Relevant Items:Sirius XM Satellite InitiationQ2’23 Media Earnings Summary
Within the sector, we have recently launched coverage on Sirius XM Satellite
and provided a detailed summary of key takeaways from the second-quarter 2023 media earnings summary
Current State of Advertising
The Standard Media Index
reported a major pickup in year-over-year advertising spending, although against a very favorable comparison.
Television Broadcast Sector Updates
Ongoing Debate: Is Television Still Relevant?
Local television broadcast management teams have long touted the value that their local news coverage provides to the communities they serve. With the significant decline in local newspaper coverage, with approximately 2,500 estimated to have closed since 2005
, local television broadcasters have sought to fill the void by increasing the number of hours of local news coverage. Several free ad-supported hyperlocal options are now available across broadcasters’ markets and a wide array of connected TV platforms and devices, including:
- Hearst Television offers “Very Local” TV, and
- Sinclair Broadcast Group offers “STIRR.”
Recently, Cox Media Group announced the launch of their hyperlocal streaming service “Neighborhood TV
The value proposition for such hyperlocal news products is that they are designed to deliver highly specific news to specific “zones,” which Cox Media Group defines as areas with only a six-to-eight-mile radius, as opposed to the broader news content curated for the broadcast station’s designated market area, or DMA.Update on Cord-Cutting
E.W. Scripps is addressing cord-cutting concerns through its embrace of accelerating consumers back to the traditional over-the-air, or OTA, method of consuming local television broadcast content through its relaunch of Tablo
, a device that integrates with OTA antennas in order to provide free access to local stations within a DMA, more than 40 free ad-supported television, or FAST, channels, a built-in DVR, and an ability to link to several popular connected TV, or CTV, platforms for additional content options.Political AdvertisingBIA Advisory Services
recently published an updated forecast, saying that it is now expecting local political ad spending of approximately $534 million for 2023. This figure is significantly ahead of the spending in 2021 and 2019, similar off-political years. Local political ad spending totaled $410 million in 2021 and $254 million in 2019. As shown below, local television is expected to garner a plurality of the 2023 political dollars.
However, this year will introduce a new advertising channel for political ad spending, as X (fka Twitter) will allow political advertising
on the platform for the first time since 2019.More Sports Coming Back to Broadcast TV
As we highlighted in our second-quarter Media Earnings Summary
, Warner Brothers Discovery, or WBD, was working to exit its regional sports network, or RSN, branded as AT&T SportsNet. Recently, WBD announced
the following in relation to its properties within AT&T SportsNet:
- Pittsburgh Pirates (Major League Baseball, or MLB): Needs to determine its path forward at the end of the MLB season;
- Pittsburgh Penguins (National Hockey League, or NHL): Sold rights to Fenway Sports Group (which also owns the Penguins franchise);
- Colorado Rockies (MLB): Needs to determine its path forward at the end of the MLB season;
- Houston Astros (MLB): In talks to sell rights back to MLB; and
- Houston Rockets (National Basketball Association, or NBA): In talks to sell rights back to the NBA.
Thus, there remain opportunities for local television broadcasters to obtain full rights to four of the above franchises or potentially partner for partial rights.Is the “Bundle” Coming Back?
AMC Networks announced that it would use its fellow streaming platform, WBD’s “Max,” as a promotional vehicle for its own “AMC+” streaming platform, providing key AMC content for a two-month period to Max subscribers
starting in September. Perhaps this will be the first step toward the often-discussed speculation the sector needs to further consolidate.Writers’ and Actors’ Strikes
The ongoing writers’ and actors’ strikes do not appear to be nearing a near-term resolution
Radio Sector Updates
Despite Superior Reach, Large National Advertisers Have Been Tuning Out
The most recent Edison Research quarterly update, the second-quarter “Share of Ear,” reinforces the dominance of AM/FM radio in terms of time spent relative to other ad-supported audio options. However, based on the dismal third-quarter pacing information offered during the most recent radio earnings calls
, advertisers remain unfazed.
However, advertisers appear to be paying closer attention to the significant increases in time spent listening to podcasts, prompting increases in either plans to begin advertising on podcasts or at least evaluate advertising on podcasts.
