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  • KPB & Co Research

IHeartMedia has been the subject of much controversy over the last year and a half as many noted investors look to make money from the company's demise. The company went into bankruptcy in March 2018, after they struggled to make payment on the US$20Bn in debt. The company racked up a ton of debt after it was taken private by Thomas H Lee Partners and Bain Capital in 2008. Over the period the company generated annual revenues in the US$6Bn region and consistent Earnings before interest and taxes in the region of US$1Bn.

Solid Business BUT Too Much Debt

The company has built up solid business assets over the years and only met their demise after private equity investor over-leveraged the company in going private transaction. With 849 AM and FM radio channels across the USA, the company is the largest radio business in the country and services over 160 U.S. markets, including 45 of the top 50 markets and 82 of the top 100 markets. The company's smartphone app alone has an active user base of 270 million. According to documents filed with US Securities and Exchange Commission, the company focuses on 3 business lines:

iHeartMedia ; Americas outdoor advertising; and International outdoor advertising. Our iHM segment provides media and entertainment services via broadcast and digital delivery and also includes our national syndication business. Our Americas outdoor and International outdoor segments provide outdoor advertising services in their respective geographic regions using various digital and traditional display types. Our Americas outdoor segment consisted of operations primarily in the United States and Latin America and our International outdoor segment consisted of operations primarily in Europe and Asia. Our "Other" category includes our full-service media representation business, Katz Media Group ("Katz Media"), which is ancillary to our other businesses. For the year ended December 31, 2017, the iHM segment represented 56% of total revenues, Americas outdoor represented 20% and International outdoor represented 22% of total revenues.

Fighting For The Scraps

Ever since the company appeared to be nearing a chapter 11 filing, various investors took a stake in the company's senior unsecured debt instruments. Over the last year, there have been major points of disagreements between investors in deciding how the company's assets will be sub-divided amongst debt holders some of which include the likes of John C. Malone and Mario Gabelli. John C. Malone's Sirius XM took a significant stake in the debt and is likely to make a sizeable profit on the deal when the company exits bankruptcy. At one point in time, Sirius XM wanted to make an arrangement to secure a 40% equity stake in the business post-bankruptcy. Mario Gabelli's - firm Gabelli Asset Management Company - has had an ongoing legal battle with the iHeartMedia's subsidiary Clear Channel Outdoor Holdings for the mismanagement of the company's finances. It is alleged that the team at Clear Channel, under the influence of the parent company, made extraordinary dividend payments and intensionally failed to collect on debts owed to just to save the parent from the inevitable. iheartMedia holds a 90% stake in Clear Channel with the other 10% publicly traded. The bickering back and forth between the different class of debt and equity holders led to months of delays in court but was finally settled on January 22.

On January 22, 2019, the company's plan of reorganization was confirmed by the United States Bankruptcy Court for the Southern District of Texas, where the company will look to remove US$10.4Bn in debt from its balance sheet. The deal will totally wipe out equity investors and turn control of the company over to debt holders. Additionally, the company will separate Clear Channel Outdoor Holdings, Inc. from iHeartMedia, and create two independent public companies. Spin-offs, in general, are interesting for special situations investors. The fact the spin will occur as a result of a bankruptcy process will make it a lot more interesting as the potential to benefit from a short term demand-supply imbalance of public traded shares is high.

iHeartMedia has continued to operate their business as normal as possible throughout the bankruptcy process. Though the financials does suggest some slippage in revenues and cashflows, we expect that as the bankruptcy process concludes, management will have less distraction and the organization will be more focused on strengthening the business. The management that was in place pre-bankruptcy will be around post-bankruptcy as they have all signed 4-year contract extensions. This continuity in key management personnel should bode well for the business, given that the operating metrics of the company remained strong and that the primary weakness was around capital structure. The strength of the underlying business, as well as the potential for spin offs, should make for an interesting investment opportunity.

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