Radio Restructuring Opportunities
There is going to be a lot of opportunities over the next few quarters in the traditional broadcasting space. For the Gen Z and younger crowd when I use the term traditional broadcasting I am talking about the radio industry. You know, the thing in your car you parents listened to before there was Spotify, Pandora, Podcasts and the iPhone.
I’ve been a big investor in the traditional media space for years. I know all of the major players. Have had meetings with executives across the 50 states. Spoken every quarter with the CFOs to understand the financials better than my competition. I’ve tracked the physical real estate a lot of these players own and have a good sense for the stick value of the radio assets across the industry.
I was initially drawn to the radio industry given the cash flow nature of the broadcasting assets. Despite intuition that the space is dying, radio assets generate a ton of free cash flow. And the industry isn’t declining and dying like you see in the newspaper industry. Industry growth, call it zero to 1% per year. The industry is highly cyclical to the overall economy and has a ton of operating leverage (75% of costs are typically fixed). So when you have blowout political years, these assets generate investors a lot of money.
The problem with the radio industry is the capital structure. Almost all of the players levered up in the heydays when radio assets were valued at 15-20x. There was consolidation and a lot of debt thrown around. When your industry is valued at 20x earnings and growing, throwing a ton of debt on these assets makes sense. When growth begins to slowdown from the rise of the internet and investors value your assets at 7-8x, real problems start to occur on a going concern basis.
In addition to the levered balance sheets, all public radio companies I have looked at have two classes of stock. The first class is the one the public investors buy and sell. This class gives us economic rights in the future free cash flows. The second class of stock is typically held by the CEO which gives them a portion of the economic rights, but more importantly gives them total voting control of the company.
For reasons I still don’t understand (probably has to do with old FCC cap rate rules) the CEO of every radio company owns and controls the Class B stock, giving them complete control of the direction of the company. Investors in the Class A stock have little say on the direction of the assets. If the CEO wants to dangerously lever-up the company, they can! If they want to go dark and leave Class A investors holding the bag, they can (look at Emmis Communications). If they want to sell assets to their pals, well hell, they can.
The non-voting control nature for outside investors combined with a no growth industry filled with debt pushes a lot of investors away from these assets. Traditional broadcasting investors are few and far in between. And I think this disparity between professional investors in the space continues until there are major changes to the industry as a whole. The big changes that I am foreseeing over the short-term is a complete restructuring and bankruptcy of a few key players. For bottom picking vultures, I think there will be real opportunity to profit from the fallout of the space.
I wrote a quick thread this morning highlighting my thoughts on the space and what could happen. Beware, this Twitter profile is filled with my obscene jokes and random nonsense that comes to my head throughout the day. A brief outlet to scream into the void about the nothingness of the world. But occasionally, I get fired up about value investing and like to share my thoughts on business.
I am following several names closely these days as I think they are on the verge of bankruptcy and a complete restructuring of the capital structure will provide a lot of profit opportunities for the bottom feeding investor. I’ve made a lot of money in post-bankrupt companies and think the opportunity here will be one of the greatest over the next couple of years for investors who know the names, understand the assets and follow the space.
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