Outdoor Advertising Sector Update
Given that the ongoing writers’ and actors’ strikes do not appear to be nearing a resolution
, it is important to note the revenue exposures of both the entertainment vertical and the New York/Los Angeles markets for the outdoor credits:
- Lamar Advertising: Minimal exposure as the company highlights the entertainment category broadly as only 4% of billboard revenue.
- Outfront Media: Significant exposure as approximately 20% of the company’s revenue is derived from the entertainment category and New York City and Los Angeles are the two largest markets, combining for approximately 34% of total revenue.
- Clear Channel Outdoor: Above-average exposure as approximately 21% of total U.S. revenue is from New York City and Los Angeles.
Movie Theater Sector Update
AMC Highlights Q2’23 Earnings
AMC Entertainment reported
second-quarter 2023 revenue of $1.35 billion, up 16% year over year. This represents roughly 90% of second-quarter 2019 revenue. Attendance grew 12% year over year to 66.4 million, which represents 69% of 2019 levels. Adjusted EBITDA in the second quarter was $182.5 million, or 13.5% of revenue, compared with $106.7 million, or 9.1% of revenue, a year earlier.
On the company’s second-quarter earnings call
, AMC CEO Adam Aron highlighted a robust second-quarter box office and a “roaring hot” start to the third quarter. He said that he believes the domestic box office will continue to show strength in the second half of 2023.
If AMC is able to raise liquidity, Aron said, the first use of cash would be for deferred maintenance on theaters after the company cut capital expenditure spending significantly during the pandemic. He said AMC would look to add new theaters to its network.
Aron noted that since the onset of the pandemic, the company has been able to bring select theaters into its network at the “attractive” prices of 3x to 4x EBITDA. He added that AMC would evaluate M&A opportunities including buying theater chains only if possible “at bargain basement prices,” or more creative M&A options if AMC is able to raise “lots of cash.”
Free cash flow in the second quarter was negative $62 million, based on negative $13.4 million of cash flow from operations and $48.6 million of capex. As of June 30, AMC reported liquidity of $643 million, comprising $435 million of unrestricted cash and $208 million of revolver availability.
AMC CFO Sean Goodman said that the Delaware Court of Chancery is reviewing its proposed settlement in its stockholder litigation
related to the pending AMC preferred equity units’, or APEs’, conversion and reverse stock split.Shareholder Litigation
Vice Chancellor Morgan Zurn of the Chancery Court on Aug. 11 released a memorandum opinion approving the revised settlement
in the AMC Entertainment Holdings stockholder litigation
, a step toward the company converting its APEs into common stock. The court also denied a pre-emptive request
from AMC shareholder and settlement objector Rose Izzo for a stay preventing the conversion while Izzo pursues an appeal of the settlement’s approval before the Delaware Supreme Court.
On Aug. 14, AMC published
a letter to stockholders from Aron signaling the company’s intention to implement proposals approved by shareholders including an increase in common shares and a reverse 1-for-10 split of AMC shares, “which together will permit the conversion of all outstanding APE units into AMC common shares.”
On Aug. 21, the Delaware Supreme Court issued
an order denying Izzo’s request to reinstate the status quo order that had prevented AMC Entertainment Holdings from converting its APEs into common stock during the course of the stockholder litigation.
In-Court Bankruptcy Coverage Updates
Diamond Sports Group / Sinclair Broadcast GroupAug. 1 RSA Business Plan Milestone / Cleansing Materials
DSG’s March 15 RSA
included an Aug. 1 milestone by which the debtors were to deliver an agreement with required consenting creditors on a go-forward business plan. On Aug. 1, DSG reported
in cleansing materials that “management evaluated numerous scenarios as part of developing a business plan which resulted in a range of outcomes but have yet to agree upon an ‘Acceptable Business Plan’ with the requisite parties under the Restructuring Support Agreement, dated March 15, 2023, by the August 1 milestone.”Plan Exclusivity Extension / Mediation
from both the official committee of unsecured creditors and the ad hoc group of first lien creditors to DSG’s requested 120-day extension of its exclusive periods to file and solicit a plan, Judge Christopher Lopez entered an agreed order
on Aug. 10 granting an 80-day extension of DSG’s exclusive periods to file and solicit a chapter 11 plan through Sept. 30 and Nov. 29, respectively.
