groups in South Carolina have simply shut their stations down. One surprise is that Russ Oasis appears to have sold an Indiana FM station to a Christian group. Locals there fear his Oldies station will be flipping to Contemporary Christian soon.

At a time when the hope was that "real broadcasters" would buy stations and return them to their former glory, we're seeing guys like Russ Oasis get out. That's not good news.

 

[TheBigA]

In neither one of these cases are banks involved. These are outside investors. These are more dangerous than banks.

Let me clarify something. When I said "outside investors," I meant they are not part of the management team. But they have inside knowledge of the operation by virtue of their investment. So they're outside investors, but not outsiders.

 

[gr8oldies]

There's a 100% chance that WKLU in Indy will go Contemp Christian. Of course, it's interesting to note how much Russ Oasis is villified on the Indy board, one guy screaming about him not going wall to wall tornado coverage exclusively for the suburb it's licensed to. Then there's Art Angotti. The villification may well be justified, but if everyone isd hoping for guys like this to buy stations, don't bet on it.

Though didn't that bus full of DJ applicants just pass me on the road? They had one Official Broadcasting School jacket to share between them. yep, the glory days are back!

 

[SirRoxalot]

The accountants are already in charge - and have been for a long time at a lot of stations, and most of the consolidators.

If the new "owners" continue to cut, the outcome will simply be further reductions in revenue, and even less profit. The other guys in the market will reap greater ratings, and greater rewards. Overall listening will continue to fall because radio will have even less to distinguish it from "somebody else's iPod".

BTW, there are no "broadcasting school graduates". The amount of interest in radio among young people is approaching nil.

 

[TheBigA]

If the new "owners" continue to cut, the outcome will simply be further reductions in revenue, and even less profit. The other guys in the market will reap greater ratings, and greater rewards. Overall listening will continue to fall because radio will have even less to distinguish it from "somebody else's iPod".

As I've said many times, revenues and overall listening fall regardless of how much money they spend. So why spend money? There is no incentive to spend money. The "other guy in the market," as you put it, is in the same boat. He ain't spending either.

 

[pocket-radio]

General Motors is a big company and they ran out of options. Chrysler is big and they ran out of options.

What the big companies and small ones have in common is debt, that can't be paid back.
Big and small companies can refinance their debt, but with banks being on the verge of failure banks are less willing to gamble. Big companies can sell stuff, buildings or stations.. but finding stupid buyers with willing to over pay for now undervalued assets is tricky. I guess they can sell stock? but who wants their penny stocks? Radio has one asset, cash flow. and it ain't what it once was is it?

If it wasn't for the recession GM & Chrysler would be operating as normal and banks would be willing to loan money, out their axxxx.. Easy money is hard to come by now for auto manufactures and radio stations.

Cars aren't selling like they once did.. job losses keep people from buying metal...
Station revenues are off 30% or more, because big companies have pulled in budgets
and little ones are conservative now.

Big A please tell us, what options do big Companies like Citadel or Clear Channel have left? Short of a govenment bailout or instant ecomonic recovery.

Inquiring minds await your pearls of wisdom and knowledge.

 

[davideduardo]

Big A please tell us, what options do big Companies like Citadel or Clear Channel have left? Short of a govenment bailout or instant ecomonic recovery.

In the two cases referenced, the lenders, who are not banks, appear to be taking equity (ownership) for the debt. They then will have to see what business model fits each company.

In the cases of the bigger companies, you have to look at the structure. The investment bankers borrowed money to buy the companies. Can they trade equity for some debt? Will they look to replace management? What route either cuts the losses or has some upside potential?

This is really not similar to GM and Chrysler, as both of those companies had major problems, like an overexteded dealer system, models that had become unappealing to consumers, poor prospects for competing with other car companies, etc. And they had billions in obligations to the pension and health plans set up in the years when those companies would give anything just to prevent a strike. A terrible number of chickens came home to roost, all at once... and the chickens looked a lot like vultures, too.

In radio, the issues are severe, but very different and the solutions will be different, too.

 

[TheBigA]

Big A please tell us, what options do big Companies like Citadel or Clear Channel have left? Short of a govenment bailout or instant ecomonic recovery.

The one thing I know is there won't be any government bailout.

 

[SirRoxalot]

This is really not similar to GM and Chrysler, as both of those companies had major problems, like an overexteded dealer system, models that had become unappealing to consumers, poor prospects for competing with other car companies, etc. And they had billions in obligations to the pension and health plans set up in the years when those companies would give anything just to prevent a strike. A terrible number of chickens came home to roost, all at once... and the chickens looked a lot like vultures, too.

