Company: Clear Channel Outdoor (CCO)
Business: Clear channel outdoors is an out-of-home advertising company providing a variety of advertising services including through billboards, street furniture displays, transit displays and airport displays. In addition, the company sells street furniture, provides cleaning and maintenance services, and operates public bicycle programs. Clear Channel is divided into the following segments, which account for the following revenue share: Americas (45%); airports (10%, in US and Caribbean); Europe North (23%); Europe South (19%); and other (3%, including Latin America).
market value: $661 million ($1.37 per share)
Activist: Legion Partners
Percentage ownership: 5.08%
average cost: $1.98
Comment from activists: Legion is an activist investor whose managing directors are Chris Kiper, formerly at Shamrock Activist Value Fund, and Ted White, formerly at European activist fund Knight Vinke. Legion prefers to do its activist work behind the scenes, resorting to proxy fighting when amicable talks don’t go well. The Company has extensive experience with consumer retail businesses.
What’s up?
Legion sent a letter to Clear Channel’s board of directors expressing concern about the scope and pace of the company’s current strategic review process. The company also argued that the board needs to consider a broader strategic review process, including possible divestitures of other non-core assets and select US assets, or a sale of the entire company.
Backstage
CCO is one of the largest and highest quality out-of-home (“OOH”) advertising companies. The OOH business has long-term growth prospects and a strong business advantage, especially in billboards. Clear Channel effectively has two divisions – Americas and Europe, each with very different business models and valuations. The European business operates on fixed, fixed-term contracts with municipalities that are repaid when due. Because of this, the European company trades at around eight times earnings before interest, taxes, depreciation and amortization. Most of its U.S. business consists of billboards, which it owns and accordingly trades closer to 13 to 15 times EBITDA. Additionally, these billboards are currently being digitized, allowing each billboard to generate approximately four times more revenue and six to ten times more EBITDA. However, this conversion will require the approval of each community and will not be a quick process.
Despite its market-leading position, Clear Channel’s shares have significantly underperformed since it split from iHeartMedia in May 2019. CCO is currently trading 79% below its pre-deal share price and 65% below its post-breakup peers. CCO’s underperformance is related to several factors, but is largely due to the company’s high leverage, which increases volatility, and its sub-optimized conglomerate structure, which increases complexity. This has led to a market misunderstanding as to the intrinsic value of the underlying assets, which should be significantly higher than the current share price implies. Legion Partners performed a sum-of-the-parts analysis based on 2024 Adjusted EBITDA estimates implying a gain of 230% (implied valuation of $3.57 compared to $1.08 on March 12). May). The company reckons this could be released as the company transitions to an all-U.S. company and reduces its leverage. Legion emphasized that while multiples for listed OOH assets have fallen recently due to possible macroeconomic slowdown concerns, multiples in the private market for OOH assets have shown to be resilient. Legion believes that industry consolidation is a profitable endeavor for any OOH player given rapid synergies.
Legion has been actively working with the Company for two years and most recently had a meeting with management on May 12, at which Legion expressed concerns about the speed and scope of the Company’s strategic review process. In particular, Clear Channel has prioritized the sale of assets in Europe South, although the significantly larger part of the business is in Europe North. Additionally, since the start of this strategic review of Europe in December 2021, Clear Channel has announced the sale of businesses in Italy, Spain and Switzerland. This is worrying because the value of a company with fixed contracts will fall as the contracts get closer to maturity. Accordingly, Legion is pushing for an accelerated pursuit of a sale of the European business.
Legion sees two potential avenues for value creation here. First, the company could sell its European and Latin American businesses and become a US-only company. While there is little value for Europe-South and Latin America, Legion believes the Europe-North business could fetch $500-600 million if sold, which could be used to deleverage the company. Additionally, the sale of Europe-South and Latin America, while not generating significant revenue, would remove a distraction and allow management to focus on its US crown jewel. As a sale of the European business would not be sufficient to optimally deleverage the balance sheet, Clear Channel may also consider selling selected US assets. Legion would like management to pursue this plan while also considering a possible sale of the entire company. Such a sale would be more complex and potentially less lucrative than the other plan, but would have the benefit of certainty.
CCO first announced its strategic review of its European business in December 2021, and very little came to fruition. It’s unclear why that is and what the deadlock is, but if this continues Legion will want to be in the boardroom to get a better view. Legion has shown in the past that it is not afraid to call in proxies when it deems it necessary. We have no doubt that Legion will seek board seats if the company’s board is reluctant to go down either path outlined. However, the company has plenty of time to make this decision as the nomination window will not open until January 4, 2024.
Ken Squire is Founder and President of 13D Monitor, an institutional research service on shareholder activism, and Founder and Portfolio Manager of 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.