At an Aug. 17 hearing, Judge Christopher Lopez granted
DSG’s emergency motion to appoint Judge David R. Jones and Judge Marvin Isgur as mediators to facilitate the debtors’ reorganization. DSG seeks to mediate all plan issues, according to an emergency motion filed on Aug. 15.
The debtors said that “various case parties,” including the UCC and three organized ad hoc groups - the ad hoc first lien group
, the ad hoc secured group and the ad hoc crossover group - have indicated that mediation could help “sort through myriad issues” confronting the debtors’ path toward reorganization. The debtors said the meditation request is urgent as they are operating “under a tight timeline,” which requires that substantial plan progress occur prior to the start of the upcoming NBA and NHL seasons.Complaints Against Sinclair, JPMorgan
DSG on Aug. 16 filed
a redacted version of its fraudulent transfer complaint against ultimate parent Sinclair Broadcast Group Inc. and related entities. The complaint, originally filed
under seal on July 19 and joined
by the UCC, alleges that for the two-and-a-half-year period that Sinclair “owned, controlled and dominated” the debtors’ RSNs, it pursued a “nefarious strategy” of “raiding” Diamond’s “coffers” of more than $1.5 billion in cash and other assets.
Sinclair responded to the complaint by asking that the bankruptcy court order DSG to immediately assume or reject its 2019 management services agreement, or MSA, with Sinclair. A hearing on the motion is scheduled for Oct. 2 at 3 p.m. ET.
Six days later, on Aug. 21, DSG unveiled
its previously sealed fraudulent transfer complaint
against two JPMorgan entities. According to the debtors, Sinclair siphoned dividends from the debtors while they were insolvent in order to redeem $850 million of JPMorgan’s preferred equity units, which were the debtors’ lowest-priority securities
but which bore redemption obligations guaranteed by Sinclair.AudacyChapter 11 Preparation
Audacy is preparing
for a potential chapter 11 filing to implement a debt restructuring, according to sources. The radio broadcaster presented two proposals to restricted lenders, including amending and extending the first lien debt and equitizing the second lien, or equitizing both tranches, the sources said.
A restructuring may include debt equitization and take-back paper, Reorg reported earlier
. Plans may change and the company may restructure its balance sheet on an out-of-court basis, the sources added.
Reorg Coverage Initiations and Deep Dives
Sirius XM Satellite
As reviewed in our initiation report HERE
, in our view, the most important consideration for credit investors is how Sirius XM and its largest equityholder, Liberty Media, formally “rationalize” Liberty Media’s 82% equity stake. We believe this is the most likely scenario for Liberty Media to transfer 100% ownership of its Sirius XM common stock to its shareholders on a tax-free basis. We provide below an illustration of such a transaction, modeled after the 2009 DirecTV RMT transaction.
Illustrative Liberty Media Reverse Morris Trust Transaction With Sirius XM Satellite
Sources: Company filings, Reorg estimates
We believe this will be the most likely scenario, as it is tax-efficient from an equity perspective and adds only modest leverage from a credit perspective. Further, Liberty CEO Maffei said on the company’s second-quarter earnings call
that “any combination, though it might have for a short period of time a relatively high leverage amount or leverage 4 to 5 times, we know that that cash flow generating capabilities would allow the combined entity to pay that debt down back to the 3.5x target relatively quickly.” On the basis of our estimates below, an RMT transaction would increase SIRI leverage by approximately three-quarters of a turn into the low 4s, consistent with Maffei’s comments.
Reorg Coverage of Media Capital Markets
Clear Channel Outdoor priced $750 million - upsized from the proposed $500 million - 9% five-year senior secured notes to address a portion of its 2026 term loan. See our primary note HERE
and covenant analysis regarding the new secured notes HERE
Local TV Broadcasting Relative Value
Sources: Company filings, SolveQuotes
Radio Broadcasting Relative Value
Sources: Company filings, SolveQuotes
Outdoor Advertising Relative Value
Sources: Company filings, SolveQuotes
Full financials for Fundamentals by Reorg subscribers are being updated HERE. To request a trial of Fundamentals by Reorg, please email email@example.com.