CCO - Clear Channel Outdoor: Key Takeaways From Earnings Call

2023-03-06 03:52:18 ET

Summary

• Ares Management is now the company's second largest shareholder.
• CCO announced the first transaction in Europe where it will divest assets, something the company has been working on for over a year.
• Quarterly results were strong and Q1 guidance was surprisingly strong in light of what industry peers and other media companies dependent upon ad dollars have discussed.

There has been a lot of news surrounding Clear Channel Outdoor ( CCO ) since we last wrote about the company on November 30 of last year. First, the company announced that they were going to divest their business in Switzerland to an affiliate of TX Group for almost $93 million on December 22nd. Then, Ares Management announced that they had increased their stake in Clear Channel and are now the second largest shareholder after Allianz.

While this news helped energize the stock, we think that the more important event since we last discussed Clear Channel is the recent quarterly results and subsequent conference call. While it may be entirely too early to get too excited about what management discussed, it certainly sounded as if the outdoor advertising space might be one of the few bright spots within the advertising arena in Q1 2023.

Here are what we viewed as some of the key takeaways:

European Divestment

The sale of assets in Switzerland is the first step in the strategic review that the company is undertaking regarding the continent as a whole. This is something that has been discussed for a while with seemingly little movement, however this does show progress. The company is going to use the proceeds from the sale to bolster its liquidity position, but the ultimate two uses of that cash are either for debt paydown or reinvesting in the business over there. If Europe remains strong, we suspect that management might elect to utilize a majority of the proceeds for debt paydown and the rest for the business via CapEx outlay. If they are truly looking to sell, and FCF generation is constrained due to rising interest rates and advertising weakness, then there is little reason to lavishly spend on a business you do not intend to own in its entirety for much longer.

The company also announced a change to how it reports the European business, splitting it up into geographic regions to mirror how the business is actually run. So there is now a reporting segment called Europe-North and another called Europe-South. We suspect, although management said it was not how they would look at it, that this breakdown could help drive further sales and telegraph to the markets assets that the company really wants to divest of. We think Europe-South is positioned to be sold off in pieces while Europe-North could be sold in whole or possibly two transactions (the U.K. in one and the Nordic regions in another).

REIT Discussion

It was quite refreshing and good news that management was pretty open about the REIT discussions on this last conference call. Obviously the company wants to become a REIT; if for no other reason than their two largest peers are REITs. However, there are hurdles that management must overcome to set the table for a possible conversion; namely getting rid of a large portion of their current debt. The company's CFO, Brian Coleman, had this to say in response to an analyst's question in the Q&A session of the call:

"I think our path to REIT optionality is both a deleveraging story, and then obviously getting the size of the portfolio of REITable assets to the right level. And so, the strategic review going on in Europe is obviously an important element to that. And while the ultimate resolution, if it's through asset sales, is probably not directly deleveraging, at least not meaningfully so. It does carry with it reduced capital expense, simplification of the business, a lowering of corporate costs. And so, I do think visibility into the ultimate outcome there will be an important consideration as we look to other options to delever. And other options may be needed, and all options are on the table, but I think it'd be premature right now to really kind of dive into those. The company has some runway. We've got the process going on and we're going to be open-minded about the things that we can and need to do to delever the balance sheet. But it's really that and getting the asset base in the right place being the two obstacles, so to speak, to putting ourselves in a position where we could eventually REIT this business."

So yes, the main issue facing the company's ability to convert is the debt, but it seems management also wants to get the portfolio assets meaningfully allocated to make the transaction make sense. While part of that is the divestiture of part, or all, of their European business, we suspect that they also want to bulk up on outdoor assets here in the U.S. as well. Importantly, we think the focus is going to be on adding more billboards to the portfolio to diversify away the contract assets (airports, etc.) which carry lower multiples and can cause major headaches when contracts come up for bid or are not renewed.

Long story short, management appears to be focused on a REIT conversion in the future, but there are steps that need to be taken in the interim in order to make that possible. So investors should focus not only on the major milestones that are needed (divestiture of European assets and paydown of large chunks of debt) but also the smaller details such as adding billboard assets in the U.S. via M&A - which they did in Q4 to the tune of $10 million.

Debt

Debt is always going to be a discussion with Clear Channel until the company is able to make a meaning move to deleverage. Simply selling assets and using those proceeds to pay down debt does not really solve the issue as it has a negligible impact on the overall debt profile. What we mean by this is that the company is not going to do a transaction that does not deleverage the company in a positive way, but the problem is that the European assets are low margin and generate lower multiples in transactions. So when the company gets cash from a sale, and applies it to debt, you have to remember that debt goes down, but so too does the EBITDA that the company generates from its assets (because it sold some). So in the current environment, and looking at the assets the company is interested in divesting, the ability to drastically deleverage, as it pertains to leverage ratio, just is not going to happen quickly.

This is going to be a methodical process with both management and the Board of Directors having to show the ability to purchase assets in the U.S. smartly - meaning not chasing deals and paying prices that work in the current economy as well as a weaker one - in order to drive the transformation the company needs to be able to deleverage and ultimately do a REIT conversion.

Capital Expenditures

Continuing a theme that investors have seen over the last few years, is that digital revenues continue to grow strongly and the company continues to spend CapEx to aid that growth. The guidance for 2023 is for the company to spend between $185 million and $205 million on CapEx, which is essentially management telling investors that they plan to spend more next year as CapEx came in at just under $185 million for FY 2022.

We think management is doing a good job keeping CapEx from running away from them, especially as they look to divest Europe and are faced with potential economic headwinds (not only in the U.S. but globally). Based off of what the company has already done over the last few years, we suspect that they have $50 million to $75 million in CapEx spending that they could cut back on if necessary, which would provide some breathing room if the ad market did turn considerably and gives management wiggle room with adjusting cash and cash flows.

Final Thoughts

We thought that the conference call and quarterly results were good, especially when compared to industry peers and other media companies who rely on advertising dollars. The news leading up to the quarterly results was also positive in our view as the company has moved forward with striking a deal in Europe on some assets while also having a major shareholder add to their position.

The conversation surrounding the REIT conversion is healthy, but we think investors need to focus instead upon the steps required to get to the point where management and the Board have to make that decision. Because regardless of whether the conversion happens or not (and to be clear we believe that it is going to ultimately happen if the company stays independent), deleveraging and bulking up on U.S. billboard assets are two moves that will add tremendous shareholder value and could create a scenario where Clear Channel has suitors circling prior to a conversion. This is a long-term play which could deliver outsized returns if management can improve the balance sheet and simplify the asset base.

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