Handicapping Radio Bankruptcy

Since consolidation the radio industry has always depended on ample advertising revenue to pump free cash into paying debt.

As long as the major groups could keep the money coming in, they could make payments on the massive debt they accrued by acquiring stations at unrealistically high prices.

Now, many of the major consolidators are in danger of defaulting on their loans.

Unlike in better times, they can't get banks to simply refinance the debt at favorable rates (to the banks!).

Of course, the banks also have a problem.

If they cause a default, they could drive the radio group into bankruptcy and risk walking away with pennies on the dollar. Before it gets to that point, you'll see banks extend loan covenants to postpone the inevitable. I say "postpone the inevitable" because any reworked financing packages are simply pumping more venom into the lifeblood of the consolidated groups.

Recently, I asked a financial analyst to do an analysis of the situation for you. He covers media companies for a well-known investment research firm, and spent more than ten years inside the industry. I wanted to get a grip on which radio groups were the most likely to risk bankruptcy and which ones had more breathing room. I asked him to tell it straight -- no need to be politically correct.

What follows is what I learned.

I am not an analyst and the information contained herein is based on the expert's opinion after crunching the numbers. I have added my interpretation of why various radio groups are in trouble -- that part is my take on how we got here. I've also added in Sirius XM and Clear Channel Outdoor for comparison.

The analysis is objective and sound, and consistent with the conclusions our expert draws in his reports. It projects which companies are in the most dire straights over the next nine months:

Debt/EBITDA is a key metric.

It is the level of debt relative to what a company generates in cash annually. Under 4 is okay. Above 6 is stressed. Above 9, alarm bells sound. Tribune company was at 12x when it defaulted. Notice Spanish Broadcasting below.

Leverage Ratios Debt/EBITDA
Current Ratio
CFO/Revenue

Emmis
8.2
2.8
15.2%

Radio One
7.8
0.96
24.6%

Entercom
3.5
1.37
18.3%

Citadel
7.2
2.1
4.4%

Spanish Broadcasting
17.5
2.9
1.2%

Cumulus
6.4
3.5
14.3%

Clear Channel Outdoor
6.2
2.0
29.8%

Cox
3.1
2.2
25.5%

Sirius-XM
-57.7
0.3
-9.2%
By that metric, Spanish Broadcasting, Sirius XM, Citadel, Emmis, Radio One, and Cumulus are in the greatest distress because they have the highest debt levels relative to their ability to generate cash.

However, Cumulus, Radio One, and Emmis all turn higher portions of their revenue into cash than others.

Radio One is having liquidity issues, based on the fact that its current ratio is less than 1. This can be mitigated, however.

Spanish Broadcasting is in a tight spot.

So, if you're handicapping radio groups from most likely to least likely to default:

At Greatest Risk of Default

Citadel
Mismanaged by CEO Farid Suleman. High income producing ABC properties in jeopardy. National programming platform being installed at some stations contrary to local radio advantage. Over leveraged. Squandering its talent to cut costs with more cutbacks expected. Unfavorable refi agreements. Delisted from New York Stock Exchange. Critically low over-the-counter stock price of four cents a share. Loose corporate oversight. Until now, disproportional executive compensation.
Spanish Broadcasting
In spite of operating stations in one of two segments that are least affected by listener declines, Spanish fails to pump cash flow to meet its debt requirements.
Sirius XM
Hammered by recession -- drop off in auto sales that generates new subscribers. Minuscule advertising revenues and they are down. Merger may have compromised content as monopoly emerged. WiFi looms and could kill satellite radio for good. Churn rate on subscribers probably worse than realized. Mel Karmazin's plea to John Malone to save the company from bankruptcy could be very temporary.

At Risk

Emmis
Best assets in largest markets that are (and previously had been) adversely affected by the local economies. Failure to heed CEO Jeff Smulyan's plea to take the company private may have missed the opportunity. LA rental of FM property to a Mexican broadcasting company cuts expenses and generates revenues but doesn't demonstrate future growth potential. But it still turns out free cash flow and lots of it.
Radio One
The other ethnic segment that has strong radio listenership even among young people. Local stations killed by the economy. Lackluster planning for this crisis and failure to articulate the future makes it a hanger on.
Cumulus
Like the other At Risk companies, Cumulus turns higher portions of their revenue into cash. Failed vision at the top. Company run as fiefdom at the expense of the overall good of the company. Weak executive oversight by board of directors. Compensation out of line with performance and shareholder value. Hunkering down without a growth plan to assure investors Cumulus has a future.

At Least Risk

Clear Channel Outdoor
The outdoor business is weathering the recession better than radio. In a digital age, there appears to be a market for capturing eyeballs and profit margins can be high for businesses that have relatively fixed costs.
Cox
This company may be the radio cream of the consolidation crop. Family interests wisely want to take the radio group private on a paltry offer to shareholders. The buyout may not happen but just knowing the Cox family has the cash to bail out the division if needed is some consolation.
Entercom
Not impressive in most ways but the Field family -- again, there's that family feeling for radio -- has managed to stay out of immediate trouble. Their debt does not raise a red flag and while the group may be operated without imagination or an eye toward the future, it is no Citadel by far.
Saga
While Saga was not included in the chart, it is on par with Entercom and at least risk. CEO Ed Christian bought up a lot of little stations while the big boys were leveraging themselves to get the big ones. Now Christian has the last laugh because although he is affected by the recession like everyone else, Saga has a very limited and manageable debt ratio. It's safe.I hope this analysis has been of help to you in getting a real time grasp of the financial risks ahead for some of the large radio groups.
You've noticed that we couldn't analyze them all today. Regent is not in the mix but has a lot of trouble and could be in bankruptcy even before the At Risk groups above. CBS Radio was hard to include because of its many ties to Sumner Redstone, his problems and overall parent Viacom.

And Clear Channel -- well, that giant is a topic in and of itself and we've devoted a lot of time in this space to tracking what they do even as a private company because other consolidators tend to follow their lead.

You get a sense as to why the radio industry is really in trouble once you analyse the numbers and circumstances surrounding consolidation.

Group owners would have you believe the recession killed them -- just as they blamed the Internet revolution, iPods, Gen Y, music file sharing and the FCC for not allowing more deregulation.

In reality, it is bad management and bad strategic planning that is killing radio.

1. Consolidation was fueled by purchasing radio properties at prices that were absolutely overpriced with no precedent to justify them and no lack of credit to stop them.

2. Owners proved to be very bad operators once their assets were put together. The most they could do is cut expenses and try to mingle operations. In the end, they snuffed out innovation at exactly the time when the Internet and mobile devices were taking off. Had they let their local stations innovate as part of a big consolidated group, operational results would have been better.

3. Bad decisions like propping up bad technology such as HD Radio, useless and wasteful industry campaigns such as Radio Heard Here preaching to the converted and untimely squabbles over People Meter, satellite radio and other issues helped big owners lose perspective on what really counted. That is, local stations, with local staffs producing local revenue.

And finally...

4. No Plan B -- no exit plan. Consolidators fully expected to have their way with consolidation and get out with bigger profits. Instead some are on the brink of financial collapse and the others that survive will be hurt for years by an industry that inflicted more damage on itself than any competing medium could do.

Like it or not, this is the way it is. There is something valuable about seeing and accepting reality in radio. One benefit is -- perhaps some companies can now begin to look to the future.

In any case, that is our hope.

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