For Radio Consolidators, No Plan B

You have to feel for radio people who are stuck working for consolidated radio companies that don't seem to know what to do next.

Some readers write to tell me that they want to remain positive and do the best that they can -- and I think that's probably a smart move.

But if you're still scratching your head wondering what these group CEOs are doing, maybe I can shed some light on it.

They never intended to be operating radio groups 12 years after consolidation began.


They were in it to make their money and sell out -- at a profit, of course.

For a time, they believed that further deregulation would allow existing radio groups to buy up even more stations for their clusters, but the regulatory scene changed from permissive in 1996 to dismissive today. If anything, the government may be looking to clean up their mess or consider some form of re-regulation.

Take Teddy Forstmann.

I don't believe he ever intended to be in radio at this late date. He put a bean counter, Farid "Fagreed" Suleman in place at Citadel to babysit the ABC acquisition and fatten up the eventual sale price.

Sam Zell is not supposed to be bankrupt.

If you still believe he hired his former radio guru Randy Michaels -- who then hired back his former Jacor/Clear Channel radio people -- to run newspapers, I've got this bridge to sell you right next to Fort Lee, New Jersey.

When Clear Channel went public with the unthinkable -- that they wanted to go private, they were in my mind conceding that there was no growth left to be had in the radio industry -- even as the owner of 1,100 stations. You can see all the angst the founding Mays family had in structuring its deal with Lee Capital Partners and Bain Media. The Mays' knew they had to get out but were in denial about what it would take to satisfy shareholders -- who, by the way, were also in denial.

When your number one consolidator heads for the exit, the industry is in trouble. When the big kahuna's share price dropped by almost two-thirds, even the Mays' realized it was time to sell.

Radio consolidators never intended to be in the radio business today -- in 2009. They were supposed to cash out. They knew what many feared -- that these mega platforms called clusters could not be operated efficiently and profitably.

Clear Channel got lucky and found suckers in Lee & Bain who will probably end up eating most of their private equity investment in the company.

The model said consolidators were supposed to be out by now so they are operating in an area that they do not know. Hence, John Slogan Hogan and his ilk still keeping their jobs. Plainly put, the consolidators do not know what to do.

No exit strategy -- because it never occurred to them that the radio business could dry up. They never considered what do you do if something goes wrong (the economy, the lending market, inability to manage huge debt service, the onset of digital media as a competitor and so on).

Believe it or not, there was no worst case scenario under consideration.

So what do they do?

The one thing they know.

Shrink the business, cut the costs, fire the people.

None of this makes any sense to people who want radio to survive. It's never going to preserve the business and it sure as hell won't grow it -- on that I think we can all agree. The radio employees who still have their jobs know what to do. There isn't any question that radio employees know how to operate. But they are powerless because their employers never counted on being operators at this point in time.

Consolidators are accidental operators.

They couldn't get rid of the debt that should have been sold for a profit. Then, there's the recession.

If it seems incredible to you that a perfectly good industry can be trashed as is the case with radio right now, you and I aren't trashing it. The operators who smelled big profits and never counted on anything going wrong are.

No Plan B.

And they can't even punt on fourth down which is why the radio industry will be drawn and quartered during the year ahead as these accidental operators have no exit strategy.

They're not in as operators -- and they can't get out.

It's hard to know how it will all end. People more knowledgeable than I don't know. It is unprecedented.

But it says a lot about the arrogance of radio's CEOs and PE firms that always assumed everything would go as planned.

So what's ahead based on all of this?

1. Many more massive cutbacks in operating budgets and employees. These operators are not under any circumstance considering the option to grow local radio thus Clear Channel's ease in redirecting its stations to a Repeater Radio model that most radio people know is destined to fail.

2. Many stations will be run without managerial employees on or near the site. Regional managers will run groups of stations and as new cost efficiencies are put into place even more employees will be fired. GMs will be hard to come by. Directors of Sales -- bye bye.

3. Virtually no attention will be paid to the digital future because the only future these owners want is to get out. As a result, radio will sink further into irrelevancy with the next generation -- 80 million young people without whom radio is condemned to no future.

4. A dangerous era of uncertainty is ahead because most of the money invested in acquiring radio stations is declining in value exponentially. In other words, the clock is ticking and the longer they play owner/operator the more money they lose.

5. The law of unintended consequences will kick in as it always does. Because they are contracting their business to manage losses, consolidators are not helping the sale prices for stations they'd like to deal. As I said a few days ago, a six time or less multiple of cash flow is more realistic than the large numbers used by buyers to assemble their groups. And that multiple will continue to decline.

6. No innovation. The end of local radio as we know it -- at least by these operators who are taking a major haircut right now. No innovation at a time when a new generation is coming of age is -- well, the final nail in the coffin.


Here is some semi-encouraging news.

Stations will be available in the coming years for reasonable prices -- maybe even cash flow plus a premium. If they are purchased without acquiring burdensome debt that cannot be managed (someday we'll all have to learn), these stations could wind up in the hands of real operators.

But there's also other risks.

The consolidators haven't done the industry any favor running it down -- even to the available older audience -- and without the next generation even these reasonably purchased stations might not be a good business.

Without a digital footprint, terrestrial radio will die on the vine no matter who owns the stations and a digital footprint is not -- I repeat not -- streaming the terrestrial signal or using text messaging for contests.

Still, a lot is going to happen in the next year or so -- and the best way to look for opportunities is to do so with your eyes and mind wide open.

No one in business makes investments without a contingency plan -- a Plan B. Only the arrogance of Wall Street investment banks and inept radio executives who sold their industry out could produce today's sorry radio industry.

Perhaps the Mays family and others recognize who B.C. Forbes was talking about when he said "The man who has won millions at the cost of his conscience is a failure".

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