Description

IHeartMedia (IHRT) is an overleveraged company that has been left for dead and is an extremely cheap option available in the market.  The company is a cash flow machine and will be able to address its coming debt maturities in 2026.  The perception is that its core broadcast is terminal.  It is not.  The core business has had problem after problem in the last five years but is now expected to return to positive growth in Q2 and beyond.  That growth will be augmented by the company’s status as the largest podcasting company in the world.  Finally, we are in an election year which is helpful with cashflows and enhances refinancing flexibility.  Under a variety of scenarios, the equity could be worth 3-5x its current price by the end of 2024 ($6-$10) and $15 by the end of 2025.

The CEO and CFO have been a stock buying machines and just received unusually timed and large RSU stock grants in late February suggesting something is coming, soon.  My guess is 1) the business is now doing much better than the past and even their recent guide and 2) some debt restructuring deal is coming soon.

IHRT is the largest audio advertising company in the world.  It is the largest podcast production company in the world by downloads and advertising revenue.    According to Podtrac, the company had 194.1 million downloads of its owned content in February 2024 with a unique monthly audience of 33.7 million people.  It’s next closest competitor by audience is Liberated Syndication which is a podcast focused advertising agency and podcast hosting company that has 146.9 million monthly downloads.  NPR is a distant third with 107.9 million monthly downloads.

IHRT is also the largest digital radio company as well as the largest radio broadcaster in the United States.  It is the largest audio advertising technology company in the world.  It is also the largest audio beneficiary of political advertising dollars.

Before COVID, radio broadcasting, surprisingly, had been a stable business for years.  Revenues were slightly up low single digits annually (1%-2%) even with growing competition from satellite radio and streaming music services like Apple Music and Spotify.  Radio owns in car entertainment.  During COVID, time in the car collapsed and other audio growth accelerated as people sat at home, didn’t work, and streamed.  At the same time, the consumer fell in love with podcasting.

For reference, Moving 12-Month Total Vehicle Miles Traveled in the U.S. in December 2019 were 3,261,771 millions of miles.  TTM miles traveled bottomed in February 2021 at 2,832,198 millions of miles, a decrease of 13.2%.  Meanwhile, given the very lengthy return to the office of employees nationwide, miles driven only surpassed the 2019 high benchmark in December 2023 when the TTM data reflected 3,263,771 millions of miles. 

Moving 12-Month Total Vehicle Miles Traveled (M12MTVUSM227NFWA) | FRED | St. Louis Fed (stlouisfed.org)

In 2019, total revenues were $3.683 billion, broadcast radio was $2.233 billion, 60.6% of total revenue.  In 2023, total revenues were $3.751 billion, broadcast radio was $1.752 billion, 46.7% of total revenue.  From 2019 to 2023, broadcast radio revenues fell 21.5%, even as miles driven recovered.  What the hell happened?

First, COVID.  Ad dollars pulled.

Second, just as things were getting back on track there was an ad recession in mid-2022 that struck all advertising.  The ad recession was prolonged for broadcast radio in 2023 as COVID advertising (government, vaccines, etc.) came out of the numbers in the last three quarters of 2023.  COVID advertising has now mostly evaporated with the exception of some seasonal COVID vaccine advertisements. 

Third, broadcast radio revenues for IHRT are approximately 50% local and 50% national.  Local was up last year, slightly.  Meanwhile, national advertisers were down 15%.  Thus, the Multi Platform Group which includes broadcast radio was down 7% for the year (do note that 2023 was not a political advertising year so ex-political the right answer was down 5%).  COVID would have been a big part of the national picture, but the national advertisers have been slower to recover than have miles driven.

Third, in 2019, revenue in the Digital Audio Group (podcast and digital radio) was $376.2 million, 10.2% of total revenue.  In 2023, revenue in the Digital Audio Group (podcast and digital radio) was $1.069 billion, now 29.0% of total revenue.  Nearly 3x growth in five years!  Some of the Digital Audio group’s revenue was bought by IHRT with the acquisitions of Triton Digital for $230 million in 2021 and Voxnest in 2020 for approximately $62 million, but those acquisitions had no more than $100 million in revenue at the time of their acquisitions.  Point is, podcast has been taking share in the audio bucket.

Fourth, in 2019, automobile advertising went from approximately 10% of radio advertising dollars to almost zero in 2022.  There were no cars for sale and those cars that were for sale were sold at premiums to asking price and there was no need to advertise empty lots.  Car inventories are now almost back to normal but the category was slow to recover in 2023.

