Not long after his tenure as CEO of iHeartMedia began in 2011, Bob Pittman ordered a complete re-imagination of the New York headquarters. He hired a designer he met at counterculture event Burning Man who brought in architects, acoustical engineers, and lighting consultants.
The team transformed three floors of a Midtown high-rise into a Kubrickian spaceship, with modular fiberglass pods, exposed ducts, laser displays, and a long, white tunnel with video images projected on streams of mist.
Soon after the move, Pittman called an all-hands staff meeting. According to a company insider, staffers were given brochures on how to keep the office looking sleek and new. Employees were not to eat at their desks, nor were they allowed to have plants or display family photos.
The instructions met with some eye-rolling, but the emphasis on appearance was typical for Pittman, a marketing genius hired to bring a “new media” makeover to the nation’s largest radio conglomerate. Under Pittman’s leadership, the company changed its name from Clear Channel — an outdated reference to a collection of AM radio frequencies — to iHeartMedia, a name derived from the company’s smartphone app. He also poured resources into concerts and the streaming business.
At the same time, Pittman was facing the massive burden of $20.5 billion in debt, the product of a private equity takeover in 2008. The hope was that by transforming iHeartMedia into a multiplatform digital brand, Pittman could lead the company out of its financial wilderness.
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Six years into his tenure, that prospect is looking shakier than ever. The company is fighting its debtholders on several fronts in court. In December, it skipped a payment to one of its subsidiaries, and ratings agencies warned that its balance sheet had become unsustainable. In 2019, $8.3 billion in debt comes due, and the company appears to have no realistic way to pay it off.
“They’ve got a ticking time bomb,” says Jude Gorman, general counsel of Reorg Research, which analyzes distressed companies. “They clearly thought they had a path, and so they gave it a shot. It didn’t work out.”
While iHeart says it is working hard to address the balance sheet, many analysts expect it to declare bankruptcy in the next year or two. One board member admits to Variety that a restructuring — either in or out of court — is inevitable.
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| Tim McDonagh for Variety |
“There will be a deal of some kind, at some point, that is the best that can be achieved under the circumstances,” says Irving Azoff, the veteran music executive who serves on iHeart’s board but doesn’t claim to speak on the company’s behalf. “You’re correct that a day of reckoning appears to be coming. That’s no secret.”
Pittman has declined comment through an iHeart representative.
The radio business is a relic of a simpler time in corporate America. In the middle of the 20th century, the industry was heavily regulated and strictly local. No company could own more than 40 stations total and no more than two AM and two FM stations per market. Radio operators were pillars in local charities and service clubs, much like the car dealers who bought huge blocks of radio advertising.
That changed rapidly with the federal deregulation of 1996, which dramatically relaxed ownership rules. A decade of consolidation resulted, with a few owners taking on debt to finance rapid growth. At the end of it all, Lowry Mays was sitting at the top of the heap. Mays, who launched Clear Channel with a single station in San Antonio in the early 1970s, wound up with more than 1,100 stations.
In 2006, the Mays family agreed to sell the company to two private equity firms, Thomas H. Lee Partners and Bain Capital, for $19 billion. Under the deal, the company was required to sell off more than 400 stations. It now owns about 860 stations nationwide.
By the time the deal closed in 2008, it was becoming clear that it was a disaster. The global recession was sapping advertising revenue; at the same time, traditional ad dollars were migrating to digital players like Google and Facebook. According to the Radio Advertising Bureau, industry revenue dropped 9% in 2008 and 18% in 2009.
In keeping with the model of private equity, the owners had expected to tidy up the business, trim expenses, and sell it for a profit within a few years. That was no longer going to happen. So instead, they turned to Pittman and asked him to engineer a miracle.
Pittman was an industry legend. From a humble start as a teenage deejay in Mississippi, he quickly became a brilliant program director at radio stations in Chicago and New York before joining the team that founded MTV. That network became the Snapchat of its day — a runaway success that made no sense to anyone over 25. Pittman, still in his 20s, was its public face, explaining the TV consumption habits of young people in media profile after profile.
Pittman emerged as a world-class marketer and self-promoter. He was named a runner-up for Time magazine’s Man of the Year in 1984, and was often credited as MTV’s “inventor,” a
controversial designation because, some observers have carped, it ignores contributions of equal weight from other executives.
In the mid-’90s, he became a top exec at companies as varied as Six Flags and Century 21 Real Estate before settling in at AOL. There, he set lofty sales targets that powered the company to Internet dominance, and helped engineer the mega-merger with Time Warner. As the combined company foundered, he sold off $94 million in stock before exiting in 2002.
