If Clear Channel Outdoor were an independent company, Wells Fargo Securities analyst Marci Ryvicker figures its value would be about $9 a share. But she has to take into account the reality of its ownership.
Ryvicker added CC Outdoor to her universe of stocks covered last week. So, while she doesn’t give any rating view to CC Media Holdings, which holds an 89% stake in CC Outdoor via its 100% ownership of Clear Channel Communications, the analyst has to look at the relationship between the two companies to value the billboard company.
“While we believe that CCO shares are fundamentally undervalued, as both our DCF [discounted cash flow] analysis and our multiples-based approach suggest a fair price of $9.00, the conflicts of interest with parent company CC Media Holdings (CCMH) and its potential bankruptcy create significant uncertainty, which limits near-term upside potential, in our view. Our two biggest concerns in the event CCMH files for Chapter 11 are that (1) CCO stands to lose $488 million in cash (roughly $1.40 per share, which we deduct from our $9.00 fundamental price to determine our $7-8 valuation range)’ ‘borrowed’’ by CCMH via its cash management agreement, and (2) 99% of the voting interest would transfer to new owners that may or may not act in the interest of CCO equity holders. Yet even if a CCMH bankruptcy does not materialize, uncertainty still surrounds the intercompany loan and the cash management agreement, which mature in August 2010,” Ryvicker told clients.
So, she rates CCO “Market Perform” with a valuation of $7-8. The stock closed Monday at $6.70.
When Clear Channel Communications was taken private by the Thomas H. Lee and Bain Capital private equity funds (leaving just a few shares of the new CCMH in public hands), the company ended up with debt totaling $20.8 billion and total leverage of 9.5 times, which Ryvicker notes made it one of the most highly leveraged buyouts (LBO) in history.
“In a normalized environment, CCMH would have been able to use the substantial free cash flow generated from its operations ($1.1 billion in 2006) to reduce its significant debt load and remain compliant with its covenants. Unfortunately, however, the global recession merely aggravated an already fragile radio industry, which suffers both from a lack of pricing power and a lack of demand, resulting in significant revenue and
EBITDA declines. As CCMH is the largest radio operator worldwide, it certainly was not immune, and therefore, suffered EBITDA and FCF declines of 21% and 59% in 2008, respectively. As a result, CCMH has not been able to delever quickly enough to offset its EBITDA declines and has gradually seen its total leverage increase to 11.6x and its senior secured leverage ratio increase to 8.1x (as of Q2 2009),” she calculated.
Ryvicker cautions that she’s not an expert on debt defaults or bankruptcies. (She follows equities.) But she figures that “CCMH will mostly likely file for Chapter 11.” And she thinks the company could be in a default situation by early 2010 unless there’s a significant upturn in the advertising market.
One of the many alternative scenarios she lays out would have CCMH selling all or part of its radio or outdoor assets to put its balance sheet in order.
“Unfortunately, given the general lack of available credit, coupled with stringent regulations, we view this scenario as highly unlikely. If the credit markets miraculously open up, we expect CCMH to part with radio assets before parting with outdoor assets, given outdoor’s lack of secular challenges and the potential for real catalysts (i.e., digital
billboards and an eyes-on audience measurement system),” Ryvicker said in her initial research report on CC Outdoor.
RBR/TVBR observation: JCDecaux is waiting and hoping that, sooner or later, either CBS or Clear Channel will decide to sell out of the billboard business. But the closely-held French company is a patient suitor. So, CC Outdoor is likely to trade at a discount to its potential market value until CC Media Holdings really gets into a jam and has to look at selling.