The first syllable in consolidation is con

Michael Hedges March 27, 2008

Clear Channel Communications stock price fell 20% on the revelation that banks are unwilling to finance a leveraged buyout. America’s largest radio broadcaster by leaps is falling to a reality of its own creation. Consolidation fails. And UK broadcasters want to follow the same path.

Clear Channel, in part deservedly, has become symbolic of all the sins and evil of media consolidation. The precipitous fall of US radio audience has been attributed to the rise and methods of ‘Cheap Channel,’ which spared no expense cutting content to the point of no return. When advertisers discovered the meaning of ‘no return’ it was just a matter of time before the myth of consolidation shattered.

With the assistance of two able investment bankers Bain Capital LLC and Thomas H. Lee Partners, Clear Channel’s founding family has been aiming for a leveraged buyout to escape demands of public stockholders and stock traders for greater return. The share price has fallen roughly by two-thirds since its peak. No more DJs can be fired when no DJs are left.

This week bankers previously lined up to loan US$20 billion soured on the deal, preferring to pay a US$ 600 million walk-away fee to losing US$ 3 billion in write-downs the instant the deal would be done. Bankers – yes, they’re under a lot of pressure these days – couldn’t handle the stress. They feared, and none would speak on the record, CC would have a bit of a problem servicing the debt.

My colleague Phil Stone, writing about bone-headed practices in the newspaper business, frequently invokes: “Will they never learn?” And hear we go again. UK broadcasters are reaching into the trick-bag of consolidation, hoping for ‘economies of scale’ or ‘market leverage.’

Three years ago two reasonably well-run and successful UK broadcasters – GWR and Capital Radio – merged to form GCap Media. Initially the new company was valued at about £700 million, its shares publicly traded. Error, miscalculation, arrogance and a dose of bad luck took the value down by half. Shareholders and stock traders did what comes naturally and demanded the company ‘unlock greater shareholder value.’

A raider emerged, Global Media, offering that consolidation solution. They’d buy GCap Media, inflicting short-term pain – GCap’s shareholders will lose money on paper – with long term savings – GCap shareholders get out of the radio business and don’t lose any real money. A yet bigger broadcasting company would be formed, cutting costs, selling more ads, better able to compete with the BBC. Consolidation would save the day.

Yesterday Global Media asked for five additional days to “complete due diligence” before making that one last and final offer. It will come next Monday (March 31) and GCap Media’s board will accept, having secured the perks of settlement. Global Media will follow in the footsteps of Clear Channel…and down the same path.

Clear Channel is not disappearing. At the very worst, it continues to shed assets to hold off a shareholder revolt. Some of those assets are substantial: the outdoor advertising division being quite profitable. Selling radio stations could be a problem.

Yesterday, another US radio company – Radio One – sold a Los Angeles station for $137 million, more than $100 million lower than the asking price. Analysts said the lower price is due to a “reassessment” of broadcast stations’ value. Certainly Clear Channel’s prospective bankers read the same smoke signals. Some smoke certainly drifts across the Atlantic. It’s doubtful the signal will follow.

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