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CLEAR CHANNEL OUTDOOR HLDGS CCO S
April 01, 2016 - 1:46pm EST by
BJG
2016 2017
Price: 4.50 EPS 0 0
Shares Out. (in M): 36 P/E 0 0
Market Cap (in $M): 1,627 P/FCF 0 0
Net Debt (in $M): 4,394 EBIT 0 0
TEV (in $M): 6,203 TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

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  • Short squeeze
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Description

 

[This is short-term oriented and may only be applicable to smaller investors and smaller funds, given float.  Obvious risk is short squeeze, compounded by the fact that entity itself (CCO, not iHeart), has ample liquidity with cash of close around $775MM PF for cash receipts from iHeart and net of dividend payments YTD.]

 

Clear Channel Outdoors Class A equity (CCO) shares are a short, as management has yet to announce the loss of its biggest wallscape – the Vornado/Marriott Marquis digital display in Times Square that was the largest high def ad display in the world at its launch in 2014 – Half an Acre in size!   Without a doubt, CCO’s biggest revenue growth driver has been its Wallscape/Spectracolor business, with revenues up 66% YoY, representing an additional $27MM vs 2014.

 

 

Also, the company has likely lost at least another 2 wallscape displays in Times Square out of its 25 Spectacolor displays in Times Square, NY.  None of this has yet been disclosed by management despite it being a “primary” contributor to revenue growth over the past 5 quarters.  

 

Moreover, what does this say about CCO as operators that they lose the contract for the most high profile ad display in the Times Square – one they clearly coveted based on regular comments and press releases on the performance of the asset(s) – just 1 ½  years after getting it?

 

What Happened?

 

In November 2014, Vornado, the entity that owns 1535 Broadway in the heart of Times Square, completed the construction of the largest, most-expensive, high definition advertising display.  Google was the first to lease space.  At that time, it was reported that the asking price for 4 weeks of exposure was $2.5MM, or $32.5MM/yr if annualized.  Headlines for that period was as follows, one was even from Clear Channel boasting how they were selected as the exclusive sales agent for the display:

 

 

 

 



Vornado’s 2015 10-K confirms continued ownership of this building address as well:

 

Source: 2015 Vornado 10-K http://www.sec.gov/Archives/edgar/data/899689/000089968916000046/vno2015form10k.htm

 

 

Now to step back to the prior month.  Back in October 2014 Outfront Media (formerly CBS Outdoors) acquired Van Wagner.  Higher profile sales executives transitioned from Van Wagner to Outfront for a period of time, according to certain Linked-In profiles.  Then, in early 2016, two Sales Executives – Gary Grossman and Justin Rinko – formerly of Van Wagner had updated social media profiles detailing their co-founding of and new employment: Silvercast Media.

 

(source: https://www.linkedin.com/in/gary-grossman-100547)

 

 

A visit to Silvercast’s website simply shows a video showing the construction of the Marriott Marquis wallscape display and concludes with showing Silvercast’s logo on that panel!

 

 

 

Also very recently –  in February and March 2016 – there was some very light press about Silvercast with no real specifics regarding the type of assets they did or planned to operate in the media space.

 

 

 

At the same time, we know Clear Channel was originally the agent for the display.  Even as of 3/29/16, Clear Channel continued to show the specific board in its list of Time Square spectacolor assets.

Source: #110 on page http://clearchannelspectacolor.com/locations/nyc-times-square/  and for specific pic of inventory http://clearchannelspectacolor.com/images/locations/times-square/display-110-022016.jpg)

 

 

This might fall into what the industry calls “lease jumping”, where an entrant provides better terms or promises better services to pick up the property as so as allowable per current contract.  The display owner is Vornado.  It could be a one-off case or Silvercast may have grabbed all of the Vornado Times Square display business.  If the latter, two other Clear Channel boards that are on Vornado’s property’s are the following:

 

CCO’s “Billboard #130”:

 

Which is also a Vornado property…

 

 

CCO’s “Billboard #007”:

 

 

Which also another Vornado property…

 



The Effect

 

For each of the past 5 quarters, management has cited its Spectacolor business as a major contributor to growth.  To boot, growth has been weak at best.  Below shows quarterly top line growth, YoY, as reported and adjusted for mgmt’s citation of FX impacts.

