Bankruptcy now an admitted liklihood for Citadel

[RBB05]

I know this was glossed over as part of the PMD Drive infomercial thread, with some saying they didn't see bankruptcy as a real option.....but based on today's release of 3rd qtr. financials by Citadel, I thought it warranted its own discussion.

3rd qtr. 2008 the company had a net revenue of 28 million. 3rd qtr this year they have a net loss of 21 million and that is DESPITE lowering operating expenses by 11 percent in the last 12 months.

The company now admits it does not expect to be able to abide by its debt covenants, which include having $150 million cash on hand in January. Once they do not meet them Citadel will be in default of its loan agreements. If it does that, the banks have the right to call notes due immediately, and of course they will because no bank is going to bail them out in the is economy.

At that point someone is going to swoop in and get them at a bargain price.

[westfield60]

I don't know if anyone will want to swoop in and buy them. Radio is not a good investment at this time.

I think there probably is a chance that the banks will more than likely re-structure the loan and give them more time. This is what seems to be happening in the industry. I think it happened with Sirius. I don't think Banks want to be holding a note that has no value or sell it at a great loss. It's much better to work with the company and hopefully once the economy turns around they might have a better chance of recouping their investment.

[ChannelFlipper]

Good thing I saved my pennies by not buying their stock.
 

[TheBigA]

At that point someone is going to swoop in and get them at a bargain price.

That's a huge leap of logic.

No one, other than an investment bank, is in any position to do that.  Citadel is already mainly owned by an investment bank, which is to say all they have to do it step in to protect their own investment.

There are lots of options that no one is considering here.  But the longest shot is the idea that someone will "swoop in and get them at a bargain price."  Because, truthfully, no one has any money, and there's no such thing as a "bargain price" for something no one wants to buy.

[oaktree]

The games major banks play.

As was mentioned  previously, and from known fact, Citadel's stock is virtually bankrupt, but the stock, at nearly $.13 a share, is now growing from the depths of when it was a nickel a share or less. Not that it's a winner, of course, but it is growing.

As mentioned before, the corporate stock has nothing to do with its operating expense or profit -- which many of the Citadel stations have.  Cash flow is good in many of their markets including San Francisco, Chicago, New York, Providence and in many others, as are other divisions, not including the ABC Radio Networks, but the music services, individual show syndications and more are doing quite well.

The "fear" of bankruptcy, and you sound like one wishing for it, will come if it does, as a "pre-packaged bankrupcy" which, for a short time, as in the case of Tribune, GM and other corporations that have lost its investor stock, but not its "institutional" investments, will mean a swap of equity (absolute holdings, licenses, operating funding, receivables, etc.) including the probable retainment of the "higher ups" -- like Farid Suleman. 

Banks may well trade "debt for equity" to cover the $150-million covenenant, and, possibly, Citadel could sell a few small clusters or a major station or two to the likes of Bruce Reese at Bonneville or Larry Wilson at Alpha betweeen now and Jan. 15th.  No big deal, really, CBS and Clear Channel have already shown how it's done. 

Now, if that doesn't happen, the pre-packaged bankruptcy, meaning, everyone, including the investment bankers, know right to the penny what's going to happen. They assume control until the company comes through the pre-packaged bankruptcy with a new and worthwhile plan to alleviate more debt, which means cost cutting, selling the network(s) (maybe)  or other opportunities.

If the SEC or even the FCC, because of "overlap" of investment banks taking on various debts of other broadcast groups in markets that also has Citadel stations, this may become a problem, but so far, the Commission isn't looking to turn off any Citadel radio stations because of debt, as they still operate and function day to day and are not going dark, like rumors had WLS doing so. Won't happen.

It's a squeeze play in progress. The banks just want their money, or an enforceable plan to get their money (hence, a pre-packaged bankruptcy,) and the 3rd quarter numbers reflect the same losses every other major group has endured. So, the banks don't want to write down $150-million or $2.7 billion for that matter, so, they'll play the game and Citadel will continue to operate, possibly with limited protection from creditors (including their banks,) until such a plan is revealed and instituted.  The banks are in no position to say "no" to a reorganization, for they'll lose too much money.

