Roderick Head ACCT 7050

9 / 2 3 / 1 2

CC MEDIA HOLDINGS TERM CASE

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TABLE OF CONTENTS

I. INTRODUCTION .............................................................................................................. 3

II. SWOT ANALYSIS ............................................................................................................. 4

III. GRID ANALYSIS ............................................................................................................... 5

IV. REPORT .......................................................................................................................... 6

V. PRINCIPAL OBSERVATIONS ........................................................................................... 15

VI. CONCLUSIONS .............................................................................................................. 20

VII. APPENDIX .................................................................................................................... 24

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I. INTRODUCTION

Private equity firms start off by raising capital commitments primarily from large

institutional investors like pension funds, foundations, and endowments, often using the

capital to buy companies with debt financing, hence the common name of leveraged

buyouts. These days, the leverage is usually on the order of 60 to 70 percent of the

purchase price, less than that of most home purchases. To increase the value of their

companies and investments, private equity funds and their managers seek ways to increase

business growth and cut costs, typically applying three types of engineering to help

increase the value of their investments: financial, governance, and operational engineering.

Financial engineering involves strongly incentivizing the CEO and top company executives,

usually requiring they invest personal monies in the company. With equity and options,

the executives usually own 10–20 percent of the company. Governance engineering

involves playing a strong corporate governance role. Private equity investors control their

portfolio companies’ boards, closely monitoring and regularly advising the company and its

executives. Most top private equity firms added operational engineering more recently,

bringing consulting and executive resources systemically and consistently to portfolio

companies. These resources might include advice on and help with pricing, sales

management, manufacturing, and procurement. Mitt Romney, a Founding Partner of Bain

Capital, pioneered the use of consulting resources (from Bain Consulting) in private equity

investments.1 In 2008, Bain Capital and Thomas H. Lee Partners (THL) took Clear Channel

Communications private in a leveraged buyout, now a CC Media Holdings, Inc. subsidiary.

This paper covers the leveraged buyout intricacies, examines corporate governance, overall

financial health, concerns from findings, and applicable recommendations.2

1 Steve Kaplan, How to Think About Private Equity,

http://www.american.com/archive/2012/january/how-to-think-about-private-equity

(January 18, 2012)

2 Clear Channel Communications

http://en.wikipedia.org/wiki/Clear_Channel_Communications

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II. SWOT ANALYSIS

Strengths

Strong outdoor advertising business enabling top line growth

Wide reach of radio broadcasting in local markets

Weaknesses

High leverage limits the ability to generate additional funding for future investments

Lack of scale limits competitive ability

Opportunities

Increasing presence of digital billboard advertising

Positive outlook for online advertising

Growing adoption for iheartradio

Threats

Significant equity investors control the company and may have conflicts of interest in the future.

Intense competition may affect the profitability and market share

Changes in regulation may affect the financial performance of the company

Economic uncertainty or deterioration

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III. GRID ANALYSIS

Corporate Governance and Ethics’ Book

Chapters CC Media Holdings Issues

Chapter 4 Board of Directors’ Roles and

Responsibilities

Significant equity investors control the company and may have conflicts of

interest in the future.

Shareholders sue company over loan from subsidiary, Clear Channel Outdoor, whose

board was alleged in a letter to be in “breach of duty.”

Chapter 8 Internal Auditors’ Roles and

Responsibilities

Company’s results have been in the past, and could be in the future, adversely affected by economic uncertainty or

deteriorations in economic conditions.

To service debt obligations and fund capital expenditures, company will

require a significant amount of cash to meet needs, which depends on many factors beyond company’s control.

Clear Channel may not be able to

generate sufficient cash to service all of its indebtedness and may be forced to take other actions to satisfy its obligations

under its indebtedness, which may not be successful.