Meanwhile, reach for radio as a medium remains steady and the value is uncontested, with radio an advertiser get 90% of the efficacy of a video/digital ad at 25% of the cost.  The core business is now inflecting positively.  What is changing?

First, the company on its recent call guided the core radio business to be down in the low to mid single digits in Q1 2024 on its Q4 earnings call.  It then indicated that the business overall will be up low single digits in Q2, ex-political.  Since then, Audacy, which does not have the same digital penetration as IHRT (faster growing podcast and digital radio), came out and said, “Q2 revenues are pacing up mid-single digits.”  The core business is inflecting and no one is paying attention to the asset class given five years of hell!

Audacy Provides Strong Performance Update Following Restructuring Plan Approval | Business Wire

Second, the national advertising data which is provided by Media Monitors (owned by IHRT) is turning positive.  For Q1 2024, the top five advertisers were up approximately 6% YOY in Q1.  While the sample size is small, the data is pointing to a rebound.

Third, broadcast TV is in free fall.  A recent survey indicated that intent to allocate ad budgets to broadcast TV in 2024 would fall from 16% of budgets in 2023 to 14% of budgets in 2024.  In a flat ad market, that suggests dollars flowing to broadcast TV would decline 12.5% in 2024.  Where will those dollars flow?  Some, of course, will go to the white hot connected TV category (video streamers such as Amazon, Netflix, Paramout, etc.).  Of note, the broadcast TV ad market is 5x the size of radio so it is a lot of dollars ($60 billion vs. $12 billion).  In the same survey of intent, advertisers indicated that they intended to increase audio spending (radio, podcast, digital radio) from 7% of total spend to 8%, or 14.2%.  IHRT will be a major beneficiary of that trend which should continue for several years as broadcast TV enters free fall.

IHRT did $3.75 billion in revenue in 2023 and $696 million in EBITDA.  Street analysts anticipate IHRT will do $3.96 billion in revenue and $855 million in EBITDA in 2024.  Since this is an election year, there will certainly be growth.  In the 2020 presidential election year, IHRT did $168 million in political advertising revenue.  This is 95% incremental margin business.  Most forecasts expect election spending to increase this cycle by at least 20%.  Assuming 20% growth, IHRT will benefit from $200 million in political advertising dollars in 2024.  At 95% incremental margins, that indicates revenue of $3.95 billion and EBITDA of $886 million.  Given this assumption, the analysts are assuming that the core and digital EBITDA will be down by approximately $30 million YOY in 2024.

To simplify, $2.681 billion was in the Multiplatform Group and Audio and Media Services Group and $1.069 billion was in the Digital Audio Group (podcast and digital radio).  I consider Multiplatform and Audio and Media Services to be “core” revenue and Digital to be the higher growth platform.  In Q4 2023, “core” was down 3% excluding political revenue (2022 comparable was a mid-term election year so also had political dollars).  In Q4, the Digital Audio Group was up 6% (Podcast up 17% and Digital Radio down 1% due to a massive COVID comp).

In my view, digital radio will grow 4% in 2024 and podcast will grow 20%.  This will grow the Digital Group revenues by approximately $105 million in 2024.  Given that the “core” has now stabilized, I anticipate “core” revenues will grow 1.5% in 2024, or $40 million.  In total, non-political revenues should grow $145 million in 2024.  For those revenues I assume a 50% incremental margin so the business ex-political should benefit from EBITDA growth of $72.5 million.

As such, I see the business throwing off EBITDA of approximately $948.5 million in 2024 vs. the street at $855 million.  Estimates are certainly level set now and low.  In addition, my analysis suggests that the company purposefully boosted bad debt, bonus accruals and took extra accrued expense reserves of approximately $50-$75 million in 2023.  I have not assumed that they “recover” any of these reserves in 2024 but they likely will.  Why?  They wanted to use a cookie jar to boost 2024.  Why?  They have a lot of debt and refinancing is at hand and having a spectacular 2024 is in their best interest.

Free cash flow for 2024 is straightforward - $950 in EBITDA, less 10% cash taxes, less $375 million in cash interest, less $150 million in capital expenditures and restructuring expenses (shedding excess real estate leases).  Net, approximately $330 million ($2.20 per share) in 2024 free cash flow.

