Audacy filed for bankruptcy — now what?

I am going to be completely honest. I don’t totally know how bankruptcy proceedings work. And unless you are on the finance side of podcasting, I am going to take a guess that you don’t either. So I called up B. Riley Securities analyst Daniel Day, who covers the big three radio companies, and asked him to explain how filing for bankruptcy affects Audacy’s business and what the company’s financial troubles tell us about the state of the audio industry.

The good news: audio has a future. The bad: it may not look like the podcasting utopia of our dreams.

This interview has been lightly edited and condensed for clarity.

The news that came out isn’t terribly shocking. I’m sure you probably were anticipating something like this, right?

Yeah. When they skipped their bond payments in October, it was pretty obvious what was going to happen. It was just a matter of how long it was going to take to hash everything out and when an actual filing would come. This has really been in the works for a year.

I want to go back a little bit. The big thing that everyone talks about with Audacy is their heavy debt load. How did we get here?

It’s not just Audacy — everyone did this. iHeart went through bankruptcy in 2018 because of this. Cumulus did [in 2017] as well. There’s even speculation saying it may not happen if you just look at the stock prices and the bond prices. Some people are theorizing iHeart and Cumulus may even have to go back into it down the line. I’d argue it’s unlikely, but it’s on the table again.

As for how this happened, we’d have to go back 20 years, really, when radio was a great business. It was very capital light, it was a great place for advertisers, it had low costs. They were very cash flow-y. And the common knowledge at the time was that all of these radio companies should take on a bunch of debt and do a rollup. So what happened in the 2000s was a bunch of debt was used to roll up radio stations into these corporate parents that we have today. The three big ones are iHeart (at the time, it was Clear Channel, but they rebranded to iHeart), Cumulus, and formerly Entercom, which they rebranded to Audacy in 2021.

The old Entercom did a pretty good job keeping their leverage levels reasonable for a long time. What put them over the hump was a huge deal in 2017. CBS owned a bunch of radio stations, and for a long time, they were trying to sell those and struggled to find a buyer to take on all of them. Little Entercom decided to do what’s called a reverse merger — it’s like when a smaller company swallows a much bigger one. Entercom, which was really a rollup of smaller regional radio stations, effectively absorbed all of the CBS radio stations, which were in large markets — New York, LA, Chicago — and transformed the company. They used a lot of debt to get that deal done.

[Audacy had trouble] turning around some of those CBS stations that needed a lot of work and were neglected under their corporate parent. I think they underappreciated that. And if you go back to the presentation in 2017, pretty much every metric, they never really met, whether it was revenue or EBITDA or whatever. It just did not hit the targets that needed to be hit. Then, during the pandemic, advertising falls off a cliff temporarily, then kind of comes back, and then we go into another ad recession starting in 2022. It was just a slow-moving roll toward the bankruptcy filing for these guys.

So I… don’t know how bankruptcy works. How does that debt actually get reduced?

Basically, all of these guys provided loans to Audacy with the expectation they’d get paid back. Audacy said, “There’s no path to us ever paying you back for this, so what we’re going to do is we’re going to restructure. On the other side, rather than being a creditor, you’re going to be the owner of the company.” So effