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$80 million Q4 shortfall clouds Clear Channel

Mar 4, 2002  •  Post A Comment

Clear Channel Communications last week violated the same public company golden rule that AOL Time Warner, the world’s largest media concern, broke in 2001 and has been paying for ever since: Never surprise the market.
The only people who hate surprises more than investors are industry analysts.
Last week analysts were uncharacteristically candid in expressing their shock at Clear Channel’s unanticipated $80 million shortfall that increased its reported fourth-quarter net loss to $365.6 million, or 61 cents a share, nearly twice what it was a year earlier. Its cash flow declined 46 percent from the year-earlier period to $344 million, coming in $90 million less than analyst estimates. For the full year pro forma revenue declined 5 percent and earnings before interest, taxes, depreciation and amortization slid 22.4 percent.
In a move that defies the current push for more public company disclosure, Clear Channel fully explained the wider-than-expected loss only during its conference call with analysts rather than in its earnings release, an act that created unnecessary confusion.
Clear Channel executives said the $80 million shortfall reflects the one-time “cost” of firing 2,000 of its 55,000 employees, hiring 600 more salespeople and reorganizing its radio operations-all abruptly decided and acted on in the fourth quarter, they said.
Some analysts called it the biggest cash flow miss they’ve ever seen at a media company. Some called it “sloppy reporting.” Lehman analyst William Meyers conceded, “While we nearly fell out of our seats when we first reviewed the release, we regained our footing during the conference call.”
Mr. Meyers said the unexpected one-time restructuring charges especially cast a “misleading” light on the overall state of Clear Channel’s core businesses. But clearly there was more at work last quarter than the continuing advertising slump playing havoc with Clear Channel’s bottom line.
Not quite at panic level
Clear Channel’s unexpected hit may not have matched the magnitude of AOL Time Warner’s missing its lofty 2001 financial targets or declaring it will face a $40 billion to $60 billion first-quarter write-down. But it is a big enough and jolting enough surprise from the world’s largest radio concern.
Clear Channel management last week also disclosed it is reviewing $40 billion in good will and other liabilities and expects to take a $15 billion to $25 billion pretax charge as it eliminates the practice of routinely amortizing acquisition good will under new accounting rules.
Those are the kind of big numbers that make Wall Street nervous, even if Clear Channel has a $29 billion market capitalization; nearly $10 billion in debt from absorbing three large acquisitions (Jacor, AMFM and SFX); $3 billion in bank facilities-enough to cover several years’ bills; and an anticipated $1 billion in free cash flow in 2002.
Although Clear Channel stock fell more than 10 percent last week on the news and is trading at about half its record high of two years ago, it appears Wall Street is eager to give it the benefit of the doubt.
Bear Stearns’ Victor Miller made the point that after adjusting for the unexpected $80 million in expenses, the company’s “core” earnings would have been in line with expectations at about $424.7 million. After Clear Channel lagged behind the industry in 2001, Mr. Miller and other analysts raised the possibility that the company-like other broadcasters-might be showing signs of modest growth.
But no one knows for sure because most companies’ returns are being influenced by many divergent factors.
Jessica Reif Cohen of Merrill Lynch said that even after adjusting for one-time items, Clear Channel is performing “at the low end of industry growth.”
Worse than average
Clear Channel’s fourth-quarter radio revenues declined 9.5 percent-more than the 6.5 percent decline analysts predicted and more than the industry’s 8 percent decline in the quarter. Its outdoor and entertainment divisions are one to two quarters behind in recovery.
If the outlook improves this year, some analysts said, it more likely will come as the result of favorable comparisons rather than from concrete revenue and real cash flow growth in the radio division, which contributes 70 percent of the company’s earnings. Analysts said Clear Channel’s new reporting figures do not reflect changes in company operations as much as they reflect new ways of figuring results.
The first-quarter earnings of $340 million to $360 million some analysts are expecting would represent a 10 percent to 15 percent decline from a year earlier and would require slight revenue growth and flat costs-something Clear Channel officials would not commit to last week.
In the end, analyst Mr. Miller pointed out that Clear Channel will benefit from leveraging its scale as the largest radio operator, largest outdoor billboard operator and largest live entertainment player, with some 1,225 radio outlets, 35 TV stations (19 of which are in the United States) and nearly 776,000 outdoor billboards in 32 countries. It also has strategic stakes, including 26 percent of Hispanic Broadcasting, 5 percent of Lamar Advertising and minor interests in American Tower and XM Satellite Radio.
Founding Chairman and CEO Lowry Mays last week glossed over the challenges, simply characterizing his San Antonio-based company as “strong” and “well-positioned for the future.”
Federal concerns
There was little mention of how Clear Channel may move to further consolidate power during the next imminent round of deregulation, having grown from only three dozen radio stations less than 10 years ago to its current enormous size.
But it is important to examine the Clear Channel situation more closely for several broader reasons, because its circumstances mirror those of many pure-play, traditional, family-owned broadcasters who will be swept up into the next wave of consolidation.
With so much of its core business dependent on advertising and hurt during the current recession, Clear Channel’s best strategy may be to diversify even as it struggles to integrate its recent acquisitions. It’s latest deal, the acquisition of Ackerley Communications’ 18 TV stations, five radio stations, and 6,000 outdoor billboards is expected to close in March.
Some longtime industry observers believe Mr. Mays and his partner, B.J. “Red” McCombs may be ready to catapult Clear Channel to the next level, although such a move could require them to sell out to a larger player such as General Electric Co.’s NBC. Analysts said if NBC acquired Clear Channel, it would give the combined company the radio and outdoor billboard breadth of Viacom. With the help of GE, NBC could then acquire a major TV station group (Post-Newsweek, Gannett or Paxson, for example) and even a content player such as MGM to round out its holdings.
In the coming months other broadcast-based companies are sure to offer more mixed and disappointing results, since advertising spending will trail any economic recovery. Prospective buyers and consolidators will view this as a window of opportunity to squeeze players of all sizes to sell off meager 2001 cash flows rather than wait for stronger financials and sale multiples.
As witnessed last week with Clear Channel, there’s no getting around the maelstrom to come. But keeping your head down and staying above board won’t hurt. The best advice for broadcasters might be the words on a plaque that sits on the desk of John Hogan, Clear Channel Radio’s chief operating officer: “When there is no wind, row.”