Will Disney Repossess ABC from Citadel?

Citadel is on the brink of bankruptcy.

It could happen within the next six months if CEO Farid "Fagreed" Suleman cannot win another stay of execution with anxious lenders.

That raises the question of what happens to Citadel stations if the company winds up in the hands of a bankruptcy court -- specifically, what's the fate of its most valuable component -- ABC?

Citadel paid sucker money to Walt Disney Company to the tune of about a billion dollars for ABC and the ABC Radio networks several years ago in what was a highly touted but little understood maneuver called a Reverse Morris Trust, (RMT).

It was all a little bit too cute but what RMT turned out to be was a legal tax dodge -- a very complex legal tax dodge, at that.

Now, with the wolf at the door, buyers and speculators are wondering whether Disney gets its properties back once Citadel goes belly up because of the Reverse Morris Trust.

Morris Trust expert Roger Wilkens helps me shed some light on the possibility:

1. In the event of a Citadel bankruptcy filing, Disney will not automatically get its stations back.

2. Citadel is now a wholly separate entity from Disney so that if Citadel were to file for, say, Chapter 11 bankruptcy protection, its creditors would become the owners of its stock and existing shareholders would almost certainly emerge with nothing. Ouch.

3. But if the bankruptcy arrangement was a "liquidation", the assets of Citadel would be sold and the sales proceeds would be distributed to the creditors in partial (and I mean partial) satisfaction of its debts. The remainder of its debts would become worthless. The shareholders would receive nothing for their stock.

4. If Disney had an interest in buying back the assets, it could bid with everyone else -- not a likely scenario as Disney sold ABC at precisely the right time to exit the radio industry with a huge profit. The future of radio is in grave doubt with the 80 million strong next generation moving on to new media while bumbling radio consolidators are stripping their stations down as outlets for Repeater Radio.

5. Therefore, the only way Disney could regain the stations/networks it sold to Citadel is in the unlikely event of a water landing (as they say in aviation) or, to be more precise -- should Disney want the stations and if Citadel chooses to sell them back to Disney.

So there you have it.

For all of you hoping that Disney will restore the once mighty ABC stations to pre-Citadel luster, sorry about that.

And for those of you hoping all those "white knights" like Larry Wilson will wind up buying Citadel stations, be careful what you wish for.

Citadel is distressed merchandise.

They've run that company into the ground.

That, too.

Citadel is distressed because it is on life support and should it enter bankruptcy, Fagreed will be in no position to bargain with bidders.

Plus, billing is expected to continue to tumble and even should it pick up a bit (from the average 20% losses most groups are posting quarterly), no Citadel station can get anywhere near full value on the open market during bankruptcy.

Multiples will be four times cash flow or less.

It will be possible for "radio people" -- the ones who still love this business to ride to the rescue and pick up these properties for pennies on the dollar.

But the real problem is -- what can new management do in an industry that has been pillaged by the likes of consolidators such as Citadel, Cumulus and Clear Channel?

Lose money, for one.

They'd have to do the very thing the three "C"s are doing now -- cut back, automate programming, install Repeater Radio, inflict economies of scale and probably lower ad rates.

That isn't a growth business.

A lot of good intentioned people are going to take a haircut after Citadel shareholders do. And they should know better. However, we radio folks are emotional. Many of us have been pained to watch the residue of consolidation on a once thriving industry. We know in our heart of hearts that we can turn it around and restore radio to profitability again if only we could get the chance.

Well, the chance is coming but the likelihood of making these stations (acquired at low, low bankruptcy sales prices) a growth business again are slim to none.

And "Slim" is vacationing while consolidators are voice tracking his show.

The reality is that buying radio stations even at bargain basement prices in an industry that has no upside other than an aging, older audience is tantamount to a future bankruptcy.

Radio has no Internet strategy.

No mobile strategy.

Never understood social networking other than asking listeners to text them during contests.

Fails to observe that attention spans, critical to the success of "broadcasting", are shrinking.

Blind to the realization that an entire new generation is coming of age and they are the program directors -- masters of their mobile devices. They stop, start, time-delay and delete their programming content on the go.

The radio industry could have made the transition, but got greedy (along with their Wall Street partners) and it all blew up in their faces when the recession came, the audience got older, the Internet and mobile spaces were ignored and consolidators took on more debt than they could repay.

Sure, radio stations throw off lots of free cash flow. And yes, if you buy bankrupt stations at low prices you'll probably be able to service the debt for a few more years.

Sorry to say, that soon won't be enough.

The world has moved on at precisely the time that the radio stations most of us have coveted all our lives are becoming available and if operators buy them now, they will wind up in Citadel's shoes eventually.

It's only a matter of time.

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