Radio After Clear Channel

Clear Channel is done.

The next six to nine months will constitute what I believe will be their swan song as a consolidated radio company. None of us can take any joy in this.

The economy isn’t helping.

It’s killing over-leveraged radio owners on their debt repayment. Some stations are actually making money, but not enough to pay down huge corporate debt – the debt that was purchased when they put together their radio clusters.

This piece is about what radio will be like after Clear Channel is broken up.

But first, the reason why we’re having this discussion in the first place.

The investment companies of Lee Capital Partners and Bain Media made a mistake when they went through with the acquisition of Clear Channel (radio and outdoor) to the tune of about $20 billion. The banks gave them an out. Lee & Bain refused to take it.

They knowingly walked down a dangerous path acquiring a company in a declining industry with a recession bearing down.

I’ve asked financial analysts to try and explain to me how smart investors could do such a thing and the answer I received was – for the fees.

Lee & Bain profited by closing the deal. Perhaps they didn’t think things would get this bad, but they have.

Recent attempts to bully their lenders into a more favorable debt arrangement seems to be failing. Clear Channel could be in bankruptcy by the end of the year or the first quarter of 2010.

The company appears to be battening down the hatches for the inevitable.

Wall Street buyout companies are used to winning and losing. They have done plenty of both. It comes with the game. But the one constant – fees – is what drives the buyout market.

I believe that Lee & Bain will be uprooted from this situation if and when the company seeks bankruptcy protection.

Bankruptcy is a slippery slope to say the least.

The fate of the company is in the hands of a bankruptcy judge. Other interests, including those of the investors and creditors seeking to avoid a full haircut are also a factor, but…

It is more likely in my view that much or all of Clear Channel will eventually be broken up – sold off to raise as much revenue as possible.

The present management may also be kicked aside – again, a bankruptcy judge has a lot of influence here.

Clear Channel is already acting like there is no tomorrow.

What do you call gutting the stations, cutting every possible expense and using repeater radio content from national syndicators and their network to fill up the airwaves? Even Clear Channel Radio President John Slogan Hogan isn’t that dumb. He’s taking orders. I don’t believe he would do this without a gun to his head.

What employees are left when the end comes will not exactly be in a strong position. And former employees with severance agreements or retirees could have their futures jeopardized.

Again, the court makes the call.

It should also be noted that Clear Channel isn’t the only large radio group to face bankruptcy. I believe Cumulus and Citadel are goners as well. They may be lucky enough (or unlucky enough as the case may be) to turn more of their equity into debt repayment but eventually they will have to pay the piper.

And, there doesn’t seem to be a huge interest among debt holders to own more of these mismanaged, over-leveraged radio companies.

As an aside, I want to remind you that you and I didn’t cause this problem so when we discuss it -- as depressing as it is -- do not forget how radio got to this juncture. You could look the other way, believe the happy talk that radio associations and others try to peddle or you could deal with the inevitable.

Because ultimately, the decline of three of the biggest radio consolidators will affect many of you.

If Citadel goes down before Clear Channel, it would be less devastating than the number one consolidator going bankrupt. As we have learned from the past in strategic financial management, programming or sales, when Clear Channel gets a cold, the radio industry gets pneumonia.

Having said that, there is an interesting scenario I see ahead – not all bad or all good and certainly with many risks.

Let me take you through radio after Clear Channel, in my opinion, step by step:

1. There is unlikely to be a buyer for the entire Clear Channel radio chain.

2. There may be a buyer for the outdoor division – maybe.

3. Clear Channel’s radio stations will eventually be sold off to offset the massive losses incurred in advance of the bankruptcy filing.

4. Multiples for radio stations – please sit down here – will be for the best price offered in some markets and no higher than 4x cash flow on average in the largest markets. Radio is a damaged business thanks to consolidation and it will be reflected in the painful process of selling off stations that were once overpriced for a lot less.

5. Many stations will be returned to the marketplace where eager buyers – those who have radio in their blood – will be ready to put together a group to operate. This is a good thing for the audience and not necessarily a good thing for the buyers. Turning radio around will be tough.

6. As in the past, any new buyer who picks up stations in the Clear Channel bankruptcy will have a hard time making it work if they do not buy the station with debt they can handle in a recession and in a world where the next generation will not be their audience – ever.

7. Thus, good radio people who have been waiting for this moment may be the unwitting victims of consolidation one more time – the inability to build a growth franchise on only two generations – X and Baby Boomers, both aging.

8. There is an unintended consequence from Clear Channel’s eventual demise and that is the detonation of terrestrial radio in the eyes of advertisers and agencies. The way back is to build local stations with a local presence – and the next successful radio owners will probably know how to do this.

9. Then there is the legacy factor – Clear Channel will be leaving systems in place that new owners may end up embracing including voice tracking (hey, it’s okay on the all-night show and some weekend dayparts, right?) and no traffic directors. In other words, once an owner, some of these good-hearted radio operators may find it hard to undo less is more.

Radio after Clear Channel will not be radio as if Clear Channel never existed.

Reread that line because you can take it to the bank.

Our fantasy is that once rid of these evil consolidators, radio can return to its former position of prominence.

But it will be hard to simply go back 15 or 20 years before duopoly and consolidation.

It will take a Steve Jobs-type to say, “Mr. Hogan, tear down this wall”.

Some cost efficiencies will be retained in spite of the "unpeople-friendly" or anti-audience effects they may have.

And there is always the possibility that some “little” Clear Channel’s will emerge from the rubble and make you wish for the day the Mays boys were back in charge (let’s hope not, but it is possible).

So, the net effect is that many stations are about ready to come home to radio people in an industry drastically hurt by consolidators.

Some of them may buy the stations and over-leverage themselves and you know what will happen to them.

Others will find local niches and return to a model similar to but not exactly like local radio of the past and rebuild or grow good franchises in the short term.

Only owners who also know how to build new media businesses – podcasting franchises, new non-terrestrial radio streams, mobile content, capitalize on social networking and new media – will really be set for the future.

For the rest, the last insult may not be the demise of the Evil Empire but the lure of purchasing radio stations at long last for favorable prices at a time in history when an entire generation is not available to be a growth engine.

I would buy a radio station not because it makes money or could make money again, but because it has a brand -- a real strong brand – that could lead into a digital media platform. A digital media platform is not defined as streaming the station on the web or having your morning personality do a podcast.

Without the strong brand, well meaning and good intentioned radio operators may wind up eventually being the victims of radio consolidators one more time – with the Clear Channel, Citadel and Cumulus groups out of harms way and new owners directly in it.

The best advice: buyer beware.

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