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IV. REPORT

Bain Capital, THL, and co-investors sponsor private equity funds that indirectly

control the CC Media Holdings through their ownership of all outstanding shares of Class B

and Class C common stock, collectively representing approximately 72 percent of the

voting power of the company’s capital stock. This empowers Bain Capital and THL to elect

all but two directors, appoint new management, and approve any action requiring the

approval of the holders of CC Media Holdings’ capital stock, including adopting any

amendments to third amended and restated certificate of incorporation, and approving

mergers or sales of substantially all capital stocks or assets. Bain Capital and THL elected

directors have significant decision-making authority affecting CC Media Holdings, including

the issuance of additional capital stock, change in control transactions, the incurrence of

additional indebtedness, the implementation of stock repurchase programs, and the

decision of whether or not to declare dividends. CC Media Holdings agreed that Mark Mays

(Chairman of the Board) and Randall Mays (Vice Chairman) serve as directors of the

company pursuant to the terms of their respective amended and restated employment

agreements. 3

Every Class A common stock shareholder is entitled to one vote for each share.

Every Class B common stock shareholder is entitled to a number of votes per share equal to

the number obtained by dividing (a) the sum of the total number of outstanding Class B

common stock shares as of the record date for such vote and the number of outstanding

Class C common stock shares as of the record date for such vote by (b) the number of

outstanding Class B common stock shares as of the record date for such vote. Except as

otherwise required by law, shareholders of outstanding Class C common stock are not

entitled to any votes upon any matters presented to shareholders. Except with respect to

voting as described above, and as otherwise required by law, all shares of Class A common

stock, Class B common stock and Class C common stock have the same powers, privileges,

preferences and relative participating, optional or other special rights, and the

qualifications, limitations or restrictions thereof, and are identical to each other in all

3 CC Media Holdings, Inc. Form 10-K http://www.sec.gov/Archives/edgar/data/1400891/000119312512069208/d272839d10k.htm (February 21, 2012), 20

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respects. CC Media Holdings did not declare dividends in 2011, 2010 or 2009. The

Company has never paid cash dividends on its Class A common stock, with no future

intentions. Clear Channel’s debt financing arrangements include restrictions on its ability

to pay dividends thereby limiting the company’s ability to pay dividends.4

Clear Channel Communications owns all outstanding shares of Clear Channel

Outdoor Class B common stock, representing approximately 89 percent of the outstanding

common stock shares. Class B common stock shareholders are entitled to 20 votes per

share, and Class A common stock shareholders are entitled to one vote per share on all

votable matters. As a result, Clear Channel Communications controls approximately 99

percent of the total common stock voting power. Additionally, Clear Channel

Communications has the ability to direct the election of all Clear Channel Outdoor board

members and exercise a controlling influence over business and affairs, including any

determinations with respect to mergers or other business combinations, asset acquisition

or disposition, incurrence of indebtedness, issuance of any additional common stock or

other equity securities, common or preferred stock repurchase or redemption, if

applicable, and dividend payments. Similarly, Clear Channel Communications is

empowered to determine or significantly influence matters submitted for vote of

shareholders, including the power to prevent an acquisition or other change in control.

A cash management arrangement requires substantially all of the cash generated

from Clear Channel Outdoor’s domestic operations transferred daily into Clear Channel

Communications accounts, and Clear Channel Communications may use for its own general

corporate purposes. Clear Channel Outdoor is obligated to continue using Clear Channel

Communications’ services under a Corporate Services Agreement until Clear Channel

Communications owns less than 50 percent of the total voting power of common stock, or

longer for certain information technology services. Clear Channel Communications

provides certain management, administrative, accounting, tax, legal and other services.

The Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer fulfill the

4 CC Media Holdings, Inc. Form 10-K http://www.sec.gov/Archives/edgar/data/1400891/000119312512069208/d272839d10k.htm (February 21, 2012), 98

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same roles for Clear Channel Outdoor. If Clear Channel Communications were to become

insolvent, notes would not be accelerated, and Clear Channel Outdoor would be an

unsecured creditor of Clear Channel Communications.5

CC Media Holdings has been the subject of multiple shareholder lawsuits. In one

case, JHL Capital Group, a $1.5 billion Chicago hedge fund owning less than 1 percent of

Clear Channel Outdoor per securities filings, argued in a letter to the company dated

