The New Clear Channel

Any way you slice it, the spin-off of Clear Channel Entertainment from its parent company, Clear Channel Communications (stock symbol CCU), is a good thing.

* It’s not so much of a referendum on the concert business as it is about keeping Wall Street happy and boosting the parent company’s stock price.

The concert industry has far smaller profit margins than radio or billboards and institutional investors saw it as a low return investment and a drag on CCU earnings. CCU expects the move will unlock hidden value for its shareholders.

* The inescapable conclusion from the move is that the “synergy” from aggregating the concert industry and combining it with a mass media conglomerate was largely a myth.

To paraphrase Robert Sillerman’s recent statement to The New York Times: Intellectually, it seemed like a good idea at the time.

* There may not have been much synergy between the radio and concert divisions, but that didn’t stop people from assuming there was. It fostered legitimate concerns of antitrust and restraint of trade issues about the way the company “might” be doing business.

Play for Clear Channel in a local market and you might see your record increase spins while the DJs talk up your show. Don’t play for Clear Channel and you might expect the opposite. At least that was the assumption many people made.

The U.S. Justice Department has been sniffing around this issue for years but the lack of action would indicate a dearth of overt evidence of such behavior. If anything, Clear Channel may have allowed people to assume the implied benefit (or threat) of working with them and all the things they could bring to the table to impact an artist’s career.

* Rumors about Michael Rapino’s job being in jeopardy are hard to believe and probably were floated by a few people within the company with axes to grind.

Rapino is attempting to make some bold changes and it’s way too early to tell if he will be successful. He needs to be given a chance to succeed. The last thing the investment community desires is turmoil and uncertainty in the top ranks of management.

* Since the start of the SFX roll-up, the most legitimate complaint about the concert giant has been that it significantly overpaid talent in a quest for market dominance. This resulted in higher talent fees for all promoters and increased ticket prices for the public.

Nearly all touring artists loved SFX and Clear Channel because they were getting paid a lot more money than they had been in the past because the emphasis was on market share and not the bottom line.

Sillerman really didn’t care as long as he could keep building his story for Wall Street. When Clear Channel bought the company, it assumed it would benefit from the elusive synergy of media bigness.

* Independent promoters tend to live and die by each booking. Clear Channel Entertainment was such a multifaceted giant that it was extremely difficult to tell if it was making money from its overall operations.

Some significant overhead costs such as IT and legal were absorbed by the parent company. Those and other costs will now have to be borne by a stand-alone CCE before it can generate enough free cash flow for Wall Street to consider it a good investment.

* It looks like some financial analysts will value the CCE spin-off at about $1.5 billion dollars. That means that more than $3 billion dollars has disappeared into thin air since CCU bought SFX for $4.4 billion in 2000.

It also seems likely that no ready buyer exists for CCE at a $1.5 billion valuation or the Mays family and the CCU board would have probably gone that route.

* The CCE spin-off generated a tsunami of rumors and a good bit of speculation in the press about what would happen next. Suddenly, other promoters like Jerry Mickelson and Dave Lucas were saying they were talking to investment bankers and would be interested in possibly buying the company. For the moment at least, it would seem highly unlikely that any of them could round up enough cattle to interest the powers that be in San Antonio.

Unless there is a billionaire out there (how much money does Mark Cuban have left?) who wants to pony up the $1.5 billion for the prestige of owning the dominant player in the worldwide live entertainment industry, it isn’t likely to happen this year.

* There are legitimate concerns about how well-funded CCE will be when it starts off. CCU is going to assume all existing debt at the parent level and has said it will provide appropriate funding for CCE but hasn’t defined how much.

A Merrill Lynch analysis of a stand-alone CCE indicates the company will have the capacity to borrow up to $700 million. ML believes that $600 million of that will be used for an inter-company loan repayment to CCU. That would leave only $100 million to fund an operation that requires large sums for up-front artist guarantee payments that could quickly eat through the spin-off’s working capital.

* The real test of the CCE spin-off will be when its stock finally starts trading on its own. Since CCU is issuing investors one share of CCE for each share they own, that will mean CCE will have about 550 million shares in circulation at birth.

Stock valuations in the public markets are generally tied to EBITDA or, in simple terms, how much money you made before taxes, interest and other accounting gimmicks.

Merrill Lynch estimates that based on what it understands of the live entertainment industry, CCE’s likely EBITDA from ’06 operations at a 5.5 multiple will lead to a stock price of around $1 per share.

If that’s the case, CCE’s market value just plummeted to $550 million and there would probably be several buyers interested at that price. That would also be the point where the company might seriously start looking to sell off assets that could be worth more separately than together.

* Under the above scenario, those promoters who sold out to Sillerman because the valuations they were given for their businesses seemed too good to be true might get a chance to buy back their companies for pennies on the dollar.

On the other hand, bolstered by better shed business in ’05 and large cash flows from the U2 and Rolling Stones tours, the company might surprise everyone. If things go well, an IPO for CCE could be on the horizon.

* As I said at the beginning, the CCE spin-off is a good thing. The highly talented people who run CCE will now be given a chance to follow a clearly focused direction that is best for their operations without encumbrances from a parent company.

CCE will have to be much more conscious of making deals that end profitably, or like any other business, it will perish. That is good for everyone.

Perhaps the days of stupid artist guarantees are finally going away and the true value of what a top-level professional concert promoter brings to the table for an artist will be properly rewarded.

Whatever happens from this point forward, it looks like the bottom line, rather than market share, will dictate who remains standing a year from now.

— Gary Bongiovanni