2007 State of the News Media Report - Radio

One story above all others dominated the landscape of radio ownership in 2006. For a decade Clear Channel was the industry giant, owning nearly triple the number of stations of its nearest rival, leading the way in automation, revenues and profits. The company rode the train of consolidation and expansion allowed by deregulation in the 1990s more aggressively than anyone else. To many in and outside the industry, it stood as a possible harbinger of where radio was headed.

Thus when Clear Channel suggested in October that Wall Street pressures and the focus on stock price were such that it could no longer manage its future as a publicly traded company, people took notice.

For now, Clear Channel’s dramatic move stands alone. But another player, Disney, has decided to leave the field altogether. Clear Channel’s decision also comes a year after other companies, namely Viacom, began to split operations; and several radio companies, led by Clear Channel itself, experimented with shorter and less frequent advertising formats.

Clear Channel Deal

While some analysts may have looked at the declining revenues and share value of the large radio corporation as clear indicators for major economic changes, few could have predicted how suddenly or how quickly the public-to-private transaction would be made.

The details of the sale bear repeating. In late October, Clear Channel announced it was being acquired by two private equity firms — Thomas H. Lee Partners and Bain Capital Partners — for a total of $18.7 billion, plus the $8.1 billion in Clear Channel debt. By year’s end the company also was discussing selling off 448 of its smaller-market radio stations, as well as its television stations.

Clear Channel had rocketed to dominance in response to changed radio ownership rules written into the 1996 Telecommunications Act. Three years later, in 1999, the Wall Street Journal named Clear Channel the fifth best-performing stock of the 1990s. By 2000, the company had purchased over 1,000 new stations. But some of the competition and many consumers grumbled that Clear Channel’s domination was diminishing the quality of the AM/FM radio dial by monopolizing key markets and homogenizing content. Meanwhile, the company’s outdoor advertising division also swelled in dominance and value. By 2004, both Clear Channel and shareholders started to notice the company’s growing pains.

Before long, the boom was over. In response, Clear Channel initiated a grand share-repurchasing program. And in 2005, it spun off its entertainment division in addition to 10% of its outdoor advertising operation. The company also experimented with new ways to maximize advertising revenue with its “Less is More” campaign, an attempt to slash the length of ads at a slightly reduced cost to advertisers.

Despite the fact that Clear Channel remained the highest revenue-generating radio owner — $3.6 billion in 2005, over $1 billion more than the second-place competitor, CBS Radio at $2.3 billion — Clear Channel’s stock value had been sliding.[1] Five years ago, its stock was valued in the range of $50.[2] In the months before the sale, stock values were regularly dipping below $30. With the announcement of the merger, stocks improved to the $35 range.

As of December 2006, it was not known whether the Mays family would continue operating the company, though both sides offered the usual praise for each other. But the step Clear Channel took is becoming a popular one for large media owners. In both the radio and newspaper industries, public owners have been selling their corporations to big-money private owners.[3]

Over all, the public-to-private strategy seems to be motivated by an agenda for long-term growth. According to the BIA Financial Network radio analyst Mark Fratrik, “By going private, these companies and their financial backers believe that they can grow in value over the long term without being concerned about investors’ quarterly targets.”[4]

Underscoring that sentiment, an internal memo from Clear Channel said of the deal, “We need to shift our focus to meet new demands in order to grow our audience and our revenue… Ultimately, we expect our overall size to grow in 2007.”[5]

Walt Disney Company/ABC/Citadel

 The year of 2006 began with the Walt Disney Company’s decision to sell ABC Radio, consisting of 22 stations, to Citadel Broadcasting. Disney had been planning the sale for some time, having begun the auctioning process in the summer of 2005. According to Disney’s CEO, Robert Iger, the sale would help the company focus on its core TV, movie and theme park businesses.[6]

Until mid-January, though, Citadel was not considered the frontrunner for sealing the deal. Other companies competing in the auction were competing broadcasters, Entercom, Emmis, Cox Radio and Cumulus, as well as the private equity firm Kohlberg Kravis Roberts.

The agreement between Disney and Citadel, announced on February 6, 2006, was valued at $2.7 billion. It will elevate Citadel Broadcasters to the third largest radio owner, up from sixth place. The deal is expected be final in early 2007.

