Wall Street banks are getting ready to trade debt for equity as several of the big consolidators find themselves unable to make their loan payments.
The Wall Street Journal says lenders are running into federal media-ownership rules as they find themselves the unexpected owners of bankrupt media companies.
In radio, Citadel is proposing to senior lenders whom they owe $2 billion that J.P. Morgan Chase, GE Capital and ING take ownership instead of the debt payment Citadel cannot make.
I hear the talks are ongoing but I don't see too many other options available to Citadel. Even some of the other radio consolidators think Citadel will have no choice but to hand control over to the banks.
You may ask -- what's holding it up? Let's get the first bankruptcy over with but the lenders are finding themselves in the midst of FCC rules designed to limit media concentration.
The body may be willing, but the spirit of the FCC may be the devil in the details. In the end the fate of Citadel will be in the hands of the FCC which must approve media sales even when banks have a small investment in a station.
Keep in mind that a handful of lenders have pieces of a handful of companies that transcend -- or may run into -- FCC ownership limits.
Another challenge, according to The Journal:
"The calculus can be even more difficult for hedge funds, some of which are registered offshore. The FCC caps foreign ownership at 20% of a U.S. broadcaster -- 25% if the stake is through a holding company -- which can change how new ownership stakes are structured".
Goldman Sachs and J.P. Morgan Chase -- you remember them from the financial meltdown headlines -- just happen to own a lot of radio.
Goldman recently took back Nassau's debt for a whopping 85% ownership -- that's 51 stations to be run by bankers. Nassau had to get around some conflicts by peeling off some stations into a separate company because Goldman had conflicts with FCC rules.
J.P. Morgan Chase will eventually end up with another familiar media company -- Tribune, owner of WGN and a bunch of poorly performing newspapers and will likely have full control there, too.
You can see why I am writing about this, perhaps. Banks, the ones that led good broadcasters into temptation in the first place and have turned them into Beelzebub, are about to get total control.
So, if you don't like the way radio stations have been run so far, at least don't be the last one to know what the industry is about to look like going forward.
If you're working at one of the major consolidators in over their heads in debt and you are praying to God that the FCC will put its foot down and stop it, then your prayers will not be answered. Few people doubt the FCC will be all that concerned with media concentration in the hands of banks -- after all, de facto ownership by the lenders has existed for years.
The hedge funds may want in but they have problems of their own. After all, radio has already consolidated. Now we are seeing the consolidation of bank debt in the hands of two major players -- J.P. Morgan Chase and Goldman Sachs.
In future days I'll devote some time to the potential repercussions.
Not all the outcomes are negative.
A quickie preview:
1. Banks are likely to keep the management teams in place (boo hoo to the disgruntled employees) but they are also likely to tighten the screws on these CEOs when they no longer have independence and the banks break their balls.
2. If the economy turns around, the lenders may be owner/operators for a while until they can see the market developing for resale opportunities. They have no other choice. There is no ready-made market out there right now.
3. Keep in mind that banks are numbers driven -- they will keep cutting costs. Where, you ask? How could they find anything else left to cut? Don't underestimate them. Regional managers who handle 25 or more stations out of their home. Elimination of another layer of management. Outsourcing sales. Don't think it's possible? News competitors are sharing news gathering in television. Don't be surprised to see Citadel, Cumulus or Clear Channel -- or an arrangement between some or both -- jointly producing (different) content from one staff -- from one location. Or some similar joint operating agreement that helps them share expenses.
4. It is unlikely that banks will invest in the digital future of their radio assets (costs money) and radio will sink further behind the Internet and mobile revolution it missed over the past 13 years.
The ray of hope is that banks don't like to be operators and that means all media brokers must come back from vacation and get to work.
The banks will want to sell their assets in small numbers since a large transfer is unlikely.
Unlike television where Comcast is rumored to be buying NBCU (they deny it, so it must be true) and Verizon and DirecTV are considering a marriage of convenience, radio offers little synergy to existing large media companies.
That's good news -- I told you I had good news for you.
That means the only way banks that will be taking over control of bankrupt or troubled radio groups will be able to sell their assets (radio stations) will be to find small buyers. This will act to diversify radio properties in a less concentrated way -- a good thing.
My estimate on how long it will be before the major impact of this happens is 12-24 months.
Then, ironically, the devils that made consolidation possible will actually have to sell their souls (or at least their stations) to the individuals who actually know how to run the stations that their clients and they could not run.
Reverse consolidation.
Or as I call it, ownership limits without regulation.
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