Accounting: Case Study: Clear Channel Communications
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Courses | Accounting |
Language | English Language |
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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