11/29/11, that its board members may be liable for “breach of duty” due to improperly

moving $656 million to its debt-laden parent. JHL argues that Clear Channel

Communications, the wholly owned CC Media Holdings subsidiary, is in such financial

difficulty now that it is improper to continue transferring money to it from the healthier

Clear Channel Outdoor. Concerns have also been expressed that the interest rate being

paid to Clear Channel Outdoor is below market and that the size of the transfers keep

growing. JHL reportedly believes that some of the cash should go to Clear Channel

Outdoor’s shareholders. A spokeswoman stated that the transfers pay for expenses such as

human resources, and the amount transferred in excess of those needs, $656 million,

remains as an “obligation” to Clear Channel Outdoor. Additionally, she noted that transfer

arrangements were formalized in 2005, prior to the Clear Channel Outdoor IPO. Melissa

Link, an analyst for Fitch Ratings, stated in an interview that CC Media Holdings has more

than $12 billion in debt due in 2016, further elaborating that default is a “real possibility.”

CC Media Holdings recently told investors in bond-offering papers that the $656 million

moved to Clear Channel Communications is up from $123 million two years ago and could

exceed $1 billion “in the next several years.” The transferred monies in question are in the

form of a promissory note at a 9.25 percent rate per the 10-K, versus the yields of 17.5

percent for actively traded debt of the company in trading late February. A Clear Channel

Communications representative stated that it repaid $500 million that had previously been

transferred from Clear Channel Outdoor in 2009. In support of the interest paid on the

moved monies, the representative stated that the company sold two debt offerings last year

at rates of 9 and 10 percent, albeit for senior, secured debt. While all transactions were

5 Clear Channel Outdoor, Inc. Form 8-K http://www.sec.gov/Archives/edgar/data/1334978/000119312512069197/d282145d10k.htm#tx282145_18 (December 18, 2009), 41-44

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disclosed, Mark Lebovitch, an attorney for another plaintiff at Bernstein Litowitz Berger &

Grossman LLP, says the cash transfer could be questionable because of the alleged

favorable interest rate, stating, “The directors of the company have a fiduciary

responsibility that goes beyond simply disclosing,” that money has been transferred,

flowing to Clear Channel Communications.6

A Florida pension fund, The City of Pinellas Park Firefighters Pension Board, claims

in their suit filed on 3/7/12, that Clear Chanel Outdoor’s board breached their duty over

the $650 million promissory note mentioned earlier. Lebovitch refers to the note as being

undervalued, could increase to $1 billion, and make Clear Channel Outdoor an “involuntary

source of capital.” Brett Harris, an analyst that follows Clear Channel Outdoor for Gabelli

and Co., stated that the discontent among minority shareholders is “wide.” The pension

fund also argued that Clear Channel Outdoor could receive just “pennies on the dollar” in a

bankruptcy scenario.7 According to Delaware’s Chancery Court, the loan “so significantly”

depleted Clear Channel Outdoor’s cash reserves that the company was forced to borrow $2

billion to fund a special dividend to Clear Channel and Bain Capital.8

Clear Channel Outdoor formed a committee of independent directors in December

2011 to evaluate JHL’s accusations. In a 3/1/12 response to JHL Capital, the committee’s

lawyer, Alan J. Bogdanow with Vinson & Elkins LLP, a Houston-based law firm, stated that

the money transferred between Clear Channel Outdoor and Clear Channel Communications

is in accordance with a “corporate services agreement” made in 2005 and disclosed to

investors in Clear Channel Outdoor’s IPO filings. Additionally, the letter states, “The money

6 Gregory Zuckerman, Transfers at Clear Channel in Dispute,

http://online.wsj.com/article/SB10001424052970204276304577263432206437496.htm

l (March 6, 2012)

7 Chris Nolter, Clear Channel Shareholders Sue Over Loan From Subsidiary,

http://www.thedeal.com/content/tmt/clear-channel-shareholders-sue-over-loan-from-

subsidiary.php (March 12, 2012)

8 Yamenko2, Clear Channel Outdoor Holdings, Bain Capital Sued,

http://www.dailykos.com/story/2012/03/09/1072649/-Clear-Channel-Outdoor-

Holdings-Bain-Capital-sued (March 8, 2012)

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swept by CCU is in fact a loan and not the payment of a dividend.” Since JHL Capital was

not a shareholder at the time of the IPO, the committee inferred that it “lacks standing to

challenge the arrangements.”9

Results have been in the past, and could be in the future adversely affected by

economic uncertainty or deterioration in economic conditions. Advertisers’ expenditures

tend to be cyclical, reflecting economic conditions and budgeting and buying patterns.

