Accounting: Case Study: Clear Channel Communications

thing in private equity history in Clear Channel Communications meaning

they took out too much debt that couldn't pay the

interest on it and they folded their pockets inside out

Well this company used to be one of the dominant

premiere radio broadcasters in the World Radio used to be

a thing In the twenties thirties and forties families would

gather round the old huge radio in the living room

and listen to music talk shows and well static Life

was less exciting Back then the radio signal covered only

a local market area maybe ten miles in diameter or

so with propagation or rip eaters on it That could

extend it tio maybe fifteen twenty miles and that distance

was plenty big to cover Most markets in the U

S There were about two hundred local markets in nineteen

forty with Manhattan being the largest of the time Advertisers

would pay say today's inflation adjusted dollars one hundred box

maybe two hundred bucks for a thirty second spot to

reach some estimated number of Manhattan listeners based on polls

taken by professional you know polling companies all right Well

given station might sell twenty thousand dollars worth of ads

in a week or a million bucks a year with

music licensing costs of maybe fifty grand and employee costs

of Oh maybe half a million bucks And yeah they

didn't make a ton of money in radio and ten

A maintenance costs where maybe another twenty grand a year

So a station on a million dollars in revenue might

have something like three hundred grand a year in pre

tax free cash flow Lovely little business even with eight

competitors in a given market all nickel and dime ing

each other competing on lower commodity ad prices Then with

the advent of cell phones in the late nineteen eighties

well the whisper of satellite radio and a few other

things While life began to change for radio after about

two thousand cell phones and their usage started to get

really cheap Verizon and Tea and others offered all you

can eat packages As the infrastructure of cell phones was

built out around the country with cheap air time people

simply preferred to chat with their families and friends and

business partners on the drive to and from work rather

than listen to music and sports Talk and radio took

a big hit Ratings went down and down and down

and all of a sudden a thirty second drive time

spot which peaked at maybe three hundred fifty dollars a

spot now couldn't be given away for two hundred dollars

on its way down to like fifty bucks The laws

had changed Everyone bought each other And then the markets

boiled down to the old CBS radio which became Infinity

and Clear Channel Well these duopoly competitors raised prices increased

ads from in twelve minutes to maybe twenty minutes in

an hour And that's a lot of ads And while

they coined money for a few years that twelve million

dollars in revenues became twenty million dollars while expenses I'ii

commissions to salespeople on ly double So all that was

great right Well when the company's bought each other they

took on tons of debt and paid prices that were

you know Hi So a typical station if you unit

ties the Numbers hadn't say 20000000 dollars of revenues five

to eight million of expenses and a hundred million dollars

of debt at ten percent interest And yes that was

way more expensive back then That said things worked just

fine for a while on twelve million dollars a pre

tax free cash flow The ten million dollars a year

in interest was just fine ish It was covered and

they were obliged to pay down two million dollars of

dead along the way Well roll the clock forward five

years and radio has begun its steady decline It's now

two thousand five or so in the twenty million dollars

in revenues that was a layup is now fourteen million

Management knows next year it'll be thirteen million in the

next twelve million But even on fourteen million dollars with

five million in expenses after big cost cutting while the

company makes just enough to pay its bills the principle

is down to ninety million bucks at this point in

it and percent Well that's nine million bucks a year

and interest costs still plenty of cushion right on you

even on this twelve million dollars number there Maybe And

oh by the way with all this interest none of

these companies ever had to pay any taxes They were

technically not profitable But you get the idea here roll

the clock forward another five years And not only is

their cellphone ubiquity but X M satellite and other Internet

streaming things that fully changed the paradigm of the quiet

time in the car Well guess what company survives today

It fully re capped and had to readjust its bondholders

toe right down their loans and take a lot less

interest for a while And the scavengers are all hunting

in hovering over the assets other than the radio broadcast

station itself There really no assets in radio There's a

notional brand value to famous call letters like K F

R C York a fog or K M E L

R K with me But if incrementally fewer people are

listening to the radio then what What's that brand or

asset really worth Yet Not a whole lot Well the

spectrum on which the radio station broadcast is worth something

Maybe something meaningful But guess what It isn't owned by

the radio broadcaster It is leased to them for a

small amount of money by the government for cycles of

three to five years after which time it's re evaluated

by the government and then re auctioned Esso Station can't

even sell its own airway numbers or wave frequency ugly

Situation unclear Asset sale unclear Future super smart people loaned

them a ton of money and later uh you know

regretted it Yeah Kids don't let this happen to you