Farid Suleman's Immaculate Deception

Late yesterday afternoon The Wall Street Journal reported what you and I already knew which was Citadel CEO Farid "Fagreed" Suleman is preparing to file for bankruptcy by the end of the year.

Merry Christmas and Happy Holidays -- now that The Journal reported it, it must be true.

Even as you read this Citadel is seeking lender approval of a prearranged Chapter 11 bankruptcy.

If Citadel succeeds, the lenders who swap their debt for equity in the reorganized company and 90 -- count them -- 90 lenders would win control of the house that Farid wrecked.

Current shareholders would see their stakes totally wiped out.

Sorry about that.

Farid made his final Hail Mary pass and it was caught by 90 receivers -- that's one for the books now isn't it?

So let's answer a couple of questions straight forward.

First, what really happened ...

1. This screwing of shareholders is blessed by Citadel, Forstmann Little -- the investors who conceived of this radio group -- and its creditors. They want this to proceed efficiently in as short a period of time as possible. Time is money -- their money. The parties want this cozy little deal so badly it is being filed well in advance of January 15th when their loans are overdue. That speaks volumes.

2. Soon the creditors will win control of the company and they will call all the shots. These are not radio people and don't expect them to act like broadcasters. They are the real Michael Douglas -- the real Gordon Gekkos -- they care about one thing and it isn't local radio.

3. Farid Suleman's place in the "Radio Hall of Shame" along side the likes of Clear Channel founder Lowry Mays is now secured. The destruction of shareholder value that occurred under Suleman's watch is jaw-dropping. The company’s market capitalization has plummeted, from more than $2 billion in 2004, to just $12 million today. Even though Suleman is apparently staying at the helm, nothing will ever change the fact that the company declared bankruptcy on his watch as a result of his business decisions as CEO.

4. The thing that sunk the ship was Suleman's egotistically inspired purchase of one of the greatest groups in radio -- ABC. He was suckered by Disney who unloaded it at the absolute right moment in time and made their shareholders wealthier while Farid weighed down his fledgling company with debt that never had a chance of being repaid. If I knew it and you knew it, why didn't he?

What happens next ...

1. Very little is likely to change near-term for operations. Only Citadel capital structure has changed. The company is actually producing revenue with respectable cash flow. Its equity is wiped out and the new entity will soon be run by debt holders.

2. If radio revenues improve, these debt holders will benefit from the increased cash flow. This could continue for a rather long time as creditors will seek to make themselves whole again on any good fortune the economy or the company might have. First and foremost, it is about the debt holders.

3. Fagreed's continued employment by these thieves who have stolen the equity from a company that could never repay their loans in the first place signals that the new operators are more comfortable with the guy who ran the company into the ground so creditors can benefit from an advertising upturn should it happen. Oh, and one more thing -- if you think Suleman doesn't know how to run a radio group, these Wall Street opportunists know even less.

4. More personnel cutbacks are possible. But it is also possible the worst of the firings are behind the company especially if ad revenues stabilize. Unfortunately, however, Citadel and Clear Channel are driving down per unit ad rates by pushing so called short spots seen as a hidden way of cutting ad rates. By driving down rates the chances of the entire radio industry recovering looks even less promising. This guy is dangerous to all of radio not just Citadel shareholders and he will continue in power under his new bosses.

5. Stay away from sharp objects for this one --with no more shareholders to please, creditors can act in their own self-interest without regard to regulations, filings, shareholder meetings, etc., the costs associated with being a public company will be gone, so this will be another cost savings. This could result in the pressure coming off operations in the near to intermediate term. It eliminates the uncertainty, but will likely mean the end of local radio as we know it.

What does it mean going forward ...

1. Many scenarios are possible. One likely scenario is that creditors run the show with Suleman at the helm to benefit from the company’s cash flows. Eventually, once the economy recovers and ad revenues stabilize, the creditors may seek to sell off the stations, either all at once or piecemeal.

2. Who will buy them and what kind of multiple they get for them is anyone’s guess. Multiples for these stations will likely be around 2 to 3 times cash flow. Meanwhile, CBS CEO Les Moonves told analysts a few days ago that he wants to sell more CBS radio stations. Lew Dickey would like to unload Cumulus stations and there is a long list of sellers and not a very long list of buyers. Of course, if the Citadel stations can throw off respectable cash flows, the creditors may just hang onto the stations and ride it out….another possible scenario.

3. Bankruptcy can be strangely liberating. The old restrictions are gone. The company will have greater flexibility to restructure, cut costs, conduct operations, etc. without the cost and scrutiny associated with being a public company.

So Fagreed Suleman has finally achieved successful failure.

And he's the market leader in that category.

Clear Channel and Cumulus and even little Regent are not far behind.

I disliked consolidation from the moment it was enabled by Congress. You may remember that initially working broadcasters embraced it -- some managers got appointed to run two or three stations and their salaries went up. They had benefits, a certain amount of control and prestige -- what was not to like.

I didn't like it because consolidation by its nature forced good broadcasters to take their eyes off of what made radio so desirable as an acquisition target in the first place -- its visceral connection with local listeners.

The deals done by consolidators to purchase stations were downright fraudulent. No radio station was actually worth, say, $100 million -- not even in New York or Los Angeles. The cash flows were impressive but the multiples were manufactured by the very equity holders who will now be writing down their losses.

And to prove it, debt has been refinanced on Mezzanine capital, patios, balconies or whatever other cute terms investors have for it -- all costing more each time consolidators got uncomfortable with the debt payments.

Farid Suleman is a bean counter and by experience not much of a radio executive.

Now after leaving his shareholders broke and his debt holders in charge, we come to find out that maybe Farid wasn't a very good bean counter, either.

Farid Suleman pulled off the Immaculate Deception.

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