Periods of economic uncertainty, slowing economy or recession, may be accompanied by a

decrease in advertising. The global economic downturn that began in 2008 resulted in

advertising revenue declines across CC Media Holdings’ businesses, which had an adverse

effect on revenue, profit margins, cash flow and liquidity. Due to the reliance on local

advertisers for a significant portion of revenue, the ability to generate revenue in specific

markets is directly affected by local and regional conditions. Even if the economy is not in a

downturn, individual business sectors or markets may experience downturns, causing

advertising expenditure reductions, which also impact revenue.

Cash flow from operations is the primary source of liquidity for CC Media Holdings,

needed to service debt obligations and fund capital expenditures. While the company

believes it has enough cash on hand enabling it to meet working cash flow needs, debt

service, and other funding requirements for the next twelve months, based on current and

anticipated operation levels and market conditions, future ability to do so and comply with

the company’s financial covenants depends on operating performance and cash flow.

Prevailing economic conditions and other factors, many of which beyond the company’s

control, are key determinants. Additional financing might be needed, especially if future

operating performance and plans fall short or are inaccurate.10

9 Andy Fixmer and Devin Banerjee, Hedge Fund Clear Channel Outdoor Defends $656 Million

Transfer to Parent, http://www.bloomberg.com/news/2012-03-07/clear-channel-

outdoor-defends-656-million-transfer-to-parent.html (March 7, 2012)

10 CC Media Holdings, Inc. Form 10-K

http://www.sec.gov/Archives/edgar/data/1400891/000119312512069208/d272839d1

0k.htm (February 21, 2012), 15

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CC MEDIA HOLDINGS BOARD OF DIRECTORS

11 CC Media Holdings Inc (CCMO.PK),

http://www.reuters.com/finance/stocks/companyOfficers?symbol=CCMO.PK

Board Member Position Primary Company

Mark Mays Chairman, CC Media Holdings Clear Channel Capital I, LLC

Robert Pittman Chief Executive Officer and Director CC Media Holdings, Inc.

Lowry Mays Founder & Chairman Emeritus CC Media Holdings, Inc.

Randall Mays Vice Chairman, CC Media Holdings Clear Channel Capital I, LLC

Thomas Casey Chief Financial Officer, Executive Vice President CC Media Holdings, Inc.

John Hogan Chairman and Chief Executive Officer Clear Channel Media and Entertainment

Roberts Walls Executive Vice President, General Counsel, Secretary CC Media Holdings, Inc.

Scott Hamilton Senior Vice President, Chief Accounting Officer and Assistant Secretary

CC Media Holdings, Inc.

Irving Azoff Director Live Nation Entertainment, Inc.

Steven Barnes Director Bain Capital

Richard Bressler Director Thomas H. Lee Partners

Charles Brizius Director Thomas H. Lee Partners

John P. Connaughton Director Bain Capital

Blair Hendrix Director Bain Capital

Ian Loring Director Bain Capital

Scott Sperling Director Thomas H. Lee Partners

David Abrams Independent Director Abrams Capital

Jonathan Jacobson Independent Director Highfields Capital Management11

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KEY RATIOS AND STATISTICS

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14

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12 CC Media Holdings, Inc., Key Ratios & Statistics, https://commerce.us.reuters.com

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V. PRINCIPAL OBSERVATIONS

CC Media Holdings’ two Independent Directors are the only ones with no ties to the

company via employment, equity ownership, etc. Robert Pittman is also the Executive

Chairman of Clear Channel Outdoor. Further research on Clear Channel Capital I, LLC,

listed as Mark Mays’ primary company, revealed the following:

