This looks like another case of private equity investors biting off more than they can chew. And now, that all-American marbled steak known in Radioland as Clear Channel is stuck in the back of the collective throat of Thomas H. Lee Partners and Bain Capital, the titans who teamed in November 2006 to take the San Antonio mega broadcaster private. They paid $18 billion and assumed $5 billion in outstanding debt. And it was a struggle to get there–it took a few court cases and 18 months to close the deal last July 25.
And now they are paying for it. This week nearly 1,000 Clear Channel employees were handed their pink slips in an attempt to cut expenses. If it sounds familiar, it’s because 1,850 other Clear Channel workers were shown the door just 14 weeks ago to the day–Jan. 20/Inauguration Day. That was to save $350 million in annual costs.
But now the buzzards are beginning to circle. “As advertiser spending plunges week by week, the likelihood grows that Clear Channel will fall out of compliance with one of its loan covenants by year’s end and be in technical default, several analysts said,” reports the New York Times Thursday morning (April 30) in an 1,136-word article focused on Clear Channel’s financial troubles. “The covenant requires that debt not exceed 9.5 times its cash flow. Lately, Clear Channel has been adding to its debt even as its cash flow is shrinking.”
While the Times notes that Scott Sperling, a president of THL Partners, “offered reassuring words about the companys future in a CNBC interview earlier this month when he said “We do not have any expectation of an imminent blowup,” adding that the company still had “a lot of levers it can pull to continue to generate reasonable cash flow,” its found enough other experts to suspect otherwise.
While the new investors have at least $22 billion into the operation, Moody’s debt analyst Neil Begley says were the market to rebound, “the company could be worth about $12 billion,” reports the Times. Bishop Cheen, the corporate bond analyst in Wachovia’s High Yield Division, recently wrote that Clear Channel was on track to become the biggest default among media companies and hence, the biggest workout ever in the industry. He figures Clear Channel’s market value today is “less than $6.3 billion,” according to the report.
Moody’s Begley tells the Times that Clear Channel has an estimated $1.4 billion in cash on reserve and that the company appears to have enough to manage through the next few years as long as it does not violate its bank agreements. Clear Channel, Begley reports, has to pay $1.3 billion in interest annually on its debt, and it and analysts forecast it needs more than $1.5 billion in cash flow this year.