 

 

Moreover, since getting the exclusive Sales Agent role in Nov 2014 for Vornado’s Marriott Marquis building property, Mgmt has cited the Times Square Spectacolor business as a primary contributor to revenue growth in each of its last 5 conference calls.  Detailed below:

 

  • Q4 2015 call, Rich Bressler COO & CFO: For full-year 2015 Americas Outdoor revenues were up 2%. Driving revenue growth in new digital billboards placed in service throughout the year and revenues from our Spectracolor signs in Times Square.”

 

  • Q3: “Turning to Americas outdoors on slide 8, our quarterly revenues were up 1% driven primarily by higher revenues for our Times Square spectacolor business,…”

 

  • Q2: Also, the campaigns we've launched on our digital billboard in Times Square demonstrate the powerful value proposition about the work.

 

  • Q1: Our quarterly revenues were up 3% driven by our growth in digital, including increased capacity and occupancy as well as new revenue from our Time Square spectaculars” AND LATER “our quarterly revenues were up 1% driven by our growth in digital billboard as well as new revenue from our Times Square Spectaculars business”

 

  • Q4 ’14: “And Outdoor continues to engage with consumers through key locations like our new digital Billboard in Times Square that spans a full city block”  AND LATER IN CALL “In our Americas business, we became the exclusive sales agent for the largest, most technologically advanced billboard in Manhattan's Times Square that I mentioned earlier”



Undoubtedly, CCO’s Wallscapes/Spectaculars business unit are a group of very large advertising surface area – and CCO’s website shows they have these assets just in New York Times Square and Atlantic City.  To remind that losing at least the biggest board in the group will have an effect on the whole group, note that AC locations probably generate immaterial revenues vs. Time Square displays for the following reasons: 1) it’s obvious – Atlantic City vs Times Square, 2) The AC locations are static, 3) there are 18 locations vs 25 in Times Square and 4) AC is highly seasonal and to boot, these AC locations are on the beach/boardwalk.  The point is, CCO lost the biggest and highest revenue ad display in its portfolio of these spectacolor assets.

 

Wall Street has $667MM as their consensus EBITDA for 2016 on revenues of $2,758MM, implying approx. 9.5x EBITDA (after adjusting EV for disclosed Q1 sources and uses that bring cash to $775MM).  The Marriott Marquis board was reported to ask $33MM in revenues annually for lease rates in late 2014.  Assuming $35MM today plus another $5MM for the other Vornado boards, and assuming at 40% take for CCO, the EBITDA effect might seem small at $16MM.

 

While the effect may not seem material, maybe $0.05/share in EPS (assuming $40MM in loss revenues at 40% gross margins) it should call into question a business who is very willing to sell non-core assets yet cannot retain its biggest growth asset, one in which it was just hired no less than 1 ½ years ago.  Moreover, either the terms were way more advantageous for Vornado (assuming  the lost displays were not just the Marriott Marquis but all vornado properties as speculated prior) OR Vornado believes the Silvercast will do a better job at monetizing that inventory, or both.  Regardless, none of this is bullish for incumbents in the Times Square area and none of this is a vote of confident for CCO mgmt.

 

Clear Channel Outdoor Cap Structure

Additionally, iHeart controls 99% of the vote and has 90% economic interest in CCO.  Cash gets to iHeart through three mechanisms.  1) Dividends, which also go pro rata to public shareholders, 2) shares services agreement that pays fair mkt rates for corp overhead functions and 3) a revolving note mechanism that allows iHeart to borrow from CCO and CCO lend to iHeart on an unsecured basis.

 

 

Trading Multiples

Lamar is not a great comparable owing to its more suburban/rural locations, US-only exposure, larger underlying land ownership and de minimis exposure to urban transit contracts.  While CCO may seem “cheap” vs. Outfront, recall that there is essentially zero voting control for the publicly traded A-shares and accordingly, pricing the equity on A-shares should reflect the ~20% noncontrolling discount that has been cited by Shannon Pratt and others for decades.

 



Risks

  • Low-float stock – float is overstated as some of the larger holders are not active traders, only 35MM shares are held outside iHeart entities/ Short-squeeze.

  • Special Dividends and CCO has other forms of liquidity depsite iHeart overhang.

  • Trades at cheapest EBITDA multiples of the group (CCO, LAMR, OUT).

  • Plenty of Liquidity at the CCO level.

  • Business performs better than expected in near-future

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

  • Silvercast announces its presence on a larger, louder level.
  • Silvercast continues to grab more business, intensifying competition in Times Square and NYC further.
  • Management announces the loss of these boards.
  • Sell-side tweaks 2016+ estimates downward.
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