By 2010, he was running the Pilot Group, his own venture firm, as well as an ultra-premium tequila company in Mexico, and traveling the world in high style. He was also ready to jump back into operations, and a return to radio seemed a perfect opportunity.
Clear Channel hired him for $2.65 million per year in salary and bonus and agreed to lease a private jet for Pittman’s use. The catch? The jet already belonged to Pittman. Clear Channel agreed to pay him $3 million over six years — plus upkeep and insurance — to ferry him around the world in his own plane. The company also reimbursed him for tens of thousands of dollars in helicopter expenses.
Pittman brought in a team of executives, including veterans of his earlier ventures. He hired John Sykes, an MTV co-founder who was working at the Pilot Group. He recruited Rich Bressler, whom he knew from Time Warner and AOL, and who — as a Clear Channel director — had originally wooed Pittman to the company.
True to his AOL roots, he emphasized the power of digital. Instead of simply selling radio time, sales reps across 150 domestic markets were given new marching orders to pitch sponsors on the company’s multiplatform opportunities. Some reps found that local advertisers weren’t that interested in streaming ads, seeing the buy as more of an add-on than a value product.
| “You’re correct that a day of reckoning appears to be coming. That’s no secret.” |
| Irving Azoff |
Part of the problem was — and is — that the company doesn’t understand how to monetize its digital audience, says Russ Gilbert, a consultant who headed digital operations for Clear Channel in the early 2000s.
“I haven’t seen any innovation on the ad side this entire time,” Gilbert says. “How are they using digital to increase the value of the advertising they sell? They’re not.”
But Bressler, Pittman’s second-in-command, says the strategy has been essential to delivering 15 straight quarters of revenue growth.
“We’ve been able to break down the silos,” Bressler tells Variety. “We’ve been able to deliver an experience to advertisers and a return on investment that no one else can.”
In addition to expending significant resources on the iHeartRadio app, Pittman has ramped up the company’s events business, launching the iHeart concert series. Both initiatives have benefited from tremendous promotion on iHeart radio stations, but some insiders grumble that neither has turned a significant profit. (The company does not break out performance by division.)
The concerts strike some at iHeart as simply a way for Pittman and his friends to relive their glory days at MTV.
“It’s largely driven by vanity,” one former iHeart exec says. “He likes hanging out backstage with stars. This is a lifestyle choice for Bob. It’s not a business plan.”
Pittman also began throwing lavish parties at annual ad-industry festival Cannes Lions. Dozens of executives and their assistants would be flown to the French Riviera, where advertisers were treated to exclusive concerts by the likes of Sting and Elton John.
Pittman’s supporters argue that these efforts have delivered a real return, presenting iHeart as a dynamic, innovative company.
“This is where Bob is a genius,” another Pittman supporter says. “You have to do things in the market to get attention.”
Pittman has often talked about the challenge of avoiding the bureaucracy typical of large organizations. “This is why big companies are all fucked up, and small [ones] aren’t,” Pittman told a reporter for Re/Code in 2014, in an unguarded moment at Burning Man, which he attends regularly. “The consensus style of business is great for a factory line, but not for innovation. And worshipping dissent — that’s Burning Man.”
But those who came up through old-school radio had come to see Pittman’s new-age approach as a distraction from the core broadcast business — which they considered the only profitable part of the company.
As he had done at AOL, Pittman set ambitious sales targets at the stations. Reps in small towns were cutting rates and selling more inventory, so listeners heard more advertising per hour. Stations also endured repeated layoffs — tough for some to swallow when Pittman and his team were partying in France.
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| source: sec filings |
While they saw the virtue in running a tight operation, some executives said that Pittman’s team began to “burn the furniture.” In 2015, iHeart sold most of its radio towers to free up cash and entered into leaseback deals with the new owners. It also sold and leased back its San Antonio office building. (Officially, the company is still headquartered in San Antonio, though Pittman and his team work in New York.)
Pittman, now 63, has spoken of himself as an idea guy. In recent years, according to executives who have worked with the company, he has turned over more operational control to Bressler, who serves as president, CFO, and COO.
The company strongly disputes this, saying Pittman is as deeply engaged as ever. But that engagement often comes from a distance, as he jets everywhere from Barcelona to Zurich to conferences or events such as Further Future, a desert get-together many call “Burning Man for billionaires.”
At last summer’s event, Pittman appeared on stage in a turban and sunglasses, and delivered a discourse on the value of employees generating great ideas. “If life is about looking for epiphanies and insights, there is no better place than communities like this and Burning Man,” he said, according to The Wall Street Journal.