Key Executives For Clear Channel Capital I, LLC Mr. Mark P. Mays Chief Executive Officer and Chairman of the Board of Clear Channel Communications Age: 48 Mr. Randall T. Mays Chief Financial Officer Age: 45 Mr. Robert W. Pittman Chief Executive Officer of Clear Channel Communications Age: 58 Mr. Herbert W. Hill Chief Accounting Officer and Senior Vice President Age: 5213 Mr. Herbert W. Hill Jr. serves as Chief Accounting Officer and Senior Vice President of Clear

Channel Capital I, LLC. Mr. Hill served as Director of Special Accounting and Information

Systems Operations at Clear Channel Outdoor Holdings Inc. since March 31, 2010. He

served as Assistant Secretary of Clear Channel Outdoor Holdings Inc. until March 31, 2010.

He served as Chief Accounting Officer and Senior Vice President of Clear Channel Outdoor

Holdings Inc. from April 2006 to March 31, 2010 and Clear Channel Communications, Inc.

from February 1997 to March 31, 2010. Mr. Hill served as Senior Vice President, Chief

Accounting Officer and Assistant Secretary of CC Media Holdings, Inc., a subsidiary of Clear

Channel Outdoor Holdings Inc. from July 30, 2008 to March 31, 2010. Mr. Hill served as

13 Company Overview of Clear Channel Capital I, LLC,

http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=544

45393

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Vice President and Controller of CC Media Holdings, Inc. since January 1989.14

CLEAR CHANNEL CAPITAL I, LLC BOARD MEMBERS

Scott M. Sperling Thomas H. Lee Partners, L.P.

Board Affiliations Clear Channel Capital I, LLC

CC Media Holdings, Inc.

John P. Connaughton AMGH Holding Corp. Board Affiliations

Clear Channel Capital I, LLC CC Media Holdings, Inc.

Charles A. Brizius Thomas H. Lee Partners, L.P.

Board Affiliations Clear Channel Capital I, LLC

CC Media Holdings, Inc.

Kent R. Weldon Thomas H. Lee Partners, L.P.

Board Affiliations Clear Channel Capital I, LLC

Robert W. Pittman CC Media Holdings, Inc.

Board Affiliations Clear Channel Capital I, LLC

CC Media Holdings, Inc.

Ian K. Loring Bain Capital Private Equity

Board Affiliations Clear Channel Capital I, LLC

CC Media Holdings, Inc. Steven W. Barnes

Bain Capital Private Equity Board Affiliations

Clear Channel Capital I, LLC CC Media Holdings, Inc.

Richard J. Bressler Thomas H. Lee Partners, L.P.

Board Affiliations Clear Channel Capital I, LLC

CC Media Holdings, Inc. Blair E. Hendrix

Bain Capital Private Equity Board Affiliations

Clear Channel Capital I, LLC CC Media Holdings, Inc.

Randall T. Mays Clear Channel Capital I, LLC

Board Affiliations CC Media Holdings, Inc.

AMFM Operating Inc.

Including Mark Mays, Clear Channel Capital I, LLC’s Board of Directors hold 10 of the 18 CC

Media Holdings board seats.15

Thomas Casey, CC Media Holdings Executive Vice President and Chief Financial

Officer, is one of 23 ex-WaMu employees being sued by the federal government as part of a

14 Clear Channel Communications, Employment Separation Agreement - Herbert W. Hill,

http://www.techagreements.com/agreement-

preview.aspx?title=Clear%20Channel%20Communications%20-

%20Employment%20Separation%20Agreement%20-

%20Herbert%20W.%20Hill&num=667519

17

mortgage securities lawsuit against JPMorgan Chase. 16 Casey was WaMu’s Chief Financial

Officer when regulators seized control of a company with $307 billion in assets and sold it

to JPMorgan Chase for $1.9 billion, in what became known as the largest bank failure in U.S.

history. 17

Investors look for a company with a current ratio of 2:1, meaning that it has twice as

many current assets as current liabilities. A current ratio less than one indicates the

company might have problems meeting short-term financial obligations. If the ratio is too

high, the company may not be efficiently using its current assets or short term financing

facilities.18 The quick ratio, also known as the acid test ratio, compares cash and short-term

investments to expected financial liabilities with the next 12 months.19 CC Media Holdings’

current ratio at the end of 2011 was 2.09 with a three-year average of 2.06. CC Media

