
iHeartRadio owner files for bankruptcy - artsandsci
https://www.engadget.com/2018/03/15/iheartradio-owner-iheartmedia-bankruptcy/
======
guyzero
So in case you're wondering how a bunch of radio stations got $20B in debt
(yes, that's twenty billion US dollars) - the answer as always is a leveraged
buyout.

From [https://www.forbes.com/2008/05/14/clear-channel-buyout-
marke...](https://www.forbes.com/2008/05/14/clear-channel-buyout-markets-
equity-cx_md_0514markets14.html):

"Thomas H. Lee Partners and Bain Capital, agreed to a lower sale price of
$17.9 billion or $36.00 per share of the radio company"

Wait, maybe the name "Bain Capital" rings a bell? That's because their
leveraged buyout of Toys R Us saddled the company with so much debt they went
completely out of business.

[https://nypost.com/2017/09/21/bain-capital-has-now-
plunged-t...](https://nypost.com/2017/09/21/bain-capital-has-now-plunged-two-
toy-retailers-into-bankruptcy/)

Also see [https://dealbook.nytimes.com/2012/02/29/sorting-through-
the-...](https://dealbook.nytimes.com/2012/02/29/sorting-through-the-
aftermath-of-private-equity-deals/)

There's really no reason for iHeartMedia to have all this debt other than Bain
Capital did their thing.

~~~
smaili
I’m a bit confused...are you implying Bain Capital wanted these companies to
go out of business? And if so, why? What’s the point of investing into
something that you want to force go under?

~~~
guyzero
No, Bain Capital wanted their fees and after the buyout servicing the deb
wasn't their problem. I'm not the best person to explain LBOs really.

~~~
exelius
Here’s how an LBO generally works:

1\. PE company secures a loan in the company’s name (usually contingent on a
turnaround plan executed by the PE with a history of turning companies around)

2\. Company turns around and loans the money for purchase to PE firm

3\. PE firm buys the company

4\. PE firm runs the company, normally collecting management fees (paid out of
the pool of cash used to buy the company)

5\. PE firm cashes out by IPOing the company (usually at the same or higher
price paid during LBO process).

6\. PE firm uses the proceeds from the IPO (which the PE keeps because they
are the sole shareholders; NOT the company itself) to pay back the loan.

The PE usually breaks even on the transaction itself once transaction fees are
taken into account; but they make a killing on the management fees (which can
be hundreds of millions a year). Normally, the company is left in roughly the
same situation as before the buyout, just with a lot more debt on the balance
sheet.

~~~
Bartweiss
So the part I've never understood is why companies accept these offer. Are we
talking about hostile takeovers? Or just already-failing companies that accept
the turnaround plan because they're short on options?

It looks like investors and the PE firm have obvious ways to profit here, but
I can't work out what the company gets out of this.

~~~
exelius
Usually this happens because the company has gotten into cash flow trouble.
When that happens, the company’s creditors lose faith in its ability to invest
capitol in productive ways. But an LBO is usually the option of last resort.
If you don’t have cash to make payroll next month and you have 2500 employees,
you take the LBO.

An LBO allows the company to raise cash to fund a turnaround; but the
incentives of PEs are set up such that the PEs don’t need to actually turn it
around to make money — aggressively cutting costs is often enough. The
creditors don’t care because they get paid back on IPO and get to collect
interest in the meantime.

The alternative is usually going to be a buyout by a competitor, chapter 7
reorganization or simply ceasing operations like Toys-R-Us is doing once their
debt rating is so far past junk they can never qualify for an LBO. Then the
company dies. This is the “service” PEs provide to the economy — they help
wind down failing businesses in a somewhat orderly way while extracting
maximum value into the economy from a company that is headed for the scrap
heap. You can argue as to whether or not that’s valuable.

~~~
Bartweiss
Thanks, this makes sense.