Not really similar to GM & Chrysler? You don't think that the "overextended dealer system" is similar to the consolidators being overextended in their purchase of hundreds of radio stations for more money than the profit would deem reasonable?

The car manufacturers had "models that had become unappealing to consumers". I think that it's safe to say that many of the consolidators are rolling out programming that is less and less appealing listeners.

The car companies had "poor prospects for competing with other car companies". Several of the consolidators have cut so much talent that they're having trouble competing with companies that are in better financial shape.

The car companies had billions in obligations to pension and health funds. The consolidators have some of the same obligations - and billions in obligations to lenders who fronted the money for them to purchase hundreds and hundreds of stations.

One thing we agree on. The government is NOT going to bail out broadcasters. That's the biggest reason that the solutions will be different.

 

[TheBigA]

This is really not similar to GM and Chrysler, as both of those companies had major problems, like an overexteded dealer system, models that had become unappealing to consumers, poor prospects for competing with other car companies, etc. And they had billions in obligations to the pension and health plans set up in the years when those companies would give anything just to prevent a strike. A terrible number of chickens came home to roost, all at once... and the chickens looked a lot like vultures, too.

For some reason, you attributed this quote to me. But I didn't say it.

You also said that consolidators have billions in obligations to pension funds. Please tell me which consolidators have pension funds.

 

[davideduardo]

Not really similar to GM & Chrysler? You don't think that the "overextended dealer system" is similar to the consolidators being overextended in their purchase of hundreds of radio stations for more money than the profit would deem reasonable?

You attributed my quote to BigA...

In any case, the word "overextended" in the context of the dealer networks of GM and Chrysler refers to the manufacturers inability to support too many dealers and too little sales. The dealers are not owned by the car companies, but the inability to move cars and overloaded lots at too many dealers builds up unsold inventory...

Very different from radio companies that are unable to pay debt service due to the recession. The car companies were in trouble way before the recession.

The car manufacturers had "models that had become unappealing to consumers". I think that it's safe to say that many of the consolidators are rolling out programming that is less and less appealing listeners.

Only in your mind.

The car companies had "poor prospects for competing with other car companies". Several of the consolidators have cut so much talent that they're having trouble competing with companies that are in better financial shape.

Many listeners are overjoyed that the "annoying DJs" are not as prevalent, or gone from the formats where they were superfluous.

The car companies had billions in obligations to pension and health funds. The consolidators have some of the same obligations - and billions in obligations to lenders who fronted the money for them to purchase hundreds and hundreds of stations.

I don't think even one of the larger broadcast companies has a pension burden... most companies in radio have used 401k's with optional employer matches to provide a retirement package. Of course, 20 years ago, few radio companies even had that.

 

[SirRoxalot]

My apologies for attributing Mr. Eduardo's quote to "TheBigA".

I find it difficult to believe that anyone can defend the multiple rounds of programming cuts as improving radio programming, or that syndication and out-of-market voice-tracking have made radio more attractive to listeners. Then again, that's what some people are going to try to sell to the money men that they depend on to allow them to hang onto their conglomerates.

 

[davideduardo]

I find it difficult to believe that anyone can defend the multiple rounds of programming cuts as improving radio programming,

While some cuts are due to financial difficulties at a few companies that are not economy related, most cuts are like those at nearly every other company and business and government office in the US and related to the recession. Good or bad radio have nothing to do with the fact that all companies are trying to survive.

or that syndication and out-of-market voice-tracking have made radio more attractive to listeners.

I'm involved with a networked format with major talents balanced with considerable local content, and find it is vastly more entertaining, well programmed and fun to listen to than anything that could be done locally in today's economy. It's really good radio, not just for these economic times, but for the listener in any time.

Then again, that's what some people are going to try to sell to the money men that they depend on to allow them to hang onto their conglomerates.

And I think that there are just as many, or more, cases where today's technology allows kinds of programming that were undoable previously. The idea is to provide the best programming. Listeners who are entertained really don't care where the studio is.

 

[davideduardo]

My apologies for attributing Mr. Eduardo's quote to "TheBigA".

I find it difficult to believe that anyone can defend the multiple rounds of programming cuts as improving radio programming, or that syndication and out-of-market voice-tracking have made radio more attractive to listeners. Then again, that's what some people are going to try to sell to the money men that they depend on to allow them to hang onto their conglomerates.