Holdings’ quick ratio is 1.84, with a three-year average of 1.85. After deducting cost of

goods and services, CC Media Holdings has a 59.36 percent gross margin, with 59.49 for

trailing twelve months (TTM), a 17.09 percent operating margin after paying expenses and

16.56 TTM, and a (4.35) percent net profit margin, also known as return on sales, with a

(4.43) TTM, and three-year average of (28.39). Net profit margin shows how much of each

revenue dollar is left after all costs of any kind, including interest on corporate debt and

income taxes. Return on assets (ROA) measures a company’s ability to operate profitably,

calculated by dividing the income after taxes by average total assets. CC Media Holdings’

return on assets ratio for 2011 is (1.58) percent, (1.65) TTM, and a three-year average of

(8.29). ROA is a better measurement of operating efficiency than return on equity (ROE),

which measures profit generated on shareholders’ equity but ignores debt funding.

16 Drew DeSilver, 23 ex-WaMu employees named in federal suit,

http://seattletimes.com/html/businesstechnology/2016150706_wamu09.html

(September 8, 2011)

17 Kirsten Grind, WaMu’s Final Days,

http://www.bizjournals.com/seattle/stories/2009/09/28/story1.html?page=all

(September 27, 2009)

18 Current Ratio, http://ycharts.com/glossary/terms/current_ratio

19 Quick Ratio, http://ycharts.com/glossary/terms/quick_ratio

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Reviewing long-term assets, CC Media Holdings has a long-term debt/equity ratio of (2.49)

and three-year average ratio of (2.61), total debt equity of (2.53) with a three-year average

of (2.68). Looking at earnings per share, CC Media Holdings finished 2011 at (3.70) with

(3.74) TTM and three-year average of (19.78) three-year average. When a company's

interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be

questionable. An interest coverage ratio below 1 indicates the company is not generating

sufficient revenues to satisfy interest expenses. CC Media Holdings has a 0.72 interest

coverage ratio.20

Per management agreement terms with “certain affiliates” of Bain Capital Partners,

LLC and Thomas H. Lee Partners, L.P., the “Sponsors” and certain other parties, affiliates

will provide management and financial advisory services until 2018, at a rate not greater

than $15.0 million per year, plus reimbursable expenses. During the years ended

December 31, 2011, 2010 and 2009, CC Media Holdings recognized management fees and

reimbursable expenses of $15.7 million, $17.1 million and $20.5 million, respectively.

Robert Pittman’s employment agreement includes an aircraft for his

personal and business use. A subsidiary entered a six-year aircraft lease with Yet Again

Inc., a company controlled by Pittman, to lease an airplane for his use in exchange for a

one-time upfront lease payment of $3.0 million. Subsidiary is responsible for all related

taxes, insurance, and maintenance costs during the lease term (other than discretionary

upgrades, capital improvements or refurbishment). Yet Again Inc. will be required to

refund a pro rata portion of the lease payment and a pro rata portion of the tax associated

with the amount of the lease payment refunded, based upon the period remaining in the

term if the lease is terminated prior to the expiration of its term.

CC Media Holdings is also negotiating a sublease with Pilot Group Manager, LLC, an

entity that Robert Pittman is a member of and investor in, to rent space in Rockefeller Plaza

in New York City through July 29, 2014. Anticipated rent is approximately $600,000

annually plus a proportionate share of building expenses. Pending finalization of the

sublease, company reimbursed Pilot Group Manager, LLC $40,000 per month for the use of

20 CC Media Holdings, Inc., Key Ratios & Statistics, https://commerce.us.reuters.com

19

its office space.21

Further investigation of Pilot Group uncovered that it is a New York based VC and

private equity firm led by former AOL president Robert Pittman, that likes to buy

undervalued companies, fix them, and resell them.22 Pilot Group, LLC specializes in early

stage, late stage and turnaround investments in privately owned companies, seeking to

invest in media, digital media, branded consumer products, and services businesses. Pilot