As of Q4 2023, the company had $5.214 billion in debt and $346 million in cash for net debt of $4.868 billion.  The company also had $1.04 billion in receivables and $236 million in payables ($804 million net) that are unlevered for which they have an undrawn receivables facility in place of $426 million.  Given that last year was a non-election year, the company screens as 6.9x levered on a TTM basis.  Subsequent to the end of 2023, the company received $101 million from the sale of its stake in BMI, tax free.  Therefore, I estimate that at the end of Q1 the company will have approximately $400 million in cash (they will have negative FCF in Q1 since it is the seasonal low point for the business).  By the end of the year, with no open-market debt repurchases, the company should have cash on hand of $780 million.  With no open market debt repurchases, net debt will be approximately $4.434 billion, or 4.67x on a trailing basis.  If they juice EBITDA somewhat by reversing some of the reserves taken in 2023, it could be as low as 4.4x.  Refinanceable. 

For 2025 I get approximately $825 million in EBITDA, so with no changes to the capital structure I anticipate around 5.1x levered on year-end 2025 (net debt of $4.234 billion).

Their debt capital structure is messy but is as follows:

$1.846 billion Term Loan Facility due April/May 2026 (all floating rate, gulp, part of the pain last 3 years, now opportunity if rates ever get cut)

$401 million Incremental Term Loan Facility due April/May 2026 (all floating rate, gulp, part of the pain last 3 years, now opportunity if rates ever get cut)

$800 million 6.375% Senior Secured Notes due 2026 (trading 85 cents)

$750 million 5.255% Senior Secured Notes due 2027 (trading 75 cents)

$500 million 4.75% Senior Secured Notes due 2028 (trading 75 cents)

$916 million 8.375% Senior Unsecured Notes due 2027 (trading 55 cents)

They have repurchased over $500 million of the unsecured notes at a discount over the last three years.  Those repurchases have ground to a halt in Q4 2023 as the company only repurchased $15 million of those notes for $10 million and the company is hoarding cash.  Why?  Something is going to happen with the balance sheet soon and they want max cash on hand for those discussions.

I can only speculate what that is going to be.  If I were in charge (famous words of course), I would immediately focus on cutting a closed-door deal with the unsecured lenders holding the $916 million of unsecured notes due 2027.  Given the current discount price of 55 cents, there is $412 million of discount available to chop up in some form of exchange offer.  I would propose something like a new note due 2029 of $600 million at 11% interest (keeps cash interest payments level), $50 million of cash now, and 25 million shares of stock.  That is approximately 70 cents in value, a 30% premium to trading value.  More importantly, it would knock out $320 million in net debt now ($1.83 per share), before the business begins showing what is happening in the market.  Time is of the essence.

Such a deal would leave them with $680 million in cash at the end of 2024 and $880 million in cash at the end of 2025.  That would be enough to retire the 2026 notes outright although those will be addressed long before then. 

After debt is slightly lowered by reworking the subordinated notes, the company has to extend the term loans with BOFA.  $2.247 billion outstanding.  Banks are fine up to 3x leverage.  They won’t love the other debt behind them but they don’t care because they are first in the stack.  For an extension, I think it is easy, go back to paying down the term loans quarterly.  My guess is that they get a 2-3 year extension by agreeing to start amortizing the facilities by $25 million per quarter.  Fine.  They can then decide how to rework the Secured notes with their strong cash balance and stronger business performance.

Assuming year end net debt of $4.434 billion (no debt transactions) and EBITDA of $950 million in 2024 and $825 million in 2025, getting a target is tricky because $950 million is a political year and $825 million is not.  What is further tricky is presidential election years are more robust than non-presidential election years.  Let’s blend it and say $875 million is the right figure.  At 6x, that gives me a target of $5.44.  At 6.5x, a target of $8.35. 

These figures do not include any discount earned from the possible sub debt restructuring proposed above.  With $320 million in less debt and $50 million less in cash, the net debt would be $4.184 billion with 175 million shares.  At 6x target would be $6.09 per share and at 6.5x $8.59 per share.  Regardless, 1) I don’t know and 2) something is coming, soon.

With a cleaned-up capital structure and a business that performing well including a “core” business that is now/soon to be comping positively ex-political, political cash flows that accelerated debt pay down, possibility for accretive debt restructuring, this is a solidly performing cash flow machine that has the extended benefit of being the biggest podcasting company in the world.  With “core” comps that exceed my estimates, IHRT could be a $15 stock in late 2025.   As such, it is one of the most undervalued and attractive lottery tickets in the market today. 

Catalyst

Weekly Media Monitors advertising data

End of April - Q1 earnings showing "core" stability and guide for acceleration in Q2 inline with Audacy's latest commentary

Now-July - Possible subordinated debt restructuring followed quickly by term loans being extended

July-December - 2026 Note retirement and new note reissuance ($300 million retired with a new 5-year note of $500 million issued for 2029)