CCU takes "body blows," still standing


Bear Stearns analyst Vic Miller says Clear Channel has taken some "body blows," such as the leaked cost cutting memo first posted on and troubles with station sale deals, but he thinks the company can withstand some body blows because 2007 BFC could come in ahead of expectations. That’s largely due to stronger-than-expected performance at Clear Channel Outdoor, owned 89% by CCU, which fellow Bear Stearns analyst Chris Ensley has upgraded to "Outperform."

Miller believes the buyout by Thomas H. Lee Partners and Bain Capital at $39.20 per share will likely go to closing. If it doesn’t, he sees CCU shares falling to a range of $25-26, but if his financial estimates are on target, he sees the real value around $34, which is still above where they have been trading lately.

Here’s more of the thinking from these two analysts.

RBR/TVBR observation: For a perspective in time RBR recommends you take a few minutes to scan and digest the Archives on Example: 5 years ago 2003 issue 24 – Clear Channel stock fared at 40.08 and by Friday that week issue #27 down to 37.70. Review CCU this week in 2007, RBR issue # 24 – 36.43 and by Friday issue #28 – 36.65. After a hard body blow last week, CCU closed Friday at 31.77. Patterns paint a picture.

Victor Miller on CCU:

Clear Channel: For What It’s Worth

* Clear Channel’s Body Blows. In the past months, CCU has suffered several body blows: a) monthly RAB numbers have been weak, b) the Providence TV deal still has not closed; c) a buyer for $450MM in radio stations terminated its agreement; d) the deal markets have seized up, e) a leaked CCU radio-CEO memo unnerved investors; f) this week, representatives from Bain and Lee remained silent on CCU’s deal prospects; and g) CCO is at a 15-month low [BSC upgraded CCO today].

* Rope a Dope? CCU may be able to absorb some body blows.  Why? We believe a) CCU’s 2007 OIBDAN may finish ahead of our original expectations [with radio in line and outdoor doing better by 4%], b) the OAAA projected 2008 outdoor revenues up 5-7%, c) that LIBOR has contracted nearly 225bps over the last six months, d) CCU sponsor-reps continue to make encouraging statements, e) that the Providence TV deal may well be re-cut and f) that there is immense value in CCU’s international outdoor assets.

* For What It’s Worth. With a) CCO at $22.22 [15-month low], b) $425MM in asset sales closed by YE-2007, c) $1.4BB in remaining TV/radio asset sales, d) $1.35BB in 4Q2007/2008 free cash flow and assuming target radio OIBDAN multiples of 8.0x-8.5x, CCU shares would approximate $34 per share. If the deal "broke," which we do not expect, the stock would probably fall to the $25-26 range, but only on demand-supply imbalances.  And if it did break, we would expect CCU to create significant value with strategic steps laid out in our March 12, 2007 piece "Advisors’ Greatest Hits" [sell TV, sell small market radio, sell international outdoor, spin-off the outdoor business, leverage companies for dividends/repurchases.] The ultimate downside seems limited.

* What Do We Watch Now? A) DOJ approval (by February 13?), b) CCU 4Q 2007 results/10-K (February 14), c) the bank road-show (February 15?) and d) a scheduled close (March 1-15?).

Chris Ensley on CCO:

Upgrade to Outperform from Peer Perform – The Derivative Call from Our Views On CCU

* Upgrade to Outperform from Peer Perform.  We are upgrading shares of CCO to Outperform from Peer Perform as a derivative call on Bear Stearns’s views on CCU (see our CCU note out this morning).  If CCU does go private, the likelihood CCO’s int’l unit would be sold increases substantially.

* A Catalyst?  If CCU Closes, Is a Sale of Int’l Outdoor Far Behind?  We believe investors could realize near term upside if T. H. Lee and Bain & Co. close on their purchase of CCU, as we suspect the private equity buyers would move to sell CCO’s int’l business as a way to delever the entity.  With the dollar at $1.48/euro, up from $1.27/euro at the time Lee/Bain announced the deal, the value of the int’l business has increased substantially, increasing the likelihood of a sale, in our opinion.  A year ago, we believed CCO Int’l could fetch ~$3B in a sale.  Through improved operating performance and a weaker dollar, we now believe ~$4B is realistic.  Importantly, the increase would not reflect an increase in the purchase multiple to a euro denominated buyer.

* Raising 2008 EBITDA to Reflect Weaker Dollar.  We are raising our 2008 EBITDA estimate by 2% to $1.05 billion from $1.03 billion to reflect the dollar trading 6% lower in 2008 than 2007.  We are making no change to fundamentals on a constant currency basis.

* Establishing $27 Target Price.  At current levels, we believe the market is pricing in a much sharper slowdown in outdoor ad spending than we currently forecast.  We also believe there is a nice arbitrage between public EBITDA multiples of int’l outdoor companies (9x) and  potential private market multiples (11x-12x).  We are establishing a $27 target price, though each incremental multiple on the int’l EBITDA creates $1/share of incremental value before taxes.

Source: Bear, Stearns & Co.