Opinions expressed by Forbes Contributors are their own. That’s a clever indemnity statement for a financial publication that has a respected name, yet seems to accept any bit of unfiltered commentary from those who think they are in the know.
One of these individuals is Gene Ely, a veteran writer and the founder of the now-defunct Media Life Magazine. On Tuesday (3/20), Forbes.com published an essay from Ely with the provocative headline In The IHeartMedia Bankruptcy, Expect A Major Selloff Of Radio Stations.
Really? We asked brokers and D.C. communications attorneys what they thought.
Before we share their thoughts, let’s delve a little into what Ely hypothesizes.
First, he’s all but convinced that the iHeartMedia that emerges from bankruptcy “will be a very different company — and a lot leaner.”
Ely then adds, “Expect to see a dramatic shedding of radio stations, likely hundreds, many at rock-bottom prices. Never mind statements put out by the company that stations will not be sold off. That’s intended to quell fears among employees and stem any flood of talent. A station selloff is all but assured for a variety of reasons — It’s the smart thing.”
If that doesn’t scare the bejezus out of an iHeart employee, Ely further instills fear in the employees of some 850 radio stations by saying, “some number of them are under-performing—losing money, in plain English—or they’re simply in markets where the company sees no future. It just makes sense for the company to dump those stations and focus on its most profitable stations and markets where it sees growth potential.”
Ely then relies on assumptions and his own expert analysis before mentioning Cumulus Media, the other of the companies some in the industry have half-jokingly referred to as “the debt-bomb duo.”
The remainder of Ely’s commentary does not contain one quote from iHeart’s Wendy Goldberg, who we shared the story link with; iHeart did not comment.
It does not contain any thoughts from industry observers or experts who might have crunched the numbers and done any sort of analysis beyond spell check.
With that, RBR+TVBR shared Ely’s story with a variety of Washington, D.C. communications attorneys and a host of top brokers across the U.S.
Peter Tannenwald, with Fletcher, Heald & Hildreth, pointed to how “highly local service is the only way radio can survive,” suggesting that iHeart long ago strayed from that business model.
Will the market be flooded with stations for sale? “Could be,” Tannenwald says. “One broker told me last year that the half-life of radio is five years — values will drop by 50% every five years until radio is re-invented.”
Erwin G. Krasnow, a partner at Garvey Schubert Barer, was blunt in his critique of Ely’s commentary.
“The author of the Forbes article fails to take into account the enduring strengths of radio: a local ‘user-friendly’ medium for advertisers, a service business with high operating leverage, an active trading market and historically a medium with a unique ability to adapt to market changes, competition and new technology. But, I have to admit that the author is a pretty good speller!”
The strongest response to Ely came from broker Doug Ferber, of Dallas-based DEFcom Advisors LLC.
“I am of the belief that iHeartMedia will change hands twice — once to the creditors and then again to an entity or entities that want to operate radio stations long term,” he says. “In the first transaction debt will be converted to equity. Creditors don’t want to own the company, so they will eventually look for a company or companies to buy the assets to recover some or all of their money. How long they hold the assets is the question.”
So, is a mass sell-off possible? Yes, Ferber says.
Is it likely? No.
“It is still very unclear how the iHeart bankruptcy will play out in real time,” Ferber says. “Rumors have it that the outdoor company will be sold first. Can the company even sell the radio station assets? Pre-bankruptcy they couldn’t because their leverage was too high (double digit multiple of cash flow) and the selling multiples were well below this. Selling stations would severely harm their ability to service their debt. Rumors suggest that the proposed restructured iHeart will have 5x leverage … anything sold for a higher multiple than this would allow them to pay down debt without impairing their ability to make interest payments what remains.”
Ferber’s guess is that there will be a “right-sizing” of assets” in stages.
The second buyer mentioned above (is it Liberty Media?) will look at the radio group and likely make “an 80/20-like decision” and sell off non-performing and/or small markets that do not move the needle much either way as it relates to revenue and cash flow, Ferber believes.
If the second buyer is not a strategic media company like Liberty, but rather a financial buyer (a hedge fund that likes to invest in distressed debt for example), look for them to build cash flow and systematically sell stations to strategic buyers, Ferber concludes.
Speaking of Ely’s piece, Ferber notes, “The article is very dramatic, particularly the first half of it. Headlines sell papers right? Technically you will have two companies that will change ownership twice through bankruptcy. If through these two events there is a mass break up and de-consolidation of the industry, the problem will not be the quality of the assets sold and the tremendous amount of cash flow that the radio stations produce.
“Running radio stations is an excellent business! The issue will be whether there will be enough buyers to soak up the inventory of stations sold. A mass sell-off, while not totally improbable, is the least likely scenario.”
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