Inside the Citadel bankruptcy filing


RBR-TVBR excluvise

You know that Citadel Broadcasting has over $2 billion in debt that it wants to slash down in its Chapter 11 bankruptcy reorganization. And you probably know that a lot of that crushing debt load came from its deal to acquire ABC Radio. But there’s lots more in the 344-page declaration by CFO Randy Taylor telling the court how Citadel got into this mess.

“Citadel, like many radio, television and newspaper companies, has seen its revenue and profitability decline due to the downturn in advertising spending by companies particularly in the auto, banking and restaurant sectors. Citadel is also highly overleveraged — indebted to its lenders for approximately $2.076 billion in secured loans. Indeed, based on Citadel’s current financial position and recent industry performance, Citadel anticipates that it will not be able to comply with the financial covenants imposed by an amendment to its credit agreement as of January 15, 2010,” Taylor said in the court filing. That referred to the requirement that Citadel have $150 million in cash on hand by the 15th of next month. The company was warning as far back as April that it would have a tough time meeting that deadline.

“All of these factors, which have been highly publicized in the marketplace, have contributed to increasing pressure from competitors in light of the instability surrounding Citadel’s existing capital structure. Recognizing all of this, Citadel determined that an expeditious balance sheet restructuring was key to its future success,” the lengthy statement by Taylor said. After six months of intense negotiations, the company got agreement from 60% of its senior lenders and filed the pre-packaged Chapter 11 plan on Sunday.

Taylor’s statement noted that from 1971 to 2008 the radio industry enjoyed a 7.1% compound annual growth rate, taking revenues for the entire industry to $17.4 billion in 2008. It was in 2001 that Forstmann Little & Co. bought out the public shareholders of Citadel and took the company private for $2 billion. Citadel had approximately 200 stations (in medium and small markets) and $323.5 million in revenue for the full year ended December 31, 2001.

Not mentioned in the filing – Forstmann Little tossed out Citadel founder Larry Wilson and brought in Farid Suleman, long the right-hand man of Mel Karmazin at Infinity/CBS, to be the new CEO.

More stations were bought and on August 6, 2003, Citadel went public again, selling an IPO of 25.3 million shares of common stock at $19.00 per share. On February 18, 2004, Citadel Broadcasting sold an additional 9.63 million shares.

Then came the big deal. Citadel won a bidding battle for ABC Radio, which Bob Iger wanted to spin off from The Walt Disney Company without having any tax liability for Disney. ABC Radio took on $1.35 billion in new debt, with the cash staying at Disney, then merged with Citadel. Citadel issued 151,707,512 shares of its common stock to its new Disney stockholders in June 2007. Just before the merger Citadel paid a special dividend to its old shareholders so that the deal balanced out with the Disney shareholders owning approximately 57.5% of the news company and the former Citadel shareholders 42.5%.

That left Citadel holding about $2 billion in debt as it headed into 2008, the year the economic downturn began. As the advertising market deteriorated, the Chapter 11 narrative revealed that Citadel looked for ways to escape its crushing debt burden. A formal search for a buyer began last June. Four potential buyers entered serious negotiations, but the company determined that pricing was not sufficient to pursue that course, so management began to focus on a financial reorganization.

Our previous story mentioned some of the broadcast industry vendors and others of note listed as major unsecured creditors in the Citadel bankruptcy. The 21-page attachment you can download from this page will let you peruse the entire list.

RBR-TVBR observation: If you’ll read our story when the sale of ABC Radio to Citadel was announced, you’ll notice the commentary on how low the multiple appeared to be, based on the standards of the time. Such a “cheap” multiple would seem stratospheric today, not to mention that margins have shrunk, so the multiple would be computed on lower cash flow.

So, was Citadel a victim of the times or of bad management? Adding the big market ABC stations was supposed to provide the heft to give Citadel the type of growth that it had not accomplished under Farid Suleman’s reign up until then. The stock had dropped from the IPO price of $19 to $12 the day the ABC deal was announced. The company continued to disappoint Wall Street, as Suleman kept making promises of a turnaround to come. Then the entire radio industry was hit by a deep recession. Citadel, already struggling, just sank deeper and deeper.

The basic problem appears to have been that after a couple of decades as Mel Karmazin’s bean-counter, Farid Suleman somehow thought he knew how to grow beans. As one former manager once said, “He thinks he’s mini-Mel.” The crop failures have shown otherwise. Amazingly, the lenders becoming the owners of Citadel want to keep Suleman in charge of the bean fields. Are they really expecting to see much of a crop?
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