The rating service gives Cumulus one star (out of five) -- their worst rating.
But Cumulus isn't the only radio consolidator standing at the great abyss.
Most of them are.
The question is not whether these groups will go bankrupt because they are already trading as a bankrupt stock.
What's of interest is -- can they avoid dissolution?
Can consolidators find a way out in the worst economy since the Great Depression?
How much more collateral damage will there be as far as employee firings and the like?
Let's dig in.
Cumulus does not have the capital structure to sustain bankruptcy.
It is a company that caught the wave of growth during consolidation but, like many other consolidators, got buried with unserviceable debt. Basically, there is nothing there but debt.
Morningstar reduced the fair value of a common share of Cumulus stock from a paltry $1 to nothing. That's zero on the low side.
And the independent rating service doesn't like a lot of other things about the company:
Management: We think Cumulus’ corporate governance practices need improvement. CEO Lewis W. Dickey Jr. doubles as chairman of the board of directors, a dual role that creates potential conflicts of interest, in our view. We prefer to see these positions occupied by different
individuals. Dickey’s brother, John W. Dickey, shares the CEO role.
Together, the Dickey family controls 48% of the voting power of Cumulus stock, which we think is materially out of proportion to their 18% economic interest in the company. Affiliates of Bank of America also own substantial concentrations of common stock and options. These affiliates also have the power to rubber-stamp their own nominee to Cumulus’ board of directors, who in turn holds a substantial financial stake in those affiliates. Its corporate governance structure is clearly designed to benefit a few concentrated shareholders, leaving the rest with little say in company affairs.
This is not to demean the programming or efforts of Cumulus people -- many of whom are withstanding another round of assaults by being forced to take a 5% across the board pay cut. Nor does it forgive Cumulus for dismissing its talent cluster by cluster with firings and cutbacks. That may cut costs but it hurts the small to medium market local radio upon which their company is based.
Cumulus is in desperate straights although as we've pointed out before, it hasn't stopped CEO Lew Dickey from taking an $8 million signing bonus to re-up as top gun. No, the economic situation at Cumulus is only bad enough to cut everyone else's compensation -- not the controlling Dickey family.
Still, Dickey is a shrewd dude.
He's probably the best educated radio CEO although the knock on him is that he lacks the balls to be his own man and make the tough decisions.
I'd keep an eye on an attempt to merge and trade with other bankrupt consolidators hoping there will be strength in numbers and that eventually the radio business will come back and they can divvy up the booty -- if any.
When you're being paid like the Dickey's, what recession?
As far as Citadel is concerned, don't expect Teddy Forstmann to throw any more of his money into this black hole. Their bean counter CEO Fagreed Suleman does not have the qualifications to run a large radio company but that's only part of their problem. Citadel is a failed financial play.
The acquisition of ABC was supposed to light its fire but instead Citadel sucked all the oxygen out of ABC rendering the acquisition worthless and expensive in terms of more debt burden.
Citadel was supposed to become ABC.
Instead, ABC became Citadel.
Clear Channel has been downgraded again from B to B- by Standard & Poor's. They, too, have a lot of debt and debt structure problems. My sense is that Clear Channel's owners, Lee & Bain, will somehow win support to keep the entity afloat. That's their thing. I may be wrong but if radio is a pure Wall Street play these two investment banks should find enough motivation to keep Clear Channel propped up.
But it was a bad investment. No putting lipstick on this pig for Lee & Bain.
If you look to the bottom feeders, it gets worse.
Radio One -- in real trouble.
CBS Radio's fate is tied to that of its chief executive Sumner Redstone who has financial headaches at Viacom. That's a sin because on their own CBS Radio has upside. And one of the few to have an Internet strategy. It needs expansion but it's a start.
Regent and Salem -- nothing but debt.
Entercom, also burdened by huge debt service, somehow is hanging in there. This by no means leads to the conclusion that Entercom can survive as is. It is as exposed to the local radio revenue shortfall as any other company, but it shows that the Fields have dodged the bullet so far.
Two companies with a brighter picture are Cox and Saga.
Cox is a public company but still very much family-owned and there is a sense the family can jump in when necessary to finance it. Also Cox Radio on the whole has been very well run by Bob Neil and his team.
Saga has only $120 million worth of debt -- nothing in this age of borrowing money and it has no bonds. It's a small company and it may suffer from the local radio recession but is not burdened with the huge debt that is bringing down the other groups.
All conventional economics is out the door.
That's why it would be easy to conclude that once one consolidator is bankrupt it would be the end of them.
In today's financial world, the government won't let a bank go under even if it might be better in the long run. We're saving everyone.
Don't get me wrong.
The government isn't going to bail out the debt-burdened radio industry, but if we've learned anything over the past few days about Mel Karmazin and his Sirius XM problems -- now Sirius is attractive because it provides $6 billion in tax losses. See, satellite radio can succeed at something.
As it turns out it all depends on what the meaning of the word "is " is -- as in "is" bankrupt.
A few final thoughts for your consideration:
• I'm looking for mergers of the broke -- two can eat as cheaply as one, as the old phrase goes and two can easily be as bankrupt as one together. Radio is not worth anywhere near what it once was so for two companies to agree to merge and trump up higher valuations is simply an easy accounting maneuver.
• The only way for bankrupt consolidators to survive is to convert debt into equity. It is as if you couldn't make the mortgage payments on your house because the interest rates were killing you and you talked the bank into taking 98 percentage ownership, forgiving your debt and letting you live in it at a price you could afford. Of course, the bank would kick you to the street if and when they could sell your house for a profit so don't get too comfortable. Same is true on Wall Street in this scenario.
• If you're a broker, retire. Only the desperate are going to sell radio stations in a declining market where six times cash flow is too high a price to pay. Any fantasy you might have of putting together an equity group to buy some distressed stations will not happen -- at least on a mass basis.
Cumulus may be the first consolidator to be forced into a move -- but then again in today's climate anything can happen.
Radio and their Wall Street partners are in denial. They just want things to go back to the way they were.
Meanwhile -- back in the local markets -- these geniuses are killing off the one thing that could be of value to them. Radio is not just a board game for finance. When retailers and local advertisers are hurting, as they are, radio could be a source of cheap, efficient and quick advertising.
If you don't fire your salespeople and deploy even more to the street.
If you don't fire your local personalities that make the station special.
And, if you don't mistake a bad recession for bad decision making because that's what got radio consolidators into trouble in the first place.
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