On the other hand, they don't want to be like Bain-Lee and operate radio stations, that's not their job or their plan. Money is tight. They'd rather see the company survive or be sold off in pieces to a Bonneville, to eliminate the debt, instead of them (the banks) having to hold on to it as equity.

That's why a pre-packaged bankruptcy, if that, is in the works. The Jan. 15 date triggers a default, which Citadel has acknowledged, as you pointed out.  It means that now, Goldman-Sachs, et al, have to decide how much it's worth to them to lose, or to save, by keeping Citadel out of the hands of creditors, or forcing sales in a still poor and struggling economy. That's a job best left to broadcasters, not banks -- and why Citadel would be best to keep those lines of communication open.

It's the usual share of regular investors who got the shaft, not the investment banks.  They will save the stations, pre-packaged bankruptcy will save, on a short leash, Citadel as a corporate entity for about a year, maybe.

Again, this will not, in my opinion, be a Chapter 11 or Chapter 7 liquidation of Citadel Broadcasting. A sale of certain assets? Probably if not possibly.  But a fire-sale? No. 

An "admitted liklihood of bankruptcy"? What would you expect Citadel to say. They have few investors now, and those who remain have lost lots of money.  But the stations keep paying bills, paying staff and talent, and unloading expenses (and talent) not needed to operate.

It's a game of "chicken." See who blinks first --- the company or the banks.   

[oaktree]

Back in early July, amongst warnings to employees about not be able to buy Citadel stock or to divest stock from its 401k accounts, Citadel hired Lazard Freres as financial advisors to look into Chapter 11 bankruptcy or "alternative options" which are still being considered by other financial advisors as "an option."

To protect its assets,a company such as Citadel could, as last resort, file for Chapter 11 bankruptcy by advise of its investment institution(s) to avoid hitting the "default" trip wire, which, in this is case, is Jan. 15.  If it did claim bankruptcy, the investment banks would get pennies on the dollar -- which they don't want to do, as Citadel can still sell the assets at whatever price it can get. It does not mean "bargain" prices -- just that the banks will eat a lot of their money, just like investors have.

The game continues. There was no "admission of bankruptcy" during the 3rd quarter conference call, but a heightened awareness that an "option" was being considered, as the company would not, from all appearances, meet its $150-million covenant call on January 15th, thus starting a default -- not the first time similar circumstances have been done to broadcasters (namely, Clear Channel,) this year.

Banks will weigh the consequences to them in saving the company before taking huge losses, especially if it appears the economy is turning. 

I believe that a pre-packaged bankruptcy aggreeable to both Citadel's near future and to the banks -- to save equity, is in the works. The same would have been true of Sirius/XM had a half-billion dollars in a debt-for-equity deal with John Malone and Liberty Media not taken place. The same or similar could happen with Citadel, as could a buyout in whole or in part.

[Element9]

Recently, All Access featured an interview with Alpha Broadcasting President and former Citadel CEO Larry Wilson.

On the state of Citadel, Wilson offered, ““Citadel is virtually selling for pennies; it has been devastated by ‘spreadsheet management.’ Why would Wall Street pay attention to Citadel stock when there's $2.1 billion debt on a company worth $800 million?””

$2,100,000,000 owed on a company worth $800,000,000. To make that a little easier to wrap your head around, it would be like buying a house for $210,000 and seeing its value slump to $80,000 but still owing $210,000.

Commenting on Citadel CEO Farid Suleman, Wilson fired at point blank range, ““At Citadel, we had a mission statement and the first line of it read: ‘People are our most important asset.’ That wasn't just talk; we walked the walk. When we sold out and Farid Suleman came in ... and I heard this from several different people ... he ordered all the mission statements that we put up in our offices taken down. He doesn't get it and he never will.””

No love lost there.

