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Accounting Allah shmoop case Study Clear Channel communications All right

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people Let's take a gander It what is likely to

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be one of the greatest bankruptcies or at least a

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PC name for a mostly bankrupt e kind of thing

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A recapitalization think decapitation Yeah it's the biggest bankruptcy ish

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thing in private equity history in Clear Channel Communications meaning

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

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interest on it and they folded their pockets inside out

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Well this company used to be one of the dominant

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premiere radio broadcasters in the World Radio used to be

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a thing In the twenties thirties and forties families would

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gather round the old huge radio in the living room

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and listen to music talk shows and well static Life

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was less exciting Back then the radio signal covered only

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a local market area maybe ten miles in diameter or

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so with propagation or rip eaters on it That could

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extend it tio maybe fifteen twenty miles and that distance

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was plenty big to cover Most markets in the U

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S There were about two hundred local markets in nineteen

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forty with Manhattan being the largest of the time Advertisers

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

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maybe two hundred bucks for a thirty second spot to

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reach some estimated number of Manhattan listeners based on polls

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taken by professional you know polling companies all right Well

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given station might sell twenty thousand dollars worth of ads

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in a week or a million bucks a year with

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music licensing costs of maybe fifty grand and employee costs

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of Oh maybe half a million bucks And yeah they

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

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A maintenance costs where maybe another twenty grand a year

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So a station on a million dollars in revenue might

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have something like three hundred grand a year in pre

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tax free cash flow Lovely little business even with eight

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competitors in a given market all nickel and dime ing

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each other competing on lower commodity ad prices Then with

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the advent of cell phones in the late nineteen eighties

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well the whisper of satellite radio and a few other

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things While life began to change for radio after about

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two thousand cell phones and their usage started to get

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really cheap Verizon and Tea and others offered all you

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can eat packages As the infrastructure of cell phones was

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built out around the country with cheap air time people

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simply preferred to chat with their families and friends and

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business partners on the drive to and from work rather

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than listen to music and sports Talk and radio took

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a big hit Ratings went down and down and down

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and all of a sudden a thirty second drive time

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spot which peaked at maybe three hundred fifty dollars a

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

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on its way down to like fifty bucks The laws

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had changed Everyone bought each other And then the markets

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boiled down to the old CBS radio which became Infinity

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and Clear Channel Well these duopoly competitors raised prices increased

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ads from in twelve minutes to maybe twenty minutes in

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

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they coined money for a few years that twelve million

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

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commissions to salespeople on ly double So all that was

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

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took on tons of debt and paid prices that were

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you know Hi So a typical station if you unit

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

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to eight million of expenses and a hundred million dollars

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of debt at ten percent interest And yes that was

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way more expensive back then That said things worked just

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fine for a while on twelve million dollars a pre

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tax free cash flow The ten million dollars a year

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in interest was just fine ish It was covered and

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they were obliged to pay down two million dollars of

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dead along the way Well roll the clock forward five

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

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two thousand five or so in the twenty million dollars

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in revenues that was a layup is now fourteen million

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

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next twelve million But even on fourteen million dollars with

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five million in expenses after big cost cutting while the

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company makes just enough to pay its bills the principle

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is down to ninety million bucks at this point in

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

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and interest costs still plenty of cushion right on you

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even on this twelve million dollars number there Maybe And

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oh by the way with all this interest none of

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these companies ever had to pay any taxes They were

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technically not profitable But you get the idea here roll

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the clock forward another five years And not only is

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their cellphone ubiquity but X M satellite and other Internet

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streaming things that fully changed the paradigm of the quiet

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time in the car Well guess what company survives today

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It fully re capped and had to readjust its bondholders

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toe right down their loans and take a lot less

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interest for a while And the scavengers are all hunting

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in hovering over the assets other than the radio broadcast

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

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notional brand value to famous call letters like K F

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R C York a fog or K M E L

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R K with me But if incrementally fewer people are

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

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asset really worth Yet Not a whole lot Well the

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spectrum on which the radio station broadcast is worth something

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

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the radio broadcaster It is leased to them for a

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small amount of money by the government for cycles of

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

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

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even sell its own airway numbers or wave frequency ugly

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Situation unclear Asset sale unclear Future super smart people loaned

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them a ton of money and later uh you know

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

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