« Good Quarter For Regal Offset By Share Issuance | Main | A Halloween Update for Lionsgate »

October 30, 2006

Clear Channel Sale Overwhelms Earnings News

Buyout news makes the 3Q06 report this morning from Clear Channel (CCU) pretty irrelevant as far as the stock price is concerned. Nevertheless, as a leading media industry company, the results are worth reviewing.

Overall, the company reported results that were largely in line with analyst estimates with revenues rising 7% to $1.8 billion. EPS of 38 cents slightly exceeded the consensus estimate of 37 cents.

The most important detail for CCU investors is the health of the radio business. For the past year, CCU has been out of sync with the industry because the company took the lead in a goal to reduce advertising inventory and switch from 60 second to 30 second spots. The goal is to firm pricing through tighter inventory and receive a premium on 30 second spots.

When CCU first put the plan in place, its own revenues vastly underperformed the industry as its competitors made no adjustments to their own as selling strategies. Some even added spots to soak up demand foregone by CCU. During 2006, the situation has reversed as CCU has faced easy comps against the implementation of its new strategy. Consequently, CCU's 3Q06 radio revenue gain of 5% compares to flat or slightly negative trends industrywide.....

While CCU's strategy makes sense, it has run up against an acceleration in market share loss for radio relative to other advertising media. Thus, instead of CCU reporting high single digit revenue gains with margin expansion, the company is reporting mid-single digit gains with limited margin gains. As radio has lost share, CCU, along with its peers, have all had to invest more in content and promotion to try to keep listening levels up.

For most of the industry this has meant that 2006 has witnessed flat revenue trends and declining margins. Since CCU is lapping the first year of its new strategy where the company took one for the industry, it is showing decent financial results. However, if industry trends don’t improve, the outperformance versus industry trends won’t last into 2007.

The willingness of the Mays family to sell CCU along with the continuing strong performance of the company's Outdoor division (40% of revenue, 37% of EBITDA in 3Q) suggests that a deal is likely to get done. CCU is the dominant player in radio and unlike newspapers where the McClatchy-Knight Ridder deal has not produced returns for shareholders, there aren’t any big recent negative precedents to scare away potential private equity buyers.

I don’t expect a big premium to the current trading value of CCU, however. With radio under secular attack from iPods, satellite radio, and the internet, I don’t see private equity firms willing to pay historical buyout multiples in the low teens. This limits upside to the upper $30s.

Should the deal fall apart, CCU shares would head back to the $20s as 2007 will prove much more difficult for the company as its own comps toughen and industry trends continue to falter. I think the Mays family is very aware of the downside and will accept an offer in the $36-38 range. The just reported 3Q and guidance or pacings for 4Q are extremely unlikely to change the approach of the Mays family of the potential buyers.

Posted by Steve Birenberg at October 30, 2006 09:22 AM in Radio