New Suitors May Come Calling After iHeart and Clear Channel Get Divorced

(Bloomberg) -- IHeartMedia Inc. and Clear Channel Outdoor Holdings Inc. finalized their long-anticipated divorce that will see Clear Channel spun out when iHeart emerges from bankruptcy early next year.

The separation frees Clear Channel from constant demands for cash from private equity-backed iHeartMedia, which used the outdoor advertising company to shore up its own balance sheet. IHeartMedia in turn emerges as a leaner company that can capitalize on its dominance in the radio broadcasting space -- and as an attractive target for a potential buyer. Clear Channel, too, has attracted potential suitors.

IHeart controls Clear Channel’s board, top management and most of its common stock, which enabled the parent to arrange an intercompany loan for itself that totaled about $1 billion by the time iHeart went bankrupt in March. Clear Channel will gain its independence and remains solvent, but $850 million of that loan won’t be repaid.

“The way things were was not good strategically,” Philip Brendel, a distressed debt analyst at Bloomberg Intelligence, said by phone. “This is like erasing the chalkboard.”

A spokeswoman for iHeart declined to comment. A request for comment from Clear Channel wasn’t immediately returned.

Ceding Control

IHeartMedia filed for bankruptcy with $20 billion of debt and a creditor-supported plan that included a spin-out of Clear Channel. Although Clear Channel never filed for bankruptcy itself, iHeart held an equity stake of about 90 percent in Clear Channel. Private equity owners Bain Capital and Thomas H. Lee Partners loaded the largest U.S. radio broadcaster up with debt as part of its 2008 leveraged buyout.

Under a reorganization plan that a federal judge will consider next month, iHeart would be taken over by senior lenders and shed about $10.3 billion in debt.

William Eccleshare, the chief executive for Clear Channel Outdoor International, will take over as CEO of the whole business after its separation, according to a Dec. 21 statement. Clear Channel eventually will have its own board of directors and management. Until then, iHeart CEO Bob Pittman and CFO Rich Bressler will continue to hold the same titles at Clear Channel.

Minority Holders

IHeart’s emergence from bankruptcy was contingent on reaching a settlement with some of Clear Channel’s minority shareholders, who have sued to recoup their losses associated with the intercompany loan. The company won initial approval this week from the bankruptcy court for an accord.

The settlement includes a termination of cash sweeps and royalty payments to iHeart from Clear Channel, a transfer of Clear Channel’s intellectual property back to the company, and as well as a revolver of up to $200 million provided by iHeart to Clear Channel after separation, among other terms.

Clear Channel has always been a fairly stable business and the separation from iHeart will be structured as a taxable transaction, which paves the way for it to potentially become a real estate investment trust, BI’s Brendel said. That would be a strategic move that would give it tax benefits and open it up to a new base of retail investors, he said.

“I have long thought it would be great for Clear Channel to be an independent enterprise since it’s been long controlled by iHeart,” James Goss, an equity analyst at Barrington Research Associates, said by phone. “It’s continued to perform well both domestically and internationally.”

IHeart should also benefit because it no longer has to pay all its profit out to private equity in the form of dividends, he said. Both companies will benefit from being able to control their own capital structures and make strategic decisions, Goss said.

Target Practice

The radio giant likely remains a target for a strategic buyer such a Apple or Liberty Media Corp. after its emergence from bankruptcy, but that activity likely won’t heat up until bankruptcy is well behind it, Brendel said. Liberty Media bid $1.16 billion for 40 percent of the company in June, but iHeart and its creditors rejected the bid as insufficient. The radio company said at the time it was still open to offers .

A spokeswoman for Liberty didn’t immediately respond to a request for comment.

IHeart is bigger than both of its next biggest competitors combined, and it has a strong portfolio of content in addition to distribution, Brendel said. “IHeart is focused on getting out of bankruptcy and the board’s going to get up to speed with what the potential opportunities are,” he said. “Someone is going to try to bid in the second half of the year.”

Clear Channel may also have suitors. French advertising company JCDecaux SA’s co-Chief Executive Officer Jean-Charles Decaux has repeatedly expressed interest in Clear Channel. Lamar Media Corp. and Outfront Media Inc. are also natural acquirers, S&P Global Ratings analysts have said. Requests for comment left with JCDecaux and Outfront Media were not immediately returned. A spokeswoman for Lamar Media declined to comment.

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