Clear Channel chief gambles on wrestling its debt

By Sujeet Indap, Andrew Edgecliffe-Johnson and Matthew Garrahan in New York..Financial Times.com 6/08/14

The entrance to Clear Channel Communications’ new Manhattan office makes it feel like a digital start-up, not a terrestrial radio and outdoor advertising company founded in the 1970s.

A sensory tunnel tunes smoothly between talk radio and music stations as visitors walk through. Inside, a small amphitheatre faces a massive digital screen showing one of the company’s concerts.

Bob Pittman, Clear Channel’s chief executive, is keener to point out the unfinished floors and exposed walls. “We wanted to prove creativity needn’t cost more money,” he explains.

Cost is no trivial matter for a company still shouldering more than $20bn of debt from its 2008 leveraged buyout, whose bonds are rated triple C plus by Standard & Poor’s.

The takeover by Bain Capital and Thomas H Lee was one of a flurry of buyouts agreed in the credit frenzy of 2005-07, but after debt markets seized up in 2008, it took months of litigation and a purchase price cut for the deal to close.

Mr Pittman, who at 15 worked as a radio announcer in Mississippi, joined in 2010 as chairman of Clear Channel’s radio unit, the largest in the US, and took over as chief executive in 2011.

The $5m investment he made in its equity – worthless unless he can wrestle its debts – means he has much at stake in improving its creativity and its cost structure.

The opportunity the former MTV and AOL executive saw in Clear Channel was that its local stations and billboards reach more people than Google, Facebook or broadcast television networks, but had never joined its local networks up to offer advertisers a national platform.

Mr Pittman has set about talking up radio’s value to an advertising industry still loyal to TV and more excited by digital music brands such as Spotify, Pandora Media and now the Apple-owned Beats.

“Radio is America’s companion,” he says, to explain its 245m monthly listeners’ loyalty to Clear Channel’s 800-plus stations, which feature everything from country music to the conservative firebrand Rush Limbaugh.

Mr Pittman’s challenge is to persuade advertisers not only that radio can withstand the digital competition, but that they should pay more to reach its listeners. According to Nielsen, the ratings group, radio can generate a sales lift of $6 for every ad dollar spent. Yet radio pricing is a third cheaper than television, Mr Pittman says.

The endurance of car radios means “we’re the only company in America that loves traffic jams”, he says, and with an audience already accustomed to consuming its content on the move, he argues that the more mobile digital media becomes, the more it plays to Clear Channel’s strengths.

Clear Channel’s digital strategy centres on iHeartRadio, an internet and mobile radio brand that has used cross-promotion from its stations to amass nearly 50m registered users (Pandora has nearly 80m) and build a growing live music business.

With Spotify’s latest valuation above $5bn and Beats selling for $3bn, “every investment banker in the world” has suggested a spin-off, Mr Pittman says, though he argues that Clear Channel’s assets are worth more together.
“Six months ago, if you’d have told me I could refinance $850m of subordinated debt at 10 per cent, I’d have looked at you like you were crazy”

– Richard Bressler, Clear Channel’s chief financial officer

If he is making progress it is appearing only slowly. Its radio revenue was up just 4 per cent in 2013, adjusting for political ad cycles. Just over half of group revenue comes from radio with the rest from a more stable multinational billboard business, Clear Channel Outdoor, which is listed with a market capitalisation of $3bn.

Mr Pittman expects growth to accelerate, but even more important to averting bankruptcy has been a series of debt restructurings that have taken advantage of yield-hungry capital markets to push back a looming wall of maturities.

In April, an $850m refinancing pushed repayments back from 2014 and 2015 to 2018. However, it came with 10 per cent interest rate, double the rate on the debt it replaced. Clear Channel’s expected interest expense of about $1.6bn in 2014 is about equal to its free cash flow.

“Six months ago, if you’d have told me I could refinance $850m of subordinated debt at 10 per cent, I’d have looked at you like you were crazy,” says Richard Bressler, a Thomas H Lee partner who became Clear Channel’s chief financial officer last year. The demand for its debt is a sign of confidence, he says.

It also buys the company much-needed time. Clear Channel’s owners are “patient”, Mr Bressler says, and Mr Pittman has just signed a contract that will keep him at Clear Channel until 2019.

The debt burden gives him little room for error, but like an experienced radio pitchman, he sounds confident that his $5m gamble will pay off.

“If the company’s not going to grow I’ll get no money back,” he admits, but he adds that because Clear Channel has so much leverage, it “supercharges” any upside. His return, he says, will be “50:100 to one if it works”.

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