WEST PALM BEACH, FLA. — Six days ago, executives at one of the nation’s most visible media companies finally reached the end of a lengthy, winding path riddled with more than a few potholes.
The Honorable Marvin Isgur, a U.S. Bankruptcy Judge since February 1, 2004, serving the Southern District of Texas, put his signature on a 210-page redlined version of iHeartMedia‘s reorganization plan, putting the No. 1 owner of radio stations and the parent of the iHeartRadio brand on the fast-track to its emergence from debtor-in-possession status.
What’s next for iHeart? The Global Head of Restructuring Data at Debtwire has some thoughts.
Debtwire Global Head of Restructuring Data Joshua Friedman has some thoughts.
They include a possible future sale of the company or, more likely, a significant investment from an entity that sees value in iHeart’s assets.
But, do obstacles still exist for iHeart, which will exit bankruptcy protection with $5.75 billion in debt, compared to $20 billion?
Not really, Friedman notes.
With Isgur’s blessing, iHeartMedia secured the court’s confirmation of its reorganization plan. This will cede ownership and control of the company to its senior creditors, while also fueling the much-desired separation of iHeart from non-debtor subsidiary Clear Channel Outdoor Holdings (CCOH).
Friedman observes, “iHeart’s restructuring significantly reduced its debt structure, knocking off well over $10 billion in debt and setting up for a separation of Clear Channel Outdoor Holdings.”
For the every-day trader and for iHeart employees eager to understand the outcome in layman’s terms, Friedman narrows the exit from Chapter 11 down to two key outcomes. First, iHeart will have new owners. Second, iHeart will have a greater ability to invest in the audio entertainment business, and grow it, he says.
Who are the new owners?
With iHeart’s bankruptcy case confirmed, ownership will be held by various groups. Two stand out as holding the highest percentage of iHeart equity: Franklin Templeton
Prior, private equity sponsors controlled iHeartMedia. With the bankruptcy case confirmed, ownership will be held by the following groups: Franklin Advisors and Pacific Investment Management Co., a.k.a. PIMCO.
These firms represent the major bondholders, and combined they represent 25% of ownership interest, as has been reported.
Also in the mix: Davidson Kempner Capital Management LP, a global institutional investment management firm.
“The PGNs and Term Loans were held by these firms,” Friedman says. “With the restructuring, they received new debt and equity in the company.”
Meanwhile, there is Franklin Templeton, which has included iHeart in its Franklin Income Fund in recent years. A Q3 2017 fixed income analysis conducted by Franklin Templeton noted that iHeart had experienced a “minor” decline during the quarter, as did another communications company it invested in — Frontier Communications.
Out of the picture are main private equity sponsors Thomas H. Lee Partners and Bain Capital Partners, and additional equity firms Abrams Capital, L.P., which gained all shares from the Jonathon Jacobson-controlled Highfields Capital Management in late December 2018.
Thus, a 12-year journey that began with the Nov. 16, 2006, merger between what was then Clear Channel Communications (traded on NYSE as “CCU”) and the Lee/Bain group for $26.7 billion — including the assumption of $8 billion in debt — ends with the company known as the highly visible iHeart, trading on the OTC “pink sheet” at roughly 45 cents a share with a ticker symbol with the unfortunate “Q” designation seen for any company in debtor-in-possession status.
The “new” iHeart will instantly see the “IHRT” ticker symbol drop the “Q.”
And, it puts iHeart in a position to grow, or pursue suitors with better leverage.
Asked what his biggest takeaway is regarding the iHeart bankruptcy plan’s approval, Friedman notes, “Employee and industry concerns about the trouble at iHeart, or the death of radio, can subside. There are still large investors, and there are still people that believe in iHeart. It is well-suited to compete and thrive in the marketplace in a way that it has not been able to in years.”
He adds that the owner of AM and FM radio stations, and producer of a plethora of podcasts, is on a strong path toward removing a lot of lingering concerns, including its remaining $5.75 billion in debt.
“With large-scale investors looking to buy debt, an exit strategy is likely to involve a future sale of some sort, rather than where it precisely trades,” Friedman suggests.
This means that iHeart’s stock, trading on an exchange known for companies representing the riskiest investments, is not so much of a factor in the company’s future than its assets and total value to a possible partner.
“There are investors with large positions aligned to their vision of how iHeart should look,” Friedman says. “This is not about market volatility but about reestablishing itself as a market leader in its actions, and not just its market share.”
Enter Liberty Media Corp., which expressed its interest in a large amount of iHeart equity in February 2018, only to be rebuffed by management as it moved forward with a bankruptcy plan. Liberty withdrew its proposal in mid-June 2018, which would have seen it grab a 40% equity stake in iHeart for approximately $1.16 billion.
The John Malone-led Liberty Media — the parent of Sirius XM Satellite Radio, which intends to merge with streaming audio pioneer Pandora —presented iHeart a term sheet that reflects ABL facility claims of approximately $365 million in unpaid principal plus interest, fees, and other expenses.
Friedman expects Malone and Liberty to make another run at a big chunk of iHeart equity. “Now that they’ve emerged [from bankruptcy protection], they may have a different view on offers being made,” he says of iHeart. “Emergence from bankruptcy gives them better leverage to get an increased bid.”
But, as iHeart rejected Malone’s moves early on, Friedman says it is hard to say iHeart would be inclined near-term to consider a new offer.
What’s next for the radio industry? A “new radio market” — one that is better positioned thanks to the elimination of balance sheet limitations from iHeart and Cumulus Media, the No. 3 licensee of radio stations, behind noncommercial player Educational Media Foundation and iHeart, respectively.
But isn’t there still a lot of debt of concern at iHeart?
“An emergence from bankruptcy with debt is not uncommon,” Friedman says. “By percentage of debt, it is a significant hair cut. In that sense it would be surprising to have seen much more taken away.”
Will iHeart try to whittle it down to zero?
“I’m not sure that is a goal of the company or the current investors,” Friedman concludes. “There are plenty of companies that carry debt and are quite successful. They use it for leverage as a growth engine — tapping the debt markets to get additional equity investments.”
This could actually help, rather than hinder, the next stage of life for an industry that continues to be challenged by alternative entertainment choices, yet persists.
“People have been predicting the AM and FM and terrestrial radio demise for some time,” Friedman says. “It seems to be just chugging along. It doesn’t seem like there is too much that is new that would lead me to think others are increasingly bearish on radio.”