John Lund, a veteran consultant in the radio industry, calls Pittman a big thinker. “Bob has done really well in life,” says Lund. “He has a plane, and he has homes in a lot of places. I think he has realized that it’s not that he has to work 60 hours a week to make things happen. You have to have great ideas. And he is a really smart guy.”
The ultimate goal, insiders say, has been to present iHeart to Wall Street as a tech company. When Pittman’s team first arrived, it calculated that the company’s stations reach 240 million “unique” listeners per month — an attempt to translate the power of radio to a digital metric. More recently, its marketers have talked up the billions of “social impressions” generated by the iHeartRadio Music Awards.
The logic was that a good radio company might be worth six or eight times its cash flow. But if it were seen as a tech company, it might be valued at a multiple of 10 or 12.
That strategy has its limits. iHeartRadio is the third-ranked streaming app, with 300,000 average active sessions as of November. But Pandora and Spotify are far ahead — with 2 million and 1.3 million sessions, respectively. More to the point, neither is profitable.
When Pittman took over Clear Channel in 2011, it was trading at about $6 a share. Since late 2015, it has been hovering around $1. Revenue has been relatively flat at $6.3 billion annually. Last week, iHeartMedia reported a quarterly profit — its first in seven years —thanks to the sale of its billboard business in Australia. But the company’s annual report also warned of the potential for bankruptcy.
For the past year, iHeart’s financial experts have been engaged in a slow-moving chess match with its debtholders. One strategy was to buy back some of the company’s debt, which was trading in public and private markets at a steep discount.
In December 2015, the company transferred 100 million shares of Clear Channel Outdoor, its billboard subsidiary, to another subsidiary that was not restricted from using the stock to repurchase iHeart debt. But that triggered protests from bondholders who threatened to issue default notices, which would speed up due dates on billions in debt and potentially force iHeart into bankruptcy court.
In March 2016, iHeart sued in state court in San Antonio to block the bondholders from issuing the notices. In a court filing, the bondholders alleged that iHeart was engaging in a series of financial maneuvers to weaken their bargaining power and to stave off “an inevitable bankruptcy.”
| “They’ve been extremely sharp at figuring out ways to financial-engineer [debt] to make it to the next year.” |
| Philip Brendel |
A judge ruled in iHeart’s favor in May, giving it much-needed breathing room. The company went forward with the discounted debt purchase, while the debtholders filed an appeal, which is still pending.
In December, iHeart failed to pay $57 million in debt to its own subsidiary in a move designed to avoid having to provide additional collateral to other debtholders. The company again went to court in San Antonio to defend the action, in a case that’s also pending. In yet another case, iHeart is suing its bondholders for damages over the threatened default notices.
“They’ve been extremely sharp at figuring out ways to financial-engineer [debt] to make it to the next year,” says Philip Brendel, an analyst at Bloomberg Intelligence. But, he notes, $5 billion of the $8.3 billion is due in January 2019. “They might be at the end of the rope.”
Bressler declines to comment on how the company expects to handle its looming debt, other than to say iHeart is focused on performance.
“We’re being very aggressive in transforming the company on an operating basis,” he says. “We’re not gonna stop until we get a better balance of debt and equity in the capital structure.”
There seems to be little doubt that iHeart is headed for a restructuring of some sort, either in bankruptcy court or through a negotiated settlement. The most attractive option may be a prearranged bankruptcy, in which the major creditors would agree to a reorganization plan ahead of time. Such a deal likely would entail the creditors trading their debt for equity in the new company. Given the large number of creditors involved, any such deal would be a herculean undertaking.
“In a complex restructuring, you can’t keep everyone happy,” says Azoff. “But the company has hired very experienced professionals to try to make sure there’s an even-handed solution for everybody.”
iHeart has recently taken steps to keep the management team in place. In January, Pittman was awarded a $1.75 million retention bonus and promised an additional $7 million if certain metrics were achieved in 2017. Bressler was given an identical retention bonus and a $3 million performance bonus.
Azoff argues that Pittman and Bressler have “performed miraculously” in spite of the company’s debt problems. The bottom line, he says, is that iHeart is an “incredible company” with a “terrible balance sheet.”
As the nation’s biggest radio broadcaster, iHeart’s woes are felt throughout the industry. Larry Wilson, chairman of Alpha Media, which owns or operates 250 stations, has complained publicly that iHeart creates a perception problem for radio. “Terrestrial radio is alive and well,” he tells Variety. “We love it, and it works for advertisers.”
He counts Mays as a mentor, and says he’s friendly with Pittman and Bressler as well. “They’re good guys, and Godspeed to them if they can work through this,” he says. “They’re throwing a lot of Hail Mary passes. Hopefully one of them gets caught.”