Big Isn’t Broken

November 22, 2006

One of the main ideas being expressed in commentary about the Clear Channel sale is that it’s business model of “getting big” is broken. That “consolidation failed”.  

I don’t agree.  

By what standard of measure does one conclude that BIG is broken?  Or consolidation failed?  

The answer being given is that Clear Channel – after becoming the biggest radio company thru acquisition after acquisition failed to deliver per share returns expected by Wall Street, and has thus withdrawn from the public equity market and gone private.  

That’s it?  

Failing to deliver 15% per year share price growth is one thing.  Failing outright its quite another and we shouldn’t get the 2 confused.  Clear Channel is NOT a failed company.  

Had Clear Channel TRULY failed, the company would have been broken up into lots of smaller, much more highly profitable pieces.  It hasn’t.  I’ll address the 450 spin offs in a minute.  

Clear Channel  has changed where it gets it’s expansion money from.  That’s the big story. Clear Channel no longer has to play games to make it’s public stock look like Google.

But it DOES still have to generate MASSIVE returns to the private equity folks.  But they don’t need to manufacture results THIS QUARTER.  They’re on the 3-5 year plan.  

So has BIG really been repudiated?  Has economies of scale really failed?

If you still think so then you’re forced to answer the question being begged –  Would shares in public radio companies in a non-consolidated radio business be returning 15% a year – the Wall Street expectation?  

I don’t think so.  

There’s simply not enough pure business growth happening in radio. It’s a lucrative business with desireable assets – it’s just not growing at the clip public markets want.

So Radio, whether big or small, many or few -is not going to be an attractive public investment in the current market.  

Maybe those people want to say “Wall Street Radio” failed. Fine.

But “Big Radio” has yet to kick the bucket.

So what are we left with.  Clear Channel sells off almost 450 stations. 

On the surface it looks like Clear Channel is going back on the “get big” strategy. 

Consider that those 450 station (over 40% of the total number of stations owned) contributed ONLY about 10% of the company’s revenue.

Let’s be honest here – from a big business owner’s perspective (40% of your assets are contributing only 10% of your revenue) – that’s like working for minimum wage. 

On a personal level -imagine taking a second job that required 40% of your time but only boosted your income by 10% – you’d probably quit.

That’s what Clear Channel did. Jettisoned those stations to focus their attention on the properties that have the best chance of churning out the most cash.  And get more.  

Yes more.  I think it’s a mistake to think Clear Channel is out of the acquisition business.

Clear Channel is still big.  It’s massive actually.   And it’s probably going to get even bigger over the next few years.  

They may spin off a few sticks here and there – but I suspect they’ll be picking up as many winners as they can also.  

And while it’s possible a few mom & pop operators may emerge from the 450 CC spin offs – it’s more likely they’ll be scooped up by already BIG radio companies – like the one I work for Cumulus. Or – another group could develp to buy most or all of them at once.

Big radio isn’t broken or even dropping a few pounds – it’s just updated it’s fashion. 

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Meet the new Gecko

November 16, 2006

A lot of talk about Clear Channel being taken “private” as if that in and of itself is a good thing.  Look at who actually bought CC and you realize that “meet the new boss – same as the old boss” is apropos.

Private Equity is the Gordon Gecko of the new millennium.  It’s nu-Gecko – a metro sexual Gecko. It’s the kind of Gecko that still believes greed is good- he’s just not stupid enough to shout it into a microphone.

Instead of contentious hostel take-overs, buy outs – and callous breaking up of companies to sell off in little highly profitable pieces – PEGs are largely faceless, hard to demonize companies who pursue the same types of business plans quietly across a variety of different industries – and do so with more tact and patience than the fictional 80’s villian.  

They often leave much of existing management in place to take care of the administrative affairs  – mostly reducing costs. They act as partners in a process that’s ultimate aim is the same as Gecko’s – just a bit more humane.  Like smart bombs.  😉     

PEGs operate on 3-5 year plans.  Buy companies – restructure to sell and/or put back into the public thru IPOs.  

Like your neighbor who seeks out distresed home sellers to buy at a bargain – put a few grand into some paint and fake marble tile in the bathrooms to re-sell a few months later and pocket 30% profit.  PEGs are flippers.  Fair enough. Yeah Captialism.

Which begs the question –

Why the sudden interest in a stagnant growth industry like radio from Private Equity?  

The main reason has to be the 3-5 year upside.  

The thinking must be that current radio prices already fully reflect the competitive threats to radio.  In other words – it won’t get worse.  

All the tolls satellite radio, mp3, Internet will ever take on radio have mostly been absorbed and that’s why you can buy Clear Channel for far less than it “should be worth” – for far less than Clear Channel itself paid for the assets.

Okay – buying into radio is a bargain. So – where does the growth come from?  

Further consolidation and mergers I guess. Still lots of room in radio to streamline operations – reduce costs. 

I think it’s safe to say one of the places PE will look to reduce costs is in any future focused R&D type ventures that are currently not contributing to the bottom line.  

Clear Channel in particular has “format labs” and other forward looking programs that will probably either be eliminated or dramatically scaled back.  Although I have to think some of that will have to be kept in place – even if in name only – for PR purposes.  

But – even after squeezing every nickle out these broadcasting companies – that probably won’t net the minimum 30% returns I’ve read PEGs demand for their efforts.  

With stagnant to low single digit growth projections for radio – one has to wonder  -where’s that cash coming from?  

Let’s look at some 3-5 year positives for radio –

Sat radio could (probably) go under – giving investors more confidence in terrestrial radio again.  Confidence is as good as cash on open markets.

Adoption of Passive Measurement can also increase confidence among advertisers who will pour more money into the medium knowing (finally) it’s a great value. (this gate could swing the other way too – proving once and for all that advertising on the radio is at best hit and miss – but I’m trying to stay as postive as possible here)

And – let’s not forget – reducing ownership limit regulations is also a very real possibility.

Is that enough?

After 3-5 years – who knows? And maybe . . .  who cares?  

EDIT:

Interesting little Nugget in the Clear Channel Investor FAQ

Question Number 21 – Will jobs be eliminated?

Second part of the answer –

We have been undergoing a shift in focus in the radio division, from being focused mainly on on-air broadcasts to a more balanced approach to investing in our business — that shift will mean more jobs focused on our radio business’s high-growth areas, such as online.