Description

Clear Channel Outdoors is a secularly growing re-opening play with business fundamentals inflecting higher, coupled with management changes that signal potential for strategic actions.  Levered balance sheet can enhance equity returns if thesis plays out.

Business

Clear Channel Outdoor is one of the largest outdoor advertising companies in the world with over 500,000 advertising displays in 31 countries.  It is the only outdoor advertising company with scaled operations in North America and Europe.  CCO owns half a million print and digital displays.

Out-of-home advertising is an attractive, secularly growing business that has been gaining share of media spend for the past decade.  CCO has been growing its share of digital screens and has made inroads on better ad measurement making its inventory more attractive to national advertisers.  Magna Global estimates a 4.6% CAGR from 2022-2025 for the out-of-home ad market, led by a 13.4% digital CAGR.

CCO owns traditional outdoor billboards, digital screens, airport, street furniture and transit displays.  Digital accounts for roughly 30% of the business and is growing faster than the remaining 70%.  Digital ads allow for better targeting and higher rates.

North America (53% of 2020 revenue) is the more attractive, higher margin business while Europe (43% of 2020 revenue) has a larger percentage of urban furniture displays and is focused on dense city centers.  The Other segment includes assets in Latin America.

Clear Channel was acquired by Bain Capital and Thomas Lee in a large LBO in 2008, and the current outdoor business, CCO, was spun out to iHeartMedia creditors via an IPO in 2019.  Under PE ownership the balance sheet was levered up, and a global pandemic in the year following year exacerbated these issues.

The global outbreak of COVID, complete with lockdowns in all countries CCO does business, was not bullish for fundamentals of an outdoor advertising company.  Comparisons to 2019 make sense as mobility levels return to, and in some cases, exceed 2019, and outdoor advertising is a secular grower not just a re-opening trade in a middling industry putting up impressive numbers off of a low 2020 comp.

Historic CCO Issues:

The company has a large amount of debt has been poorly managed in the past, in our view.  In addition, CCO has a unique corporate structure, as it is the only major scaled out-of-home advertising player with operations in Europe and North America.  The company doesn’t pay a dividend, like some of its REIT peers.

Entry point

CCO announced a strong earnings report on July 29, with the added kicker of a management transition that doesn’t appear to be getting as much attention as we think it should.  Results for the second quarter were above estimates and showed strong year/year growth in each of the three months.  Management guided the second half of the year to 95% of 2019 levels, up from the prior 90%.  All regions reported improving numbers, though the airport business remains well off 2019 levels.

Management change

In our view, even more important than the improved business outlook, CEO William Eccleshare announced his exit as CEO, and will transition to a newly created role at the end of the year.  Eccleshare has been with CCO since 2009 and I don’t get the impression many investors are disappointed by the news.  The new CEO, Scott Wells, is currently CEO of the America’s business.  Prior to joining CCO in 2015, he was a partner at Bain and worked with the company through the LBO period.  Given the America’s is the better segment where all of the technology innovations originate from, the appointment of Scott to the CEO role was not a surprise but what was interesting was the new role for current CEO Eccleshare.

"With the business showing clear signs of recovery, I believe now is the right time to implement our succession plan and for me to transition from the operational leadership of the business and assume the new role of Executive Vice Chairman, as of January 1, 2022, supporting the management transition and leading strategic M&A activity.” 

We think this is the first step towards a sale of the European business, as Mr. Ecclestone has been more involved on the European side of the business while the new CEO exclusively runs the America’s business.  With a leveraged balance sheet and an asset that can be monetized, the creation of an entirely new M&A role jumps off the page.  The transition from CEO Eccleshare to CEO Wells seems like a clear changing of the guard from a Euro centric CEO to an America’s focus.

From the 2015 Press release announcing Scott Wells as CEO of the America’s:

“The Company also announced that William Eccleshare has decided that, in order to intensify his focus on the increasing potential of the international outdoor advertising market, he will become Chairman and CEO of Clear Channel International to build on the company’s current momentum and drive its strategy for long-term profitable growth.”

Proxy

Mr. Eccleshare, who is a citizen of the United Kingdom, participates in a private pension plan (not sponsored by Clear Channel Outdoor) and, pursuant to his employment agreement, is entitled to have the Company contribute a portion of his salary to the private pension plan.

Other notes

On the most recent call Mr. Eccleshare reiterated that they have in the past spoken about selling lower margin business units and could look to do so in the future.  Re-listening to the June 3 presentation at the Cowen conference, one doesn’t come away with the impression the new incoming CEO is dialed in on the European business unit.  At the four minute mark he makes reference to thinking Europe had the same business strategy to the U.S. in the midst of COVID crisis, and throughout speaks in more vague terms when referencing the European business. 

Reading the tea leaves this appears to be a – tell me you’re going to sell Europe without telling me you’re going to sell Europe – type of deal.  We are under no delusions that this is the first suggestion to sell a unit to pay down debt – but the management change appears to be a definitive first step.  The outgoing CEO has all the ties to the European business, and is moving into a newly created M&A role for a company that has two distinct business units and needs to reduce leverage on the balance sheet.  The incoming CEO has spent all of his time running the America’s unit, and would presumably like a cleaner balance sheet for career risk mitigation and a simplified investment story.

Valuation

In some ways this is a fun with spreadsheet numbers on a levered equity stub in which we’re expecting a divestiture.

If business momentum continues and CCO is close to 2019 levels by the end of 2021, we think it’s possible next year is 102% of 2019 , and that they can sell Europe for 10-12x, delever the balance sheet with the proceeds, and the US can rerate to an Outfront Media / something south of Lamar multiple and the stock should double from current levels.

The above might read like we’re planning to hit the Superfecta at Saratoga this weekend, but we think the strategic process was put into place yesterday with the management transition and that there is high correlation to the events in the sequence above (i.e. if they sell Europe proceeds will definitely go to debt pay down and the multiple will improve).

In a status quo scenario you own a highly levered re-opening security with improving fundamentals and the hope that one day strategic actions will be taken.  Depending on your outlook that may or may not be interesting. 

Risks

CCO is a heavily levered cyclical with net debt to EBITDA of 15.8x based on 2021E and 9.6x based on 2022E.  The company is heavily exposed to economic activity and any additional COVID-19 variants / lockdowns in the US or Europe.

Mitigants – the company has done a good job pushing out covenants; in the current monetary environment it is almost impossible to go bankrupt; fundamentals are improving and the management changes should improve operations and open the door to a transformational divestiture; expectations and valuation reflect troubled past.

Management are not large shareholders and therefore might not be incentivized to sell off a business unit to shrink the company.

Mitigants - CEO Wells will get a new comp package soon and the creation of a new role should also allow for a new comp package for outgoing CEO Ecclestone, with his role in M&A a change of control package would make sense; Ares took a large stake last year and probably will exert its influence in terms of what the business and balance sheet should look like moving forward. 

Catalyst

Changes to executive comp for new CEO and new role of Executive Vice Chairman

Business continues on current trajectory leading to reasonable bid/ask in sales negotiations

Sell European business

Use proceeds to pay down debt

Convert to a REIT

Initiate dividend to expand shareholder base