The Top Companies

Despite the Clear Channel sale, and with its planned sale of 448 smaller stations still to be completed, the basic outline of radio ownership — who owned what stations — remained fairly stable in 2006, along the lines of the previous year.

Number of Stations Owned by Top Broadcasting Companies
2005

Source: BIAfn Media Access Pro, unpublished data

Clear Channel, as of the close of 2005 when that information was gathered, continued to be the clear leader in the total number of stations it owned — nearly four times the number of total stations as its next competitor, Cumulus.[7] Similarly, Clear Channel owned more than four times the number of news channels as Cumulus. But in proportion to the total number of stations owned, 23 rd-ranked Cherry Creek formats about 24% of its stations as news, followed by 22% of Salem’s stations and 15% of Entercom Communication’s stations.

The list of top owners, according to the number of stations owned, looks much different than the top owners by revenue. The top three owners by revenue are Clear Channel, CBS and Entercom.

Changes in ownership through 2006 have been marginal. But 2007 promises some big changes, anticipated in large part by Clear Channel’s expected sale of almost 450 radio stations.

Change in Stations Owned by the Top Companies

1999-2005

Design Your Own Chart

Source: BIAfn Media Access Pro Note: *Due to restructuring within the Viacom Corportation, Infinity is now CBS Radio

In looking at the number of markets reached by the top companies, as in years past, Clear Channel dominated for the latest year available, 2005: 189 markets versus 56 for Cumulus, which had the second-largest market reach.[8] The top five companies other than Clear Channel, however, are closely clustered in the number of markets reached, with a spread of only 23 markets separating second-place Cumulus and fifth-place CBS Radio. The figures are similar to those for the previous year, 2004. The only real change was that Infinity, which is now CBS Radio, lost some of its market reach, going from 41 markets in 2004 to 33 in 2005 as CBS.

Number of Markets Reached by Top Companies

2005

Design Your Own Chart

Source: BIAfn Media Access Pro Note: Due to restructuring within the Viacom Corportation, Infinity is now CBS Radio

Air America Bankruptcy

One other major development in the ownership picture of radio in 2006 was the growing financial woes of the fledgling liberal talk radio network Air America.

Air America, begun in 2004 as a liberal alternative to the burgeoning array of conservative talk personalities, filed for Chapter 11 bankruptcy protection on October 13. The announcement came after two weeks of speculation and rumors, accompanied by fervent denials from Al Franken and others at Air America.

The truth of Air America’s dire financial situation was brought to the forefront by the owner of one of the stations that carried the programming, claiming that the network had not been paying its bills.

In its two years of operation, Air America had never been profitable. It reported losses of $8.6 million in its first year, 2004, and more than double that, $19.6 million, in 2005.[9] As the Radio Business Report observed on October 16, “Seems the network got off the ground with shoestrings and credit cards in the first place. So it was never running with a decent amount of cash.”

But an internal ABC Radio Network memo disclosed in late October suggested that Air America’s financial losses may not have been due entirely to poor business decisions and lack of public interest in liberal talk, but also to an advertiser blacklist of the network. In the memo, ABC Radio Network told their affiliate stations that about 90 prominent advertisers — led by Hewlett-Packard, and including Microsoft, Wal-Mart, Visa, Exxon Mobil, Cingular and McDonalds — did not want their advertisements running during any syndicated Air America programming the ABC stations carried.[10] The consequence of the ad blackout to Air America would be no sponsorship from advertisers participating in the blackout, which could significantly reduce revenue for the network. Reports of such practices are not uncommon; several advertisers exerted similar censorship of their ad content on the Howard Stern show. But because of his popularity, the ad boycott did little to affect the profitability of his program. The practice is also known to occur on other politically opinionated programming like Rush Limbaugh, industry professionals say. The leak of the ABC memo, and the identification of the advertisers, however, was unusual in this case.

Air America has continued programming on the network’s 90-plus affiliates around the country, though some of those affiliates have hinted that they might drop the liberal program from their stations.

