BOCA RATON, FLA. — With the closing of the third quarter of 2020 on Wednesday, Cumulus Media has completed the initial closing of what it is calling a tower portfolio monetization transaction first made public on August 10.
According to the Atlanta-based company, it earned $208 million in gross proceeds — slightly lower than what the audio media operation that owns AM and FM stations and the Westwood One national radio business first said as further closings get it to the expected total.
With the release of Cumulus’ Q2 2020 earnings report, CEO Mary Berner announced that the company was poised to pocket more than $210 million in the tower deal with Boca Raton, Fla.-based Vertical Bridge — a transaction designed to “monetize” its tower portfolio.
In fact, during the company’s Q2 earnings call, Berner noted the tower agreement has a 14.25x multiple and is a transaction that will increase future cash resources. “We are delighted with the deal,” Berner said. Cumulus EVP/CFO Frank López-Balboa added that the deal with Vertical Bridge is a “fantastic transaction” that can reduce debt, add liquidity and bring more shareholder value.”
It involves some 250 towers, and an all-important lease-back arrangement that will involve $13.5 million in expenses in year one. To buffet these costs, third-party lease deals are anticipated to generate some $2.3 million.
That arrangement has raised eyebrows with at least one radio industry executive. Requesting anonymity, the executive asks, “Has anyone at Cumulus said if the savings for retiring debt exceeds what their new rent payment is going to be?”
The executive also asks how easy, or hard, it would be to transfer one of these leases to a new buyer. “It could make it hard for Cumulus to [sell] a property, should they need to. Otherwise, it is a horrible business decision.”
With the Sept. 30 first closing of the Vertical Bridge transaction, Berner said Cumulus is “thrilled to have expeditiously completed” it.
She added, “Pro forma for its completion and based on our Q2 ending cash balance, we will have reduced net debt by nearly $325 million during 2020 and by nearly $580 million since emerging from bankruptcy in 2018. Our further improved liquidity position and covenant-lite, long-dated debt will continue to support our growth initiatives and allow us to take advantage of accretive opportunities as we navigate through near-term uncertainties to drive long-term shareholder value.”
While $208 million in gross proceeds was earned, some $8 million is being subtracted for transaction fees and expenses and related costs.
And, as Cumulus previously noted, the use of net proceeds from the transaction are governed by the Company’s Term Loan Credit Facility due 2026 and its 6.75% Senior Secured First Lien Notes due 2026.
In these debt agreements, it is stated that net proceeds of approximately $64 million from assets being sold and not being leased back, and net proceeds of approximately $96 million from assets being sold and leased back, are required to pay down the Term Loan and be applied to a tender offer with respect to the 6.75% Notes on a pro rata basis.
Further, the paydown from the sale-leaseback proceeds is required to be made at closing for the Term Loan portion and within thirty days of closing for the 6.75% Notes.
As such, at closing, the Company paid down approximately $49 million of its Term Loan at par, and it intends in the near future to launch a tender offer for up to approximately $47 million of the 6.75% Notes at par. Any amounts offered but not accepted under the tender offer will be used for an additional par paydown of the Term Loan.
The mandatory prepayment/tender offer required in connection with the Sale Proceeds is subject to a 12-month reinvestment right.
Operating Highlights of the Transaction
At closing, Cumulus Media entered into a master lease agreement for the continued use of substantially all of the towers that were sold. What are the business terms?
The initial term of the lease is 10 years, followed by 5 option periods of 5 years each. This puts Cumulus in a position to continue using the towers until 2055, when over-the-air radio broadcast signals could become an outdated technology and face decommission.
The annual lease payment obligation for the assets leased back in the initial closing is approximately $13.2 million, subject to customary escalators, and will be accounted for as a reduction of the financial liability and interest expense.
Annual tenant revenues of approximately $2.2 million and operating expenses of approximately $2.3 million (of which approximately $1.5 million is non-cash intangible amortization) will no longer be reflected in the Company’s financial statements. The Company will report non-cash imputed rental income for tower sites where it continues to use a portion of the tower along with other existing and future tenants.
The transaction will not have any effect on Cumulus Media’s current broadcast operations.
The Company anticipates that one or more subsequent closings will be held for the assets comprising the remainder of the previously announced $213 million purchase price, subject to adjustment based upon due diligence and the curing of outstanding site defects. The Company anticipates that substantially all, if not all, of the subsequent closings will occur by the end of the second quarter of 2021.