As it angles to purchase a stake in iHeartMedia, Liberty Media CEO Greg Maffei said Thursday that his company has already bought enough of the broadcaster’s debt to fund its portion of an equity offering it made last weekend. Speaking during Liberty’s fourth quarter 2017 earnings call, Maffei also elaborated on potential synergies among iHeart, SiriusXM Radio and Pandora.
The proposal Liberty put on the table, which apparently has not been accepted or rejected, calls for Liberty to pump $600 million and Sirius XM to invest $560 million into iHeart. Under the proposal, Liberty and Sirius XM would split 40% of newly issued shares in the recapitalized company. The investment firm also proposed that it take four seats on iHeart’s board of directors. Maffei said that the move would be made through the media conglomerate’s SiriusXM division, of which Liberty owns 69%.
Maffei, for the first time, publicly acknowledged what has been widely reported by Inside Radio and other publications that Liberty has been in discussions with iHeart’s creditors as the broadcaster works against a ticking clock on a comprehensive restructuring of its debt. Explaining why Liberty is swooping in just as iHeart is at a critical juncture in negotiations with its lenders, Maffei said, “the opportunity with iHeart was now.”
“We believe that we and our companies have something to offer there,” Maffei said in response to questions from analysts about the proposal during the investor call. “And we have bought a position in the iHeart debt which we believe is economically attractive. And I would note that we have bought a sufficient amount of debt to fund virtually all of our proposed equity commitments.”
If Liberty’s offer is accepted, the portion of debt it purchased would be converted into equity in a recapitalized iHeart, Maffei said. Liberty bought the debt at a discount so even if its offer is spurned, it expects to make a “modest gain” from the investment.
Maffei also showed an appreciation for the large reach and undiminished staying power of broadcast radio, quoting Nielsen figures about its audience and calling the medium “relatively resilient and relatively stable” adding, “It’s a large free cash flow generator.”
Clock Ticks On Restructuring Talks
Liberty Media’s offer comes as a grace period triggered by a loan payment iHeartMedia intentionally skipped is set to expire later this weekend. The company said it had ample cash on hand to make the $106 million interest payment due Feb. 1 to a group of its unsecured noteholders but the board chose not to while iHeart’s equity holders and lenders continue to negotiate a comprehensive debt restructuring. On Thursday it opted not to make interest payments totaling $138 million due March 1 on a second note, setting in motion a separate 30-day grace period that if not met would also trigger a default. The company said in a regulatory filing that its board chose not to make the payments “as active discussions continue among its lenders, noteholders, and financial sponsors regarding a comprehensive debt restructuring.”
The Wall Street Journal, quoting people familiar with the negotiations between the company and its lenders, reports iHeart is preparing to make a chapter 11 filing as soon as this weekend. The situation remains very much in flux however, with the possibility that those conversations could result in some sort of an agreement—or the parties may opt to talk past the deadline.
The reported hang-up is whether iHeart’s current equity owners, Thomas H. Lee Partners and Bain Capital, will continue to hold an interest in the company after the restructuring is completed. The Journal says the two private equity firms are pushing to hang onto a 5.25% stake. But senior creditors led by Franklin Advisers aren’t willing to go along with that proposal. Instead, the senior creditors are angling for 95% of iHeart with the remaining interest divvied up among junior bondholders leaving T.H. Lee Partners and Bain out in the cold.
On Friday morning iHeartMedia released details of its latest offer. "No agreement has been reached with respect to the above discussions and discussions remain ongoing," it told investors adding the company "will continue to work with all of its constituents to develop a consensual transaction to allocate consideration among its various stakeholders. There can be no assurances that a consensual transaction or any agreement will be reached."
‘Substantial Synergies’ Seen In Liberty Proposal
Should the Liberty offer be accepted, Maffei told investors there are “potentially substantial synergies” to be had among iHeart, SiriusXM and Pandora, which Liberty made a $480 million strategic investment in last September. For the satcaster, the possibilities revolve around sharing personalities across broadcast and satellite radio platforms and cross-promotion. Maffei also suggested ways iHeart could be integrated into the satellite broadcaster’s forthcoming 360L receivers, which provide a two-way interactive platform between SiriusXM and its subscribers and promises a personalized listening experience, with more variety, smart content recommendations and on-demand audio. That, he said “may be able to bring strength for iHeart into the car in a differentiated way and probably protect the position that FM radio has in the car.”
With Pandora, there are opportunities to share ad technologies and leverage iHeart’s “powerful” and “substantially larger” local sales force, Maffei said. “There are potentially a range of synergies on the cost side and a range of synergies on the revenue side,” Maffei said, adding that the three platforms could be used to move listeners through “the funnel” and convert them into paying subscribers.
But while there may be numerous potential synergies, such a combination would need to win approval from a number of skeptical stakeholders. “There’s a lot of deal risk still here,” Lance Vitanza, an analyst at Cowen, told the Wall Street Journal. “I think some of iHeart’s bondholders understand the potential power of a merger between iHeart and Sirius, but not all creditors understand that.”
Maffei fielded multiple questions from analysts about what one of them referred to as this “interesting offer” and its chances of being accepted. Asked to provide a timeline, Maffei said he expects iHeart is “probably likely” to file for Chapter 11 reorganization soon, given its recent intentionally missed loan payments. Maffei said Liberty could be part of that filing “in some way, maybe not documented but agreed to in principle, or we could see it could go on for a while with some negotiations among creditors and our potential participation.”
The Liberty CEO also offered the company’s rationale for why both Liberty and SiriusXM are involved in the complicated equity offer. “While we’re highly aligned, there are some different things we both bring to the party,” Maffei said. Liberty offers what he called structuring skills while SiriusXM has operational skills.
If its offer is accepted, Maffei said Liberty has no plans to spin off the stake it would gain in the company. “Our history is we’ve tended to keep these things as part of the Liberty family,” he said.