Clear Channel's Privatization Bid Under Pressure

Outdoor Unit's Ad Picture Looks Brighter Than Bigger Radio Division

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NEW YORK (AdAge.com) -- Clear Channel's $19 billion private buyout appears to be one of the first major media casualties of the credit-market crisis. But even if the deal does get done, under duress or not, Clear Channel will need a rock-solid plan for growing ad revenue.

The Wall Street Journal first reported yesterday that Thomas H. Lee Partners and Bain Capital Partners' bid to acquire Clear Channel Communications for $19.4 billion might collapse due to a lack of resolution on the financial terms. The news was soon followed by a lawsuit against six banks involved in the transaction -- Citigroup, Morgan Stanley, Deutsche Bank, Royal Bank of Scotland, Wachovia and Credit Suisse -- essentially demanding the banks provide the funds for the deal. Clear Channel was granted a temporary restraining order against the banks until the deal's terms were resolved.

Much to lose
In an investor note issued yesterday, Citigroup analysts David Hamburger and Patrice Cucinello concluded the Clear Channel buyout had a 50/50 chance of being executed at this point. "On the one hand, we firmly believe neither the banks nor the private equity players are excited to complete this deal. That said, on the other hand, the cost of not doing the deal for all parties involved is perhaps too high to walk away," the analysts wrote. "Specifically, the $600 million break-up fee together with the likely-to-follow flood of litigation and reputational risk may be just enough of a negative incentive to put the ball over the goal line."

But buyout or not, Clear Channel's future revenue as a media company may be in for a change. The company has sold off major assets such as its Television Group (to Newport Television for $1.1 billion) and has been in the process of divesting several hundred of its non-core radio stations since November 2006.

A Clear Channel spokeswoman could not comment on the terms of the buyout, but said in an e-mail of the company's overall financial status, "Clear Channel Outdoor is doing extremely well and Clear Channel Radio continues to outperform the rest of the industry ... even with all of this going on. The company has terrific assets. It remains a strong company."

Industry leader
Indeed, Clear Channel is still by far the largest radio company, with nearly twice the revenue of its closest competitor, CBS Radio. But its revenue increases have been marginal to flat in recent years, albeit ahead of the rest of the industry. The company's end-of-year earnings report showed fourth-quarter revenue to be up 3%, while overall revenue were flat year-over-year from 2006 to 2007 at $3.4 billion. That accounts for nearly a third of the $10.69 billion spent in radio in 2007. And 2007 spending was down 3.5% compared to 2006, according to a report issued this week by TNS Media Intelligence.

Citigroup's Mr. Hamburger told Ad Age: "I'm a firm believer radio will continue to come under pressure and not be a big revenue growth driver. In all likelihood, they'll rest on the profitability equation and their ability to generate free cash."

Outdoor, however, continues to be a booming business for the company. On Ad Age's 2006 list of Top Three Out-of-Home Companies, Clear Channel Outdoor ranked second to CBS with $1.26 billion in revenues. Like radio, Clear Channel's outdoor division accounted for nearly a third of its sector's overall ad expenditures in 2007, which increased 4.9% to $4 billion, according to TNS. The company's 2007 end-of-year earnings reported Outdoor's overall revenues to be up 13%, due largely to the growth of its digital billboards, which have recently been rolled out with increased internet-esque functionality in markets like Cleveland and Los Angeles.

Outdoor is so robust that it might be ripe for a sale down the road, should the company attempt to sell off more key assets to drive profits. But Mr. Hamburger said such a sale should be approached with caution. "Certainly in this market they'd be wise to hold on to it. They're not going to get the type of value they could get otherwise," he said.
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