iHeartMedia IPO: It Could Emerge From Chapter 11 In Q4 2019

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About: iHeartMedia, Inc. (IHRTQ), Includes: P, SIRI
by: Wilsonville Capital
Summary

iHeartMedia, Inc. is a global media and entertainment company doing radio, digital, outdoor, mobile, live events, and other forms of entertainment.

On the cash flow front, investors should appreciate that the CFO increased from -$491 million in 2017 to $966 million in 2018.

Using a ratio of 6x to 7x EBITDA, the total enterprise value could be equal to $9 billion to $11 billion.

The company expects to use the proceeds to pay its debt.

The financial debt is larger than $5.2 billion. The liabilities subject to compromise represent debt reclassified in 2018.

As iHeartMedia (OTCPK:IHRTQ) expects to emerge from Chapter 11 in the second quarter of 2019, the company is organizing an IPO. Reporting positive cash flow from operations of $966 million in 2018 and after reclassifying its long-term debt, the recent financial situation is a bit better than that in 2016 and 2017. Having said this, the financial risk is still very significant. Using a ratio of 6x to 7x EBITDA, the total enterprise value could be equal to $9 billion to $11 billion. Taking into account this figure, the market capitalization should not increase a lot when the iHeartMedia emerges from Chapter 11.

Source: S-1

Business

Headquartered in San Antonio, Texas, and incorporated in May 2007, iHeartMedia, Inc. is a global media and entertainment company doing radio, digital, outdoor, mobile, live events, and other forms of entertainment.

iHeartMedia owns several brands. Take a look at them in the images below:

Source: Company's Website

Source: Company's Website

iHeartMedia has three business segments: iHeartMedia, Americas outdoor advertising, and International outdoor advertising.

For the year ended December 31, 2018, the iHeartMedia segment comprised 54% of the total revenues. iHeartMedia offers entertainment services via broadcast and digital delivery and also includes the company's national syndication business. As of December 31, 2018, the company owned 848 domestic radio stations operating in 82 of the top 100 markets in the United States.

The company's Americas outdoor and International outdoor segments offer outdoor advertising services. For the year ended December 31, 2018, Americas outdoor business segment represented 19% of the total amount of revenue. This segment operates a total of 79,000 display structures in the U.S. with operations in all of the 20 largest markets.

Finally, the International outdoor segment comprised 24% of total revenues in the year ended December 31, 2018. International outdoor advertising operations are conducted outside the United States, in Europe, Asia, and Latin America.

Chapter 11

On March 14, 2018, the company and certain subsidiaries filed voluntary petitions for relief under Chapter 11. In 2019, while debtors continue to operate iHeartMedia, the company has made some progress. The amount of debt was reclassified last year, and the company reported positive CFO for the first time.

Read the lines below regarding the Plan of Reorganization. The company expects to emerge from Chapter 11 in Q2 2019:

On January 22, 2019, the Debtors filed a modified fifth amended Plan of Reorganization and the Bankruptcy Court entered an order confirming the Plan of Reorganization. Although the timing of when and if all such conditions will be satisfied or otherwise waived is inherently uncertain, we currently anticipate the Plan of Reorganization will become effective and we will emerge from Chapter 11 during the second quarter of 2019." Source: 10-K

As iHeartMedia nears exiting bankruptcy, it is organizing an IPO for its Class A shares.

Balance Sheet

With $12.26 billion in total assets, market participants should be interested in the large amount of goodwill and intangible assets. As of December 31, 2018, these assets comprised 64% of the total amount of assets.

As shown in the image below, the most valuable intangible assets are advertiser relationships, transit, street furniture, and other rights. Often, accountants have issues while assessing intangible assets. With this in mind, investors may not appreciate the large amount of intangibles present in the balance sheet.

Source: 10-K

With regards to the goodwill, assessing each acquisition closed by iHeartMedia is difficult. With that said, the amount of goodwill registered in the most recent transactions was large as compared to the total amount of assets acquired:

During the fourth quarter of 2018, the Company acquired Stuff Media LLC and Jelli, Inc. The assets acquired as part of these transactions consisted of $27.0 million in fixed assets and $35.2 million in intangible assets, consisting primarily of technology and content, along with $77.3 million in goodwill." Source: 10-k

It means that accountants and iHeartMedia, Inc. are very optimistic about the future of the acquired company. The price paid is higher than the sum of the fair value of all the assets acquired.

A list of total assets is shown in the image below:

Source: 10-K

On the liabilities front, the total amount of liabilities is equal to more than $17 billion. As a result, the asset/liability ratio is below one. The financial debt is larger than $5.2 billion. The liabilities subject to compromise represent debt reclassified in 2018. The lines below provide further details on this matter:

Source: 10-K

A list of liabilities is shown in the image below:

Source: 10-K

Investors should be interested in the company's contractual obligations. They are equal to more than $31.4 billion with $17 billion to be paid in 2019. The table below seems very relevant in this case:

Source: 10-K

Stable Revenue And Positive CFO

It is beneficial that revenue remained stable in 2018, 2017, and 2016. In those years, revenue was approximately equal to $6 billion. In addition, the operating income has also remained very stable. It amounted to $980 million and $969 million in 2018 and 2017, respectively. The image below provides further details on this matter:

Source: 10-K

On the cash flow front, investors should appreciate that the CFO increased from -$491 million in 2017 to $966 million in 2018. The decrease in the consolidated net loss from -$458 million to -$202 million explains the positive results. The image below provides further details on this matter:

Source: 10-K

Use Of Proceeds

The use of proceeds may not be appreciated by investors. The company expects to use the proceeds to pay its debt. The text below was taken from the annual report:

We intend to use the net proceeds from this offering to repay indebtedness." Source: S-1

With that, investors should understand clearly that the company's debt is significant. In order to continue its operations, iHeartMedia should, first of all, pay its debt.

Competitors And Valuation

The company does not provide information about its direct competitors in the S-1 document. So, let's find publicly-traded media companies that may compete with iHeartMedia. The first one may be Pandora (P), which runs an internet radio station. Pandora was recently acquired by Sirius XM Holdings (SIRI), another peer.

Pandora was trading at 1.41x sales when it was acquired. With a stable revenue of $1.516 million and negative EBITDA, Pandora can be compared with iHeartMedia. Using a ratio of 1.41x sales and with revenue of $6 billion, iHeartMedia should have a total enterprise value of $8.46 billion.

SIRI provides satellite radio services in the US. It trades at 16.72x EBITDA with 6.3% revenue growth, revenue of $5.77 billion, and debt/EBITDA ratio of 3.33x. As shown in the image below, iHeartMedia reports adjusted EBITDA of $1.611 billion. iHeartMedia should not have an EV/EBITDA ratio as large as that of SIRI. Keep in mind that iHeartMedia has a large amount of debt. With this in mind, most investors should accept paying 6x to 7x EBITDA. Using this ratio, the total enterprise value should be equal to $9 billion to $11 billion.

Source: 10-K

Conclusion

While it is positive that iHeartMedia should emerge from Chapter 11 during the second quarter of 2019, the amount of financial debt is still large. Using a ratio of 6x to 7x EBITDA, the total enterprise value could be equal to $9 billion to $11 billion. With these numbers in mind, the expected amount of market capitalization cannot be significant. Sophisticated investors should not be interested in holding shares of a business with such a large amount of financial risk.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.