In late January, Stephen Green, a New York real estate entrepreneur, agreed to acquire Air America for $4.25 million, which could mark new beginnings for the network. The only major change announced with the purchase was that the popular talk host and comedian Al Franken would be leaving the network on February 14 amid rumors that he’ll pursue a seat in the U.S. Senate. Green said that his goals for the company are to stabilize its finances, build upon the current Air America line-up to “assure the best radio talent possible,” and extend the platform beyond that of radio in order to reach a wider audience.[11]

Clear Channel Timeline

The following timeline highlights some of the major activities that occurred in the brief but immense Clear Channel buyout.

October 24, 2006: Average closing share of Clear Channel stock in the 30 previous trading days: $29.99 a share.

October 25: Clear Channel announces it is evaluating “strategic alternatives.” Hires Goldman, Sachs & Company as financial adviser.

October 30: Providence Equity Partners, the Blackstone Group and Kohlberg Kravis Roberts & Company are the first to approach Clear Channel about a buyout and become the favored bidders. Bain Capital and Thomas H. Lee Partners and The Texas Pacific Group are the second consortium to bid. Rumors circulate that Carlyle Group LLC and Apollo Management LP make up a third interested party.

November 13:

• The Texas Pacific Group, who had been part of the Bain Capital and Thomas H. Lee Partners consortium, drops out.
• Clear Channel makes major restructuring plans at its radio stations by eliminating almost all of its overnight live disk jockeys, replacing them with pre-recorded “voice-tracking.”
• Bids close

November 16:

• Clear Channel announces definitive merger agreement with Thomas H. Lee Partners, L.P., and Bain Capital Partners, LLC.
• Though the buyout is valued at $18.7 billion, the total cost of the company is $26.7 billion, including the approximate $8 billion of debt. Shareholders will receive cash for their shares at a price of $37.60 per share, an increase of approximately 25% over the average price before Clear Channel announced plans to sell.
• According to Thompson Financial, the transaction is the fourth-largest buyout in history, ranking behind KKR’s 1988 buyout of RJR Nabisco Inc. for $25.1 billion; the $21.8 billion buyout of the airport development company BAA PLC in February 2006; and the $21.2 billion paid for the hospital company HCA Inc. in July of 2006.
• Clear Channel also announces plans to sell 448 radio stations in smaller markets (outside of the top 100 markets), as well as its television broadcasting division, which consists of 51 stations in 25 markets.

December 7: The date by which competing bids from third-party competitors had to be submitted. Analysts at Merrill Lynch, suggesting that the company’s worth was undervalued, said that Clear Channel should entertain additional offers. Furthermore, analysts at Stifel Nicolaus found the $37.60 share price to be low and estimated a proper selling price to be $42 a share.

January 5, 2007: The date by which all negotiations with competing third parties were terminated. Thomas H. Lee Partners, L.P., and Bain Capital Partners, LLC remain the new buyers.

January 18, 2007: Some Clear Channel shareholders voice resistance to the sale, including the largest holder, Fidelity Management & Research, and other top 10 holders.

February 23, 2007: The deadline for bids on the assets that it put up for sale: 448 radio stations and 42 television stations.

March 21, 2007: Special meeting of shareholders will vote on the proposed buyout agreement. Approval of the transaction requires that two-thirds of the votes be in favor.

1. BIA Media Access Pro, unpublished data

2. Yahoo Finance, http://finance.yahoo.com

3. Sarah McBride and Dennis I. Berman, Wall Street Journal, “Clear Channel’s Founders Stand to Get Windfall,” October 30, 2006.

4. Frank Ahrens, Washington Post, “Clear Channel Sale to End an Era,” November 17, 2006.

5. David Hinckley, New York Daily News, “Clear Channel Stills Voices in the Night,” November 14, 2006 For full memo, see SEC.gov Edgar site, November filings.

6. David Lieberman, “$2.78 Deal Would Put Disney Radio Unit in Citadel’s Hands,” USA Today, February 7, 2006.

7. BIAfn Media Access Pro, unpublished data.

8. Ibid.

9. Jeff Leeds, “Air America, Home of Liberal Talk, Files for Bankruptcy Protection,” New York Times, October 14, 2006.

10. Maria Aspan, “Some Advertisers Shun Air America, a Lonely Voice from Talk Radio's Left,” New York Times, November 6, 2006.

11. Katy Bachman, Media Week, “Air America Sold to SLG Radio,” January 29, 2007.