iHeartRadio owner files for bankruptcy
engadget.com
engadget.com
From https://www.forbes.com/2008/05/14/clear-channel-buyout-marke...:
"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...
Also see https://dealbook.nytimes.com/2012/02/29/sorting-through-the-...
There's really no reason for iHeartMedia to have all this debt other than Bain Capital did their thing.
But I can't explain what CEOs and shareholders are up to; surely they know when an LBO is over-leveraged and likely to bankrupt them. Can anyone explain why these offers keep getting accepted?
You only hear about the failures, not the successes. So the likely explanation is somewhere between, "because it works" and "because they don't have much choice."
Also, they often buy and hold. So it's not like they go about gutting every company they acquire.
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.
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.
Yet every time they IPO their debt rating gets worse because they’re carrying more legacy debt, until finally it’s so laden no bank will fund another buyout, so there’s a fire sale on remaining assets and the company closes.
Also, you can imagine that Bain has a few inside managers who do very well personally from this kind of deal.
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.
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.
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.
Just look at Guitar Center. Unfortunately when they explode, they're going to take companies like Gibson and probably also Korg with them. Gibson is already in the process of unraveling right now. Their impending bankruptcy was obvious when they didn't have a booth at NAMM this year.
It's absolutely predatory behavior what they did.
They don't care about long term. You could argue that they're setting up the companies for failure but that's not their intent. They do however have complete disregard for anything but making a profit.
One thing they like to do is sell off holdings and pocket the money. This hurts the company long term as it can't use those assets as collateral. An example of this is selling off store front property and then renting it back from the new owner.
They aren't trying to bankrupt companies, they are aware that what they're doing is harmful, and they don't care if their short term actions do bankrupt the companies in the long run.
It's like a kid throwing rocks at cars. They aren't trying to cause an accident or injury anyone but their actions can only lead to bad things.
That problem is not necessarily what Bain does, it's that they don't care about how it impacts others. That's pretty much the problem with society today. They're like vampires extracting the wealth from these companies and leaving them by the side of the road. At the end of the day the profit at the expense of everyone else.
I mean, even if the creditors were promised an unbelievable interest rate of 20%, they still lose out if the company goes bust in the next 5 years.
Sidenote: It's very important to understand risk when comparing returns, as returns must be risk adjusted to be properly compared. For example, 5% returns on bonds and 5% returns on equities are not the same based on the underlying risk of the asset class.
[1] https://www.bloomberg.com/news/articles/2017-08-02/5-is-the-...
Scale. The same way VCs only count on one or two wins to pay for the rest of the losses.
But the entities that write these loans make their money in different ways and may not actually lose as much as you think, or at all!
Everyone knows the loan will not be repaid in full, so people hold the loan for a short window in order to collect that juicy interest payments, then sell it to the next sucker whose spread sheets convince them that they aren't going to be the one left holding the bag.
If you look at their list of previous acquisitions ( https://www.baincapitalprivateequity.com/portfolio ) there aren't a lot of survivors in 2018.
A leveraged buyout (LBO) is a financial transaction in which a company is purchased with a combination of equity and debt, such that the company's cash flow is the collateral used to secure and repay the borrowed money. The use of debt, which has a lower cost of capital than equity, serves to reduce the overall cost of financing the acquisition. The cost of debt is lower because interest payments reduce corporate income tax liability, whereas dividend payments do not. This reduced cost of financing allows greater gains to accrue to the equity, and, as a result, the debt serves as a lever to increase the returns to the equity.
The ToysRUs thing was such an obvious con. My son really digs certain Lego things and I stop by the store frequently. It was pretty obvious that it was being run into the ground... they would load up on inventory based on generous trade terms. The inventory in my local ToysRUs in November was aging and popular items like Lego and hot wheels were out of stock or merchandised to hide holes in the shelves.
For example, it says "In order to then balance the financial statement, there must be a debit of $20 million to equalize the new credit of $20 million ($30 million of loan less the $10 million of new worth that has been eliminated). To do this, a “plug” asset usually under the heading of goodwill (here for $20 million) is added to the asset side of the financial statement."
Most people reading this would conclude that 'goodwill' is some accounting thing that is required due to the use of debt, or because the company doesn't received the money from the lender.
But goodwill has nothing to do with debt. Whenever one company purchases another, paying more than the book value (accounting value) of the target (which is almost always the case), goodwill arises on the acquiring company's balance sheet.
That said, the goodwill thing is clarified in the next sentence. Also, the text doesn't make the connection between goodwill and debt. In fact it is nice that you try to explain what 'most people' will think after reading this while in fact the only thing your post proofs is you poor understanding of intermediate level texts in english language.
I don't know why you try to discredit the text here.
I can assure you I'm able to grasp simple concepts of English grammar, but thanks for the feedback anyway!
The connection between goodwill and debt isn't clarified in the next sentence. I stand by my point that a reader unfamiliar with goodwill would, after reading the article, understand it to be the result of debt.
My comment about the article was motivated by the fact that I found it poorly written by the standards of newspaper journalism. No other reason.
But, in these cases, when they got down to the hard work of re-configuring the target companies, they found out that they had done their sums wrong and that the interest on the loan was eating up all the money that was supposed to be used to make the target companies better and more valuable. Oops. So then they ran the companies into the ground and filed for bankruptcy so that they don't have to pay back the loan. This makes the investors mad, and Bain might not be able to play the leveraged buyout game any more, but they collected hundreds of millions of dollars in 'management fees' so they don't really care. And, hey, maybe some investors will still give them money because they certainly know what not to do next time.
does mitt romney ring a bell.... bain is his
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.
https://www.iheartmedia.com/press/clear-channel-outdoor-hold...
Interestingly enough, Bain Capital has been involved with helping all four of these companies consolidate the media landscape of the US.
If you look through their earning they are generating about 800 mil or so in profit. The issues they have like 1.2billion dollar interest payment.
This has kind of the been the MO for Bain Capital.
I sometimes catch Martha Quinn's 80s show in my morning or evening drive and enjoy it. No throat-shoving there!
It's a business model designed to mine the value of local radio, extract the money, kill the host organism, and move on. The zombie shells left behind are vanilla, deceptive, and empty.
Turns out after you remote play Rhianna, Bieber, and Katy Perry on loop for 15 years, (with a 60/40, commercial to music ratio) people stop paying attention.
Even before Clear Channel, pop radio stations would have you believe that Bruce Springsteen and Prince only ever recorded 3 tracks each, Radiohead recorded a single track in 1991 and then stopped, U2 got stuck at Joshua Tree, Soundgarden made a single track... I could go on. That fine tradition continues today, where at any given moment I can turn on the radio and find Portugal The Man's "Feel it Still", or one of ten other predictable tracks.
Looks to me like Clear Channel just replaced one brainless programming model with another.