Can Clear Channel Survive?

Includes: CCO, IHRT
by: SA Editor Rocco Pendola

Clear Channel's (CCMO.PK) radio division continues to shed staff. The almost always reliable reports that the company fired "dozens" of staffers from its creative and production departments in Columbus and Atlanta this week. This follows recent back office and newsroom cuts.

According to its most recent annual report, Clear Channel generates nearly half of its revenue from its radio division. Its outdoor advertising segment (Clear Channel Outdoor Holdings; CCO) accounts for the other half through a mix of national and international efforts. It's tough to blame the company for bringing down the ax with frequency given a reality so sober it's worth repeating verbatim: "We have debt maturities totaling $885.1 million and $292.8 million in 2011 and 2012, respectively." These bills account for a mere fraction of Clear Channel's total debt load of more than $20 billion with a 'B.' While the company has about $1.9 billion in cash on hand, much of it goes toward debt service.

As somebody who started his radio career in the pre-consolidation days at a 1,000 watt by day, 76 watt by night local AM station, it's tough to watch Clear Channel turn employees over with such disregard for radio's history and tradition or people's lives. It's also upsetting to see opportunities like the ones I had become increasingly few and far between. You'll never be able to find the next Rush Limbaugh unless you give the Rusty Sharpe's and Jeff Christie's of the world the chance to cut their teeth on-the-air at stations hardly anybody listens to. To be fair, Clear Channel has made recent solid moves aimed at talent development, but the common paradigm has been to use national talent and pre-recorded material as opposed to going live and local. By ridding itself of back office and production staff, Clear Channel obviously aims to have as small of an impact on the on-air product as possible.

On another positive front, Clear Channel continues to diversify its revenue stream. After reacting to new media for years, the company has gotten proactive in an attempt to deliver its content via multiple channels. For instance, Clear Channel estimates that it reaches between 25 and 30 million people through its iHeart Radio web and mobile concept. Coupled with the fact that its terrestrial radio listenership exceeds 220 million listeners each month, Clear Channel remains the top dog, ratings and revenue-wise in radio. When you consider the company's balance sheet, however, all of this might not be enough.

How It Might Play Out

It's tough to see Clear Channel existing as is long- or even mid-term. One potential scenario could involve the company's creditors and equity holders forcing it to divest its radio stations to meet its financial obligations. This move would likely end up benefiting terrestrial radio. As noted in its annual report, Clear Channel owns 892 radio stations, as of December 31, 2010. Eighty-nine of these stations exist in the nation's top 15 radio markets. It owns 546 stations in markets number 51 through 300, 76 stations in unranked markets, and the rest in markets 16 through 50. Consider the fall out.

Suitors would line up for days and pay a premium to get their hands on Clear Channel's properties. Entercom Communications (NYSE:ETM), for example, operates 100 stations in 23 U.S. cities with significant holdings in San Francisco, Boston, Seattle, Denver, Portland, Sacramento, and Kansas City, according its most recent annual report. Those key cities, excluding Portland, accounted for about 50 percent of Entercom's net revenues in 2010. The company cites this concentration as a risk to its bottom line should these local markets experience economic trouble. By strategically picking up Clear Channel stations in markets where it has a strong presence already, Entercom could strengthen its position in those cities, particularly if the Federal Communications Commission (FCC) further relaxes the industry's ownership limits. To broaden its risk exposure, Entercom would likely bid on Clear Channel stations in similar size cities where it does not have a large presence, such as Dallas, Houston, Minneapolis, and San Diego. Given its presence in many of the same key markets, CBS Radio (NYSE:CBS) would likely enter this mix as well.

Other radio companies, including the recently-formed Cumulus (NASDAQ:CMLS) - Citadel (OTC:CDELA) behemoth and Emmis Communications (NASDAQ:EMMS), would likely target Clear Channel properties, particularly in strategic large markets and medium to smaller size cities. If FCC caps come into play, more desirable "scraps" could be left for independent players that hopefully have the creative license to take radio back to its community-oriented, live and local roots.

A big question, given Clear Channel's recent acquisition of Thumbplay and its online/mobile streaming plans, would be what happens to the iHeart platform. Given its size, picking up where Clear Channel left off would make the most sense for Cumulus/Citadel.

At the end of the day, this analysis represents just one way things could play it out if Clear Channel fails to survive or faces a mandatory downsizing. Investors have gobbled up some radio stocks over the last year, as revenues improved alongside a strengthening economic environment. EMMS shares, for instance, have traded between $0.43 and $2.45 over the last year, closing at $1.06 on Thursday. ETM has been a top performer, climbing from a low of $4.97 in August 2010, to a recent high of $12.68 in February. Shares have leveled off, closing at $10.83 on Thursday. If these companies and other players can benefit from a wholly bankrupt or partially divested Clear Channel, it might be time to give them a look for at least a small portion of your portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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