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Radio Giant iHeart Faces Costly Reckoning on Debt 10 Years After Buyout

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iHeartMedia
Inc.,


IHRT -2.36%

the nation’s largest radio broadcaster, is likely to file for bankruptcy protection as early as March after a decade of ballooning debt and faltering growth, drawing the curtain on one of the biggest leveraged buyouts before the 2008 financial crisis.

An insolvency would put iHeart’s 856 terrestrial stations and its billboard-advertising business into the hands of creditors, who would then have to figure out how to find growth in the face of challenges ranging from a sluggish advertising market to new technologies that have changed the way consumers listen to music.

For five years, the company has spent more on debt payments than it earns. It has juggled more than $20 billion in debt during much of the past 10 years, repeatedly pushing the due dates further into the future through refinancings and debt swaps.

This week, iHeart missed a $106 million interest payment and kicked off a countdown on a 30-day grace period during which creditors and the company will try to reach a deal to restructure the debt, most likely including a bankruptcy filing. The two sides are in talks to cut debt on iHeart’s radio business to a more manageable $6 billion to $8 billion, which could allow the company to start generating cash, according to the company’s filings.

“This company going bankrupt is not a problem, it’s the solution,” says Cowen analyst Lance Vitanza. A bankruptcy could free up cash to invest in talent and programming, he said.

A spokeswoman for iHeart said, “Separate from our capital structure, iHeartMedia has a strong operating business.”

The iHeart insolvency comes barely two months after its rival, No. 2

Cumulus Media
Inc.,

declared bankruptcy, unable to service debt it had taken on for acquisitions. Pacifica Foundation Inc., a nonprofit that operates a handful of politically liberal talk stations around the country, was on the brink of bankruptcy recently after it fell behind in rent payments for a broadcast antenna atop the Empire State Building used by its New York City station. And E.W. Scripps said last week it plans to sell all 34 of its radio stations as part of a restructuring.

Though the particulars of each case differ, together they highlight the challenging environment for traditional broadcasters today.

The world was different in 2006 when private-equity firms Thomas H. Lee and Bain Capital entered into deal talks with iHeart, then known as Clear Channel Communications. Started by Lowry Mays in 1972 as a single radio station, Clear Channel was the largest radio company in the U.S. at the time of the buyout, reinforced by outdoor advertising and concert promotion businesses.

The $26.7 billion buyout closed in 2008, on the eve of the financial crisis. Bain and THL had loaded up iHeart with more than $13.5 billion of new debt to fund the acquisition, on top of the company’s existing $8 billion load, just as markets seized up and advertising rates cratered.

The music landscape too was changing. In 2006, iHeart’s main competition came from satellite radio and iPods; later it would have to contend with Spotify AB, which launched its on-demand streaming service in the U.S. in 2011, and with online advertisers that were already siphoning off market share of print and broadcast media companies.

Since the buyout, iHeart has been running in place, eking out marginal growth in revenues in its radio business. Still, it has performed better than its peers, Cumulus and

CBS
Corp.’s

radio business. iHeart also owns the majority of a publicly-traded outdoor-advertising unit, whose debt isn’t being restructured.

Yet even as Spotify and other online services like Pandora Media Inc. continue to woo consumers away, radio’s core audience remains massive. iHeart says its broadcast radio alone reaches 271 million people in the U.S. each month, more than any other media company including Facebook and Google. But radio also is less profitable than it was in 2008, as airtime increasingly turns from music to more expensive programming such as news, talk and sports.

iHeart joined the already-packed on-demand streaming market in 2016 with the launch of a pair of services within its existing iHeartRadio app, which had previously just played programming from the broadcast stations.

Analysts see iHeart’s foray into streaming—which has failed to generate meaningful profits even for Spotify or Pandora—as a defensive move rather than a growth opportunity. As the appetite for music on-demand grows, iHeart is hoping to keep listeners from migrating to competitors while also recouping some of the ad dollars flocking to digital platforms.

“It’s smart for iHeart to have a dog in the fight, but I don’t think it’s the future of the company,” says Mr. Vitanza. “Most people still view 10 bucks a month for something that’s free as kind of a rip-off.”

The picture is a little brighter for iHeart’s private-equity owners. Although they stand to lose their entire $2 billion equity investment, THL and Bain have managed to offset virtually all of the potential loss of iHeart’s equity, a person familiar with the matter said.

That’s because the two firms also bought iHeart’s debt at steep discounts in the early days of the buyout, then sold it over the years at a profit as the markets recovered, the person said.



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