Possessing a formidable ego and being a millionaire attorney, Wilson's no Mother Teresa. He just fired a slew of people at his newly acquired cluster in Portland, Orgeon.  He does however, have a track record for successfully running a large radio group... and a good sense of timing for unloading Citadel before the market crashed.

A well-known financial analyst says Citadel's purchase of ABC involved an unusually high number of banks and lending institutions, which will no doubt complicate matters if the January 15th default payment is not made.  Yet, even he acknowledges that anything can happen. Citadel might attempt to float more bonds to come up with the money, but it's quite likely buyers will be hesitant to make a commitment to a company in such dire straits.  Larry Wilson may know more than he's letting on. And don't be surprised if Randy Michael's has his finger on the pulse of Citadel's faltering heartbeat.

[oaktree]

And if you read what I wrote previously in these two threads, Wilson, Michaels and Bruce Reese of Bonneville were all mentioned as possible suitors.

The one thing to keep in mind, however, is this: as a suitor, the last thing one does is reflect on the "greatness" of a property in trouble. You always make it look like it's worth less.  You "buy low, sell high."  One wouldn't expect Citadel to sell at fire-sale prices and Suleman, an accountant by trade, won't allow that. 

Sell debt? Of course he will, if he can get bonds to do so and interested bank buyers/investors.  But it has a way to go before Citadel gives up control. This will play out for a year, just like the deal did with Clear Channel.

Again, leveraged debt management is one thing (Citadel's problem), while asset value based on operation liquidity, cost savings and a below average economy are completely different factors to consider.

I fully expect Larry Wilson or any potential owner to say what he said, or, he'd be paying three times the multiples that the assets would be worth.  They are, even at 4x - 6x multiples, still expensive properties to own ... or to buy.  They won't come cheaply to anyone. 

It's not what Larry Wilson can get, it's what he can afford to buy and $800-million is not the number.  Anyone who's ever bought radio stations knows the difference in "magic numbers" between the low end buyer and the high end seller. Not that he can't do it at that number, but whether he'd get away with that number is another story.  I find it doubtful.

Anyone who watched what Clear Channel did in selling this past year and a half knows that. Look at the new owners of clusters still overpaid for the intrinsic value of many of those properties -- just as Clear Channel did originally. And -- those stations were losing money.

I can show you several examples -- right here in my 26 station market. They still got more than they paid for stations in two markets.

Creative financing can show the devil in the details. And there are two devils.

Pre-packaged bankruptcy, dumping of non-productive and weakly performing clusters, more cost cutting and more consolidation of programming by Citadel are options, yet.

For now, business goes on. Budgets are being drawn right now. And Citadel is seeking protection as well as a potential suitor or even a partner, in my opinion.  They aren't throwing in the towel - yet.

I can see them sell the networks, which are draining the company, quickest.

[Element9]

Point well made.  There has been some speculation that Citadel might be broken into two (or even three) divisions comprised of (1) the major market [ABC] stations (2) the pre-ABC medium market [Ciatdel] stations and (3) the ABC networks.  Even the experts who are wired-in to the intricacies of this proposal don't know how it would appease the banks and lenders, if at all.  Nor can they be sure that dividing the company will guarantee fincancial benefit.  Such a scheme seems like a roll of the dice to me.  As to Citadel's stock improving, months ago I offered the observation to one of my financial friends, "If you buy CTDB at 3 cents and it goes to 15 cents, you've made a few bucks." He sneered, "Good for you. You're a small-time player. Tell that to the banks, mutual funds and investors who bought in large at 10 dollars and took a bath."  Another point well made.

[TheBigA]

I can see them sell the networks, which are draining the company, quickest.

They seem to be shutting down the networks, since obviously no one wants to buy.  They've canceled several shows in the last few months. They lost Hannity to Premiere.  I think you'll see more to come.  They don't own the news content.  ABC Radio News is still owned by Disney, and Citadel pays them a cash figure for that...probably around $6 million a year.  Citadel owns the interconnect, the affiliations, and the rights to sell it.  No one is in any position to buy a radio network with the kinds of expenses it has.  Their network business used to be a cash cow, and it still could be, but not the way it's being run now.