iHeartMedia Could Be a Thriving Business – If It Didn’t Have $20 Billion in Debt

The decision by its private equity owners makes Sam Zell’s Tribune buyout look fiscally responsible

Last Updated: May 16, 2017 @ 12:57 PM

Being America’s largest radio station owner doesn’t mean as much as it used to in the era of podcasts and YouTube, but iHeartMedia’s business model still works. The 850-plus AM and FM stations held under its iHeartRadio subsidiary reach more than 110 million listeners weekly, and the company hauled in $6.3 billion in revenue last year with $1.5 billion in operating income, clearing $1 billion in operating income each of the past 5 years.

However, iHeartMedia had to pay $1.8 billion in interest expenses last year, after paying more than $1.5 billion in each of the past 5 years. That’s because when the company was acquired by private equity firms Bain Capital Partners and Thomas H. Lee Partners in 2008, just as the financial crisis was in full swing, it was loaded up with more than $20 billion in debt that it hasn’t been able to grow its way out of. The company hasn’t turned a profit since 2007 – the year before it was saddled with all that debt, and it warned investors earlier this year it may not last another 12 months as a “going concern.”

Furthermore, a whopping $8.3 billion in senior debt comes due in 2019, which the company has no hope of repaying and has engaged its creditors in attempts to refinance, offering equity in healthier iHeartMedia subsidiary Clear Channel Outdoor Holdings. Further down the debt table, iHeart has $1.7 billion in 14 percent notes due 2021, which is not the type of interest rate businesses with other options tend to pay.

IHeartMedia’s capital structure, where its brutal balance sheet lives, is distinct from its operating businesses. Any refinancing or capital raise would only change who owns the company’s debt and equity, not determine whether iHeartMedia continues to operate.

A spokesperson for iHeartMedia declined to comment for this story.

While iHeartMedia is certainly facing structural challenges with the emergence of streaming music services like Spotify and Pandora, those competitors haven’t completely prevented it from running a viable business. Revenues have shrunk from their mid-2000s peak, but radio remains a tremendously relevant source of news and entertainment for millions of Americans, and iHeartMedia has contracts with some of the biggest names in radio including Steve Harvey and Ryan Seacrest. It also recently reported its 16th consecutive quarter of year-over-year revenue growth.

To be fair, the company hasn’t always made the most forward-looking business decisions in its history, as iHeartMedia’s predecessor sold off live events company Live Nation in 2005 — the one part of the music business fairly immune to digital disruption. Live Nation Entertainment, which was formed in 2010 when Live Nation and Ticketmaster merged, has a healthy $7 billion market cap and its stock has nearly tripled over the last five years. IHeartMedia’s market cap is less than $200 million.

But what really killed the radio star was finance, which brings to mind another mid-2000s private equity-backed acquisition where a major media brand buckled under the weight of a massive debt load. Sam Zell bought Los Angeles Times parent Tribune Company in 2007 in a deal that involved $13 billion of debt, right at the time newspapers were starting to get cannibalized by the internet. Tribune filed for bankruptcy protection a year later.

Legendary music manager Irving Azoff, who left iHeartMedia’s board this month, called the business a “great company” with a “terrible balance sheet” in a February interview. But in 2017, there’s probably no radio company great enough to overcome $20 billion in debt.