I could never understand why a company takes an LBO instead of just taking out
a massive loan against their assets directly, but this explains it. A
combination of "the existing team isn't trusted to use that money" and "the
creditors can collect without a full recovery" explain it nicely; PEs might
theoretically be more objective at deciding when to restructure and when to
strip assets.

~~~
Blackstone4
I've invested in private equity funds across the entire spectrum. I mainly
focused on the small to medium end of the market...

The bankruptcies of the large LBO deals skew the public's perception of the
industry. Sure it has faults but the reality is much more nuanced than some of
the views outlined above.

Yes there are large private equity firms that will acquire companies and
overload them with debt, cut costs and sell prize assets. Yes there are many
other firms who operate very differently. In the smaller end of the market,
debt loads are much more conservative and returns are generated through moving
into new geographies (i.e. opening a new store in MA), moving into adjacent
markets (i.e. we sell tables. Let's move into the chair market), let's hire
more sales people, acquire complimentary products to cross-sell etc. The list
goes on. There are many positive qualities to private equity but the industry
is tarred because of the large amounts of money. People on the whole don't
like large amounts of wealth.

So why does a company sell to an LBO? Could be any number of reasons. The
founder might want to retire. Maybe the kids inherited the business and no
longer want to run it. Maybe the business is in dire straits and the current
owner lacks the skill or the patience to turn it around. Maybe a company wants
to sell a non-core division. Maybe a parent company is financial trouble and
will sell assets. Maybe the price is right.

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wolfspider
iHeartMedia does more than radio they also previously owned a bunch of
television stations and do billboard advertising. You may recognize their
former name "ClearChannel" a little bit better. I would say this not only
signals how difficult it is to make money from radio broadcast but how
difficult it is to make money from any type of broadcast. They make use of a
bunch of towers and satellites which I think is probably where the returns are
failing in comparison to the internet. That whole industry needs to change
anyways they are all living in a different age. This is what happens when the
leadership of such a big corporation becomes so exclusive they fail to adapt
and promote people with fresh ideas. They live an extremely narrow vision of
reality- so now this vision is paying them all back the dividends that they
earned.

~~~
guyzero
iHeartRadio makes billions of dollars in revenue every year, they just can't
keep up with their debt payments from the leveraged buyout. Radio ads make
plenty of money and stations aren't really that expensive to run.

edit: to be more specific, in 2016 they had $1.5B of operating income which is
great. Too bad they had $1.8B of debt payments.

~~~
220V_USKettle
Also, outdoor advertising is quite profitable as well.

~~~
guyzero
I think the outdoor advertising arm has been sold off from iHeartRadio.

[https://www.iheartmedia.com/press/clear-channel-outdoor-
hold...](https://www.iheartmedia.com/press/clear-channel-outdoor-holdings-inc-
sells-interest-adshel-joint-venture-partner-apn-news-media)

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legitster
I think these are good examples of the limits on economies of scale. Certain
things work well when you consolidate them (One corporate headquarters, lower
margin). But a large corporate office somewhere in corporate land does an
awful job determining local taste and selling ad space.

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fancyfacebook
Is this the end game of consolidation of an industry? Where are the supposed
advantages and efficiencies of all that merging and streamlining?

~~~
dvdhnt
I mean, I think it's the end game of any capitalist, extract the maximum value
from whatever resources are available. That generally requires acquiring and
ultimately consolidating resources either drive the value of what is produced
or dictate production costs. They are able to manufacture popularity through
choosing what music is most widely available on their stations and streaming
services. Then, they use that ability, along with the data they acquire, to
decide what artists to book for what festivals and where. It's similar to
Netflix using its streaming data to decide what original content to produce,
down to the second, no less.

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8bitsrule
Muzak, 2009. iHeart, 2018. One more heart, one more stake.

~~~
spaceflunky
But where will people go to listen to 21 Pilots!?!? Won't someone think of the
children for once.

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msie
If only it was possible to do a LBO of Bain Capital...

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swyx
excuse me, what? they owe 20 billion dollars? That is way more than Spotify!
Am I missing something here, what have they done with that money?

~~~
kevin_b_er
Bain capital, the same ones who killed Toys R US, bought them out with a loan.
Extracted the loan money and turned it into debt saddled onto the victim
company. Bain made a bunch of money and iHeart now magically has a bunch of
debt. Free money for Bain and iHeart dies. Same story as Toys R US.

~~~
pwinnski
Bain lost money with Toys'R'Us (although they made money while killing KB
Toys).

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bluedino
I like iHeartRadio. Non-intrusive app on my phone and computer, it's free with
very few ads. It's simple and I can just fire it up when I want some music. No
libraries, no discovering music or sharing playlists with friends, it's simple
and works.

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nugi
I do love radio, which is why I celebrate the continued demise of clear
channel and their affilliates. You ruined what was left of radio. I 'heart'
radio indeed.

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brickmort
iHeartRadio is the company that nobody asked for, who attempts to shove their
music down your throat with moderate success. The sooner it's gone, the better
off the music industry will be.

~~~
Aloha
You don't have to listen to the radio if you don't like what's on.

~~~
sp332
I don't _get_ to listen to what I want on the radio if they keep closing
stations I liked.

