With its publicly traded shares at 55 cents and its lenders clamoring for equity, debt-laden iHeartMedia may be on the path to Chapter 11 bankruptcy and a reorganization — just as Cumulus Media has opted for.
For veteran financial analyst and top blogger Michael Boyd, such a path for iHeart is likely the best route forward.Writing for Seeking Alpha, the registered independent advisor shared his thoughts on iHeart by summarizing its current financial state of affairs.
Boyd first turns his attention to Clear Channel Outdoor Holdings, for which iHeart’s lenders seek 100% equity in lieu of debt owed to them by the company.
“Over the past several years, Clear Channel Outdoor Holdings looked to have some clear tailwinds to its share price,” Boyd says. “The company looked cheap versus key comps Lamar Advertising and Outfront Media. Long-standing majority owner iHeartMedia, with its strong access to inside information, made frequent purchases at much higher share prices than today, oftentimes in spite of its poor capital structure. While the bankruptcy of iHeartMedia seems to be a long-time coming, many investors thought the eventual sale of Clear Channel Outdoor Holdings shares by creditors in private placements would likely boost the share price (elimination of the majority holder discount). Unfortunately, none of this has materialized.”
Boyd adds that the value of the company’s common equity “has continued to bleed,” as any and all asset sales done by Clear Channel Outdoor that have raised capital simply resulted in special dividends being issued to shareholders; a tactic done to strengthen iHeartMedia’s balance sheet.
As a result of these transactions, he notes, “the company looks to be losing a little bit of operating leverage and scale, and margins are weakening, particularly as costs increase internationally. Despite the cash infusions, the bankruptcy of iHeartMedia looks assured, and given senior bond pricing, the receipt of the unsecured promissory note payable by iHeartMedia, while always a long shot, looks to be a goose egg.”
Is there, then, value in CC Outdoor Holdings common stock?
“At the end of the day, the common stock has far too much hair and risk for even me to shoulder, but the bonds look attractive,” Boyd concludes, declaring that investors “run from the equity.”
FAINT iHEART BEAT
Boyd then does a “pulse check” on iHeartMedia. It showed “the faintest of beats,” he notes.
“Majority owner iHeartMedia now trades at near all-time lows; just $55 million in market cap remains, or nearly 95% loss of market cap since the highs,” Boyd says. “The company was saddled with a staggering $20 billion of debt as part of the leveraged buyout of then-Clear Channel Communications by private equity firms Bain Capital and Thomas H. Lee Partners back in 2008.”
For Boyd, “the structure was doomed from the start,” and iHeartMedia has posted quarterly losses “nearly every single quarter” since the deal.
He adds, “The company raised going concern doubts earlier this year, and it remains unlikely the company’s equity survives.”
What about the $1.05 billion due to CC Outdoor from iHeart’s iHeartCommunications subsidiary?
“This is a promissory note,” Boyd explains. “As an unsecured creditor (substantially all of iHeartMedia debt is senior), the company has no chance of collection.”
This is the major problem to Boyd, given the net transfer that occurred during 2017 to iHeartMedia ($166 million) “is likely akin to setting shareholder funds on fire given the situation at the firm.”
Boyd adds that this has been the subject of shareholder lawsuits before, with the settlement driving a payment from the firm, as well as the establishment of a committee to monitor the note and demand payment under circumstances.
“Cleverly, under the settlement, if a demand is made the money must be paid to shareholders as a special dividend; iHeartMedia ends up getting substantially all of the capital back given its controlling stake,” he says. “Luckily, the promissory note has a current principal cap of $1 billion (the remainder currently on the note made up of interest owed).”
Once one normalizes EBITDA for corporate expenses that are unallocated on a segment level, Clear Channel Outdoor generates around $500 million in EBITDA. There is some $5.27 billion in gross debt “floating around, including a large chunk of short-dated maturities,” Boyd says. “That’s more than 10x net debt/EBITDA leverage as I define it (less than the covenants, which exclude some items). All the asset sales over the past several years, which should have gone to paying down high cost debt versus special dividends, have driven that leverage number higher.”
This, Boyd says, is what continues to hold back iHeart.
He concludes, “iHeartMedia is bleeding the company dry, and if it isn’t careful, it might drag Clear Channel Outdoor down with it.”
So, what does iHeart do, in Boyd’s view?
“A bankruptcy – sooner rather than later – of iHeartMedia would likely be a good thing,” he says. “Clear Channel Outdoor could take the billion dollar-plus impairment charge (write-off of the promissory note asset on its balance sheet), restructure, and move on. The corporate services agreement, under which iHeartMedia provides management services like treasury, payroll, human resources, etc., would be null and void, but the company could plug these shortfalls on its own.
“I think this is a classic case example of missing the forest for the trees. Simple SOTP valuation does prove out some value, but that largely ignored how long iHeartMedia has managed to stave off bankruptcy, in large part by bleeding this company dry. What was beneficial to them (infusion of cash) has been value destructive for shareholders. While the going concern announcement likely means the end is near, it also means that the company is growing more and more desperate. Who knows what other levers beyond ridiculous licensure fees and asset sales iHeartMedia might try to push through. Given the leverage here, any move to fire sale assets (10x EBITDA or lower) is going to be dilutive to the equity and push the bonds into covenant violation.”
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