Group, LLC was formed in October 2003 and is based in New York, New York.23 In

November 2010, Pittman took on the role as Chairman of Media and Entertainment

Platforms for Clear Channel and made a personal equity investment in the company. In this

role, Pittman worked to leverage the Company' media assets and spearhead the further

development of a digital strategy for Clear Channel Radio, particularly with regard to its

new iHeartRadio digital radio product. Pittman also played a pivotal role in developing the

iHeartRadio Music Festival, the biggest live concert festival in radio history, which took

place in Las Vegas on September 23–24, 2011, and this year’s version occurring September

21-22. On October 2, 2011, Pittman was named Chief Executive Officer of CC Media

Holdings, Inc. He also joined the Board of Directors of CC Media Holdings, Inc. and Clear

Channel Communications Inc. and the Board of Directors of Clear Channel Outdoor

Holdings, Inc. as its Executive Chairman. In addition, he is on the boards of David's Bridal

and live social video company Airtime. Pittman oversees the company's global media

properties including broadcast, digital and mobile, syndication, media representation and

Outdoor. In conjunction with this position, Pittman also maintains his role as Founding

Member of Pilot Group and continues his activities as a venture investor. Pittman’s office

space, 75 Rockefeller Plaza, 23rd Floor, happens to be located in the AOL Time Warner

21 CC Media Holdings, Inc. Form 10-K

http://www.sec.gov/Archives/edgar/data/1400891/000119312512069208/d272839d1

0k.htm (February 21, 2012), 56-58

22 Pilot Group, http://www.crunchbase.com/financial-organization/pilot-group

23 Company Overview of Pilot Group, LLC,

http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=578

3691

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building. Pittman was COO of AOL Time Warner when he departed in 2002.24

VI. CONCLUSIONS

Negative net profit margin, return on assets, long-term debt/equity, total

debt/equity, and earnings per share ratios, along with an interest coverage ratio of 0.72,

pose serious concerns for CC Media Holdings. To put it in perspective, CC Media Holdings

appears destined for bankruptcy and may not be able to generate enough cash to stay

afloat beyond another 18-24 months. As of 12/31/11, total indebtedness was $20.2 billion,

including $11.5 billion aggregate principal amount outstanding under loan credit and

delayed draw credit facilities, which obligations mature at various dates from 2014

through 2016. Additionally, all outstanding principal amounts under the revolving credit

facility, $1.3 billion, will be due and payable in July 2014.25 According to Fitch Ratings

analyst Melissa Link, the company obviously will not be able to repay the debt out of cash

flow, and lenders will decide whether they want to keep the company going or extract

whatever value possible via a debt restructuring. One lender even says, "We would be

content to get par, which we think is a reasonable base case. On the other hand, if the

company was unable to service its debt, we like these assets a lot."26

Local advertising is the largest source of revenue for the company. However, local

sellers are 100 percent commission and receive no expense allowance or reimbursement,

which can be an Achilles heel for sales staff recruitment and retention versus other

industries. Even if they receive a guaranteed draw of $2,500 - $3,500 a month for 3-6

months as a new hire, odds are high that the hire may ultimately view the position as

24 Robert Pittman (media executive),

http://en.wikipedia.org/wiki/Robert_Pittman_(media_executive)

25 CC Media Holdings, Inc. Form 10-K

http://www.sec.gov/Archives/edgar/data/1400891/000119312512069208/d272839d1

0k.htm (February 21, 2012), 21

26 David Carey, Three LBOs on the Edge,

http://www.thedeal.com/magazine/ID/043040/features/three-lbos-on-the-edge.php

21

nothing more than a stop-gap between jobs. 27 Particularly in what was formerly known as

the radio division, Clear Channel Media and Entertainment, team sales structures, account

assignments, on-air defects associated with station programming (i.e. lack of local on-air

talent on music driven stations), which in turn affect ratings, has posed challenges. Larger

accounts that are unassigned from staff turnover may remain house accounts and be used

to compensate and retain new hires, which can create tension with senior sellers.

