Thursday, November 19, 2015

Crystal Ball Gazing at Radio Ink’s Forecast 2016

I enjoyed participating in this week’s Radio Ink Forecast 2016 in New York.  The event was well attended, and the panels informative and engaging.

My panel was entitled Prospects for Radio as an Investment in 2016: Wall Street or Main Street?  Moderated by Drew Marcus of Sugarloaf Rock Capital, the speakers included Brian McNeill, Founder and Managing General Partner of Alta Communications and Jerry Sargent, Middle Market Banking Head at Citizens Bank. Drew provided the Wall Street perspective, I talked deal making/station trading and values, Jerry talked about debt/banks, and Brian brought a private equity point of view.

Not surprisingly, there was a lot of talk about Cumulus and iHeart, specifically their balance sheet problems. My takeaway was that there was still time for Cumulus to resolve their operational issues, and work their way out of trouble.  Not so much for iHeart.

iHeart has a looming series of important bond payment due dates.  So far, they have masterfully been able to kick the can and refinance debt, albeit at much higher interest rates (with the result of a steadily increasing cost-of-capital).  But their bonds are now trading at a deep discount; that does not demonstrate much confidence on the part of the bond holders.

We talked about the impact on the industry if Cumulus and/or iHeart went through restructuring.  I believe that we would suffer through a (hopefully short) period of nuclear winter; station prices would suffer, and the lenders would likely pull back from the business.  But the thaw could get interesting.  If, for example, they decided to become a more CBS-esque type of company, focusing on the top 25 or even top 50 markets, the spinoffs into the hands of entrepreneurs more comfortable (and perhaps more skilled) in operating in small and mid-sized markets could result in a tremendous resurgence for the industry.  I contend that good operators, with healthy balance sheets, would line up to acquire the markets being spun off.

Brian indicated that there is not much love coming from the private equity world, but that family offices, with their more “patient money” approach, are an option.  On the other hand, Jerry is open for business on the debt side. Capital structures of at least 40% equity and 60% debt seemed to be a 
safe target.

Tomorrow, I will post some thoughts on station pricing which I shared with the group.

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