iHeartMedia IHRT, the #1 audio media company in the US, has emerged from bankruptcy and its ownership is now available to the public on the NASDAQ exchange. The debt owners have taken over the firm in a restructuring plan that wiped more than $10 billion in debt off the books.
IHRT debuted this morning in a direct listing on NASDAQ, not raising any additional capital but providing liquidity for its current shareholders. Direct listings may be becoming a trend in the equity markets, with Spotify SPOT and Slack WORK pioneering this method of public share offering.
IHRT opened at $16.45 with the stock trading close to flat for the day. I have a feeling we could see a larger dip in the coming days as existing shareholders liquidate their positions.
iHeartMedia filed for chapter 11 bankruptcy on March 14th, 2018 and finally rose from this strenuous restructuring on May 1st of this year. Bond owners and lenders have since taken control of the company from private equity firms Bain Capital Partners and Thomas H. Lee Partners. This transfer of control was headed by Franklin Advisers leaving both the CEO and CFO in their current positions.
This firm’s downfall into bankruptcy was due to a few key factors. The first being the timing of the leveraged buyout by Bain and Lee, which occurred on the brink of the 2008 credit crisis. This buyout put roughly $20 billion in debt on iHeartMedia’s balance sheet at a time when both advertising revenues were plummeting, and extensive lines of credit were hard to come by.
The second contribution to this media behemoth’s downfall is advertisers opportunity cost with more engaging platforms. Advertisers don’t typically see the same return on investment from radio ads compared to say a personalized Google GOOGL or Facebook FB ad.
This depreciating return on ads over the airwaves has led to a depreciating willingness to pay by firms. Costs for iHeartMedia have been growing, but unfortunately revenues haven’t been able to keep up.
The excessive $1.48 billion annual interest expense was hemorrhaging funds from the company, and when $16.4 billion in debt matured they had no choice but to file for bankruptcy.
iHeart’s reorganization involved a spinoff of its outdoor advertising company, rebranded as Clear Channel Outdoor Holdings. This allows the firm to focus on their higher-margin core radio business.
Can iHeartMedia Come Out of the Ashes?
The future of iHeartMedia isn’t as gloomy as you may think. The morning/afternoon commute keeps these radio stations alive and thriving. Radio reaches over 90% of American’s, with 95% of millennials listening monthly, according to Nielsen Audio.
The company owns 848 live broadcast radio stations, six times its closest competitor. The US radio advertising market is sitting at $15.9 billion, according to PwC, but this figure isn’t expected to see much growth in the coming years. iHeartMedia is going to have to leverage their digital radio streaming platform to capture needed growth moving forward.
iHeartMedia’s digital segment makes up only 7% of the firm’s top-line but is responsible for most of its top-line growth. The digital radio streaming is expected to grow 23% over the next three years. iHeartRadio is the number one streaming broadcast radio platform, with its service & app currently having 128 million registered users. If it is able to continue to gain market share, this segments could propel them back into profitable growth.
Podcasts are also going to be a central focus for iHeartMedia moving forward. This is a fast-growing space with mounting competition from companies like Spotify and Apple Music AAPL, who are all fighting for the podcast throne. iHeartRadio’s competitive advantage is their ability to stream live sports as well as live news.
The media behemoth has finally risen out of the ashes of chapter 11 bankruptcy, but the question is whether they have eliminated the systemic issues that led them there. They are keeping both the current CEO and CFO in place, which causes me some concern over a potential lack in constructive changes.
CEO Bob Pittman is quoted after the bell this morning saying, “We’ve had a very good operating business but our capital structure was not in good shape.” This is not the full story considering the shrinking margins that iHeart has been experiencing was one of the bankruptcy catalysts.
I still believe that there is hope for IHRT, but it is going to take some structural changes to get there. Like I mentioned above, I think that this stock could be subject to further price depreciation from current stockholders dumping their shares. Valuations are quite low for IHRT with a P/S far below 1. Look to buy this stock once moment can be gained from positive forward guidance and robust earnings results.
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