Depending on the market, combined with economic conditions, even senior sellers are

encountering difficulty making a decent living and may be forced to exit the company for

other opportunities. While local direct new business, non-traditional revenue, and digital

are the highest incentivized areas of the commission plan, often times, larger pieces of

business are placed by agencies. Such placements are discounted 15 percent, which is

what the advertiser pays the agency. For the seller, unfortunately, this is the lowest

incentivized area of the commission plan, and has a tendency to be the most time

consuming.

While U.S. advertisers have spent strongly this year on Olympic and political

advertising, forecasters have pulled back their expectations for ad spending. The economic

uncertainty that has hurt ad spending in the U.S. and Western Europe is now showing signs

of spillage beyond developed countries in several of the so-called BRIC countries (i.e. Brazil,

Russia, India and China), that have helped drive recent growth in the global media

economy. Warc, which publishes five highly respected magazines and journals: Admap,

Market Leader, International Journal of Advertising, Journal of Advertising Research and

International Journal of Market Research, lowered the outlook for ad spending growth in 11

of the 13 countries in their most recent Consensus Ad Forecast report, for every nation

except Japan and the UK, compared to its April forecast. "The lack of resolution to the crisis

in the Eurozone is continuing to impact confidence," notes Suzy Young, the data editor at

27 Laurie Kahn, Where Are the Applicants for New Radio Sales Jobs?

http://www.mediastaffingnetwork.com/filebin/content/10-08-

07%20Where%20are%20The%20Applicants%20for%20New%20Radio%20Sales%20Job

s%20Radio%20Ink.pdf

22

Warc. 28

University of Iowa business professor Tyler Leverty, assistant professor of finance,

underscores that bad leadership usually sends their companies on a death spiral. “We

found that managers of failed firms are less skilled than their peers, and the consequences

of their incompetence are economically significant. We conclude that yes, managers do

matter when companies fail.” A study done by Leverty and his co-author examined the

performance of 12,000 insurance companies between 1989 and 2000, with about 2,000

having CEO overlap. The study measured how quickly CEOs remove their firms from

regulatory scrutiny, whether management quality reduces the likelihood a firm becomes

insolvent and whether ability influences the cost of insolvency in a firm that goes out of

business. Evidence shows that good managers matter. Good CEOs remove their firms from

regulatory scrutiny 8 percent to 16 percent faster than a poor manager, and in insurance

companies that are going out of business, a more talented CEO can get a better return on

the firm’s assets by up to 10 cents on the dollar.29

New regulations and codes of best practices might be necessary, but they won’t be

sufficient to cure weak governance. Corporate boards must adopt the right roles to reflect

and shape those government conditions. Governance has to continually adapt to changing

conditions because a company, its management, and business environment are forever

evolving. 30

Best practices in corporate governance call for an increase in independent board

members in the oversight activities to provide a stronger foundation. Corporate boards are

designed to provide strategic advising and management oversight. Specific SOX and major

stock exchange requirements increase the board’s responsibility for monitoring the actions

of management, particularly through the use of independent members. While these

28 Bill Cromwell, Less-Cheery Outlook for Global Ad Spending,

http://www.medialifemagazine.com/less-cheery-outlook-for-global-ad-spending/ (August

7, 2012)

29 Tyler Leverty, CEOS: Yes, They Make a Difference, Industrial Engineer (October 2010), 13

30 Paul Strebel, The Case for Contingent Governance, MIT Sloan Management Review

(Winter 2004), 59

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requirements are intended to improve monitoring quality, in the case of CC Media

Holdings, with only two independent directors, that quality is clearly missing.31

In closing, with serious conflicts of interest and insolvency concerns, CC Media

Holdings’ issues stretch far beyond this paper. Please see appendix for article by Ted

Dewhurst, Esq., providing further instruction for CC Media Holdings’ Board of Directors.

31 Cynthia E. Bolt-Lee, CPA; David B. Farber, Ph.D., and Stephen R. Moehrle, CPA, Ph.D.,

Highlights of Corporate Governance Research, Journal of Accountancy (September 2011), 59

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VII. APPENDIX

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