Clear Channel's grim prospects
With its sale likely to fall through, Clear Channel faces a tough environment for media companies.
WASHINGTON (Fortune) -- As Clear Channel limps away from what looks more and more like a failed attempt to sell itself, prospects for the nation's largest radio broadcaster - not unlike most media companies - look grim.
Private equity firms Bain Capital and Thomas H. Lee Partners agreed to purchase Clear Channel (CCU, Fortune 500) in November 2006 for $39.20 per share. Bain, THL and Clear Channel filed suit last week against five lenders who had promised to fund the $19.5 billion purchase of Clear Channel. In the midst of the credit crisis, and a slowing economy, the banks - Citigroup (C, Fortune 500), Credit Suisse Group (CS), Deutsche Bank AG (DB), Morgan Stanley (MS, Fortune 500), The Royal Bank of Scotland (RBS) and Wachovia (WB, Fortune 500) - may have entertained second thoughts about the agreements they forged when the deal was announced 16 months ago. On Wednesday, Clear Channel's stock price hovered near $28. As a result, if a deal were to close, the banks could be forced to write down more than $3 billion in losses.
Apart from the legal mess, and the slim possibility that a deal could still be completed, Clear Channel is facing an uphill battle to grow revenues and enhance shareholder value. "There's a contraction happening in radio that is making lenders nervous," says David W. Miller, an analyst with SMH Capital in Los Angeles.
According to Bernstein Research, U.S. ad spending in the final quarter of 2007 grew less than one percent, its slowest pace in five years. As ad agencies increasingly shift greater resources onto the Web, traditional media outlets such as radio, television and print publications are expecting an ad spending downturn in 2008.
Indeed, radio industry revenues have been stagnant over the last five years. In 2007, ad sales in the sector fell 2% to $21.3 billion, according to the Radio Advertising Bureau. "One year ago, the industry was looking forward to 2008," says SMH Capital's Miller. "With all the political ads and the Olympics in summer, money usually flows down to radio because of inventory constriction on TV. But a lot of other revenues have dried up this year."
Although Clear Channel was able to grow its overall revenues by 5.5 percent in 2007, net sales at the company's radio division fell 2% during the year. They are expected to fall by a similar measure in 2008. Much of Clear Channel's revenue growth last year came from the company's outdoor advertising subsidiary, which owns 870,000 billboards and displays along city sidewalks, rural highways, in shopping malls and subways, worldwide. Thanks to the introduction of electronic advertising displays in recent years, outdoor advertising is an area that is expected to remain strong in 2008.
Should Clear Channel go unsold, controlling shareholders, the Mays family, will be back to square one. They began entertaining buyout offers in 2006, after a number of efforts to boost the company's share price - including aggressive share buybacks and some asset sales - failed. Analysts speculate that a scuttled deal would mean that shareholders will likely pressure the Mays family to take up those value-boosting efforts once again, possibly by selling off a handful of the company's lesser-performing radio stations in small markets.
To unlock some hidden value, says Frederick Moran, media analyst with the Stanford Group, "Clear Channel could sell off or spin off its lucrative outdoor advertising business, which is growing and defending market share, even in the face of Internet competition." Clear Channel controls 90% of its outdoor subsidiary, while 10% is publicly owned and traded as a separate stock, (CCO).
Another option, Moran notes, is that the Mays could sell the outdoor billboard unit to French competitor JC Decaux. Analysts estimate that Clear Channel Outdoor is worth between $8.5 billion and $10 billion.
James Goss, an analyst with Barrington Research in Chicago, rules out the possibility of an all out Clear Channel outdoor sale. He believes the Justice Department's antitrust unit would take issue with selling Clear Channel Outdoor to either of its three top competitors, JC Decaux, Lamar Advertising Company, or CBS.
The prognosis on Clear Channel, therefore, is that "they are a better-positioned company in an industry that is challenged," says Goss. "Even as industry leader, they can't escape the overall trends."