From Bankruptcy To IPO: What iHeartMedia’s Public Offering Means

Tommaso Boddi/ Getty Images for iHeartMedia – Florence + The Machine
performing at iHeartRadio LIVE at iHeartRadio Theater on Oct. 22, 2018 in Burbank, California.

If ever there was a storyline for the Internet’s disruption of legacy media companies, it’s iHeartMedia and its rocky, decade-long ride to bankruptcy in 2018. Multiple forces are at play here: the rise of digital distribution, leveraged buyouts as recession loomed and a weakened advertising market. After a decade of private ownership, and a year after filing Chapter 11 bankruptcy and reorganization, iHeartMedia is about to have an initial public offering of stock. 

The IPO size has not been announced.IHeartMedia is going public for two reasons: it went bankrupt and creditors want at least some of their money back. It’s as plain as day in the “Use of Proceeds” section on page 40 of the S-1 prospectus filed with the Securities & Exchange Commission last week: “We intend to use the net proceeds from the offering to repay indebtedness.” 

Debt taken on a decade ago has been choking the radio giant. Unable to make immense interest payments, iHeartCommunications, after exhausting legal options, agreed to the bankruptcy reorganization. Creditors extended new debt to keep operations running. More importantly, the company’s debt was reduced to approximately $5.75 billion from around $16 billion. (The outdoor advertising business, Clear Channel Outdoor Holdings, will be spun off and retain about $4 billion of debt.) IHeartMedia CEO Bob Pittman and COO Richard Bressler will have their employment contracts extended four years from the IPO date. 

The story goes back to the 2000s.

Private equity firms Bain Capital, LLC and Thomas H. Lee Partners bought iHeartMedia, formerly CC Media Holdings, in 2008 for $17.9 billion. Back then, a leveraged buyout seemed like a good bet. For Bain and Lee, getting money was the easy part. This was the height of the leveraged buyout boom of the 2000s. Credit was easy to acquire and the economy expanded through most of the decade. The new owners had high hopes for Clear Channel and the radio industry in general. As with all LBOs, success would mean a good return on investment. 

But Clear Channel’s new owners immediately ran into problems. The Great Recession, for one thing, tightened credit markets causing banks to seek tighter restrictions on loans and require higher interest payments. Bain and Lee argued the banks were in breach of contract – the parties had signed a commitment letter with specific terms – and sued its lenders to finish the deal. “It seems clear that lenders’ remorse set in when credit markets worsened,” Bain and Lee said in a statement. The two sides reached agreement just a few months later. By that time, however, Clear Channel’s value had dropped, and Bain and Lee ended up paying $36 per shared and not the $39.20 price of the original agreement.

The recession quickly depressed the advertising market. In the first quarter of 2009, Clear Channel’s revenue declined 23 percent year-over-year while cash flow fell 47%. Clear Channel laid off 12% of its workforce that quarter. Moody’s dropped its credit rating on Clear Channel due to a heightened chance it would break its debt covenants. Then, just a year after the bitter legal bout, Clear Channel returned to its lenders seeking new deal terms to help it make interest payments. With the banks unmoved, the broadcaster went elsewhere to raise $750 million of new debt to pay interest and retain control of the company. It was a temporary fix: about $21 billion of debt hung over Clear Channel’s head for the next decade and the company borrowed additional sums to repay maturing notes.

The Great Recession also wreaked havoc on leveraged buyouts at the time. Many lenders halted their deal-making, but some transactions went through. Around the same time, EMI Music was acquired for $4.7 billion by Terra Firma Capital Partners. Attempts to remake the company failed; lender Citi took control of EMI in 2011 and sold off its most of its recorded music to Universal Music Group and publishing division to a consortium of buyers that included Sony/ATV Music Publishing, the world’s largest music publisher.  

All the while, digital competition stiffened. Internet radio was gaining listeners. The two satellite radio companies, Sirius Satellite Radio and XM Satellite Radio, merged in 2008. The new company, SiriusXM Radio, quickly ran into financial trouble and faced bankruptcy before taking a $530 million loan from Liberty Media in 2009. A decade later, however, SiriusXM is financially strong, generates hundreds of millions of dollars in profit and owns Internet radio station Pandora. Now digital subscriptions services are blossoming: Apple Music and Spotify are reported to have 28 million and 26 million subscribers, respectively and Spotify has additional free listeners.  

Tony Barson / Getty Images / iHeartMedia – iHeart
The IHeart Brain Trust: From left, Gayle Troberman, Tom Poleman Rich Bressler, Jon Bon Jovi, John Sykes, Bob Pittman and Tim Castelli pose before Jon Bon Jovi performance at a VIP dinner party hosted by iHeartMedia and MediaLink in Antibes, France during the Cannes Lions Festival of Creativity on June 19, 2018.

Market research shows iHeartRadio is swimming against a strong tide. Personalized Internet radio and on-demand streaming are taking listening time from owned music (CDs, downloads) and one-to-many AM/FM broadcasters. Yes, radio has a huge footprint, but the key question is “how deep is that footprint?” It’s possible for a fast food restaurant, for example, to have the same number of customers from one month to another while at the same time having fewer orders. People are still coming, but they’re not coming as often. Three years ago, radio had 52% of adults’ audio listening, according to Edison Research. Last year the number was down to 44% – even through radio consistently reaches about 92% of American adults each month. 

It’s not that iHeartMedia doesn’t make money. The company has had revenues in the $6.1 to $6.3 billion and operating profit around $1 billion. Bnterest expense was about $1.8 billion, and net losses were in the hundreds of millions of dollars. Even though the recession is over, revenue never met the owners’ expectations. Revenue was $6.7 billion in 2008 but fell to $5.5 billion in 2009. By 2012 it had recovered to $6.2 billion but hasn’t risen above $6.3 billion since.  The reorganization, however could help iHeartMedia turn a profit. The S-1 filing details how it would happen: after removing Clear Channel Outdoor revenue and taking into account a lower interest payment, the new company would have turned a $49.8 million profit in 2018. And it can’t be understated that iHeartMedia is the dominant company in a $17 billion radio advertising market. Its 848 live broadcast stations give it a presence in every major market in the country.

IHeartMedia is trying to change with the times. Last year it beefed up its podcast business by acquiring Stuff Media, maker of the popular “How Stuff Works” series, for $55 million. Then in February, iHeartMedia purchased Radiojar, a platform for streaming podcasts and broadcast radio. Also last year, the company acquired Jelli for its programmatic advertising platform; programatic allows brands to automatically bid for digital ads at the moment they are served to a consumer. Given the rise of podcasts and inevitable demand for digital advertising, all three are sensible additions. 

But ultimately, a bet on iHeartMedia is a bet on legacy media at a treacherous time. The entertainment and news businesses are transforming. The cable business is losing customers to lower-priced streaming options; traditional pay television subscribers declined from 105 million in 2010 to 91 million in 2018, according to Digital TV Research, as viewership of Netflix and Amazon Prime have exploded. 

The news business has become difficult and not well-funded Internet companies like Buzzfeed, Vox and Vice have mostly escaped layoffs. The AM/FM radio business isn’t going to escape additional disruption. A purchase of an iHeartMedia share will be a vote of confidence in the company’s digital business. s