Clear Channel Sheds Troubled Concert Unit: The planned spin-off points to problems in integrating media formats, sluggish stock prices

Back in 2001, when packing all modes of media and entertainment into the same corporate houses was in vogue, Clear Channel Communications Inc.’s plan to meld its sprawling radio network with live entertainment seemed novel but worth a shot. The company’s acquisition of concert promoter SFX Entertainment Inc. came complete with an elaborate script stressing how the deal could thrive on the unique economics of live performances. Now Clear Channel has virtually conceded that the idea worked better on paper than on the ground and that the combination has caused enough headaches to warrant a breakup. The company plans to execute a three-way breakup by spinning off renamed Clear Channel Entertainment to its own shareholders and teeing up its billboard unit, Clear Channel Outdoor, for sale of a 10% slice via an IPO. Despite the spin-off plan, industry experts report that Clear Channel has received offers – ranging as high as $2 billion – to buy the concert operation, which had revenues of $2.75 billion in 2004. If the breakup is primarily driven by forces peculiar to Clear Channel, its timing has left observers questioning whether the entire concept of media amalgamation is unwinding. Clear Channel moved not long after widely diversified Viacom Inc. announced a possible split-up and just before Emmis Communications Corp. unveiled a restructuring plan featuring a stock buyback worth up to $400 million and the possible sale of its TV stations. Pascal Volle, a media expert at Mercer Management Consulting, calls Clear Channel’s original plan a “brilliant idea” but says it faltered in execution because people in the two units weren’t working together. “Clear Channel also has a huge debt, and if you don’t have a stock price that goes up, you can’t really manage your debt,” he adds. “Clear Channel is extraordinarily powerful in its industry, and they found it difficult to do without having the industry shouting about it.” Clear Channel’s original story was that its radio stations and outdoor ad sites would promote the concerts to maximize attendance. Turnout is important because promoters typically make no money after paying the performers and the arena and they depend on tie-in merchandise sales for profits. However, audiences are down because of rising ticket prices amid general economic problems and a painful restructuring of the entire music industry. The concert operation has been a lightning rod for Clear Channel, no stranger to controversy in the operation of its radio stations. Some people in the entertainment industry have criticized the company for heavy-handed operation of the concert business, and, reportedly, the company is being investigated by the U.S. Justice Department on antitrust grounds. Although the concert business still could be sold outright, the spin-off apparently was preferred over an IPO because there appeared to be little investor interest in a public offering. The live performance business is highly discretionary and lacks the predictable consistency that is favored for public offerings. By contrast, outdoor advertising has better ingredients for an IPO, including substantial hard assets and a relatively predictable cash flow. Volle believes that the strategy of integrated media remains viable and has been practiced successfully at such firms as News Corp., Tribune Co., NBC, and even Time Warner Inc., which had trouble after merging with AOL. Rollbacks are taking place at firms with lackluster stock prices. Viacom stock, he notes, “hasn’t moved despite the fact that earnings had been moving very well for the past four years.” Viacom’s proposal would segregate its slower growing, cash-generating units – CBS television and Infinity radio – from higher-growth operations like Paramount Pictures, MTV, and Simon & Schuster. Volle notes that the two firms will have product and service agreements between them, “acknowledging that they have created value and want to maintain value, but it’s a story they’ve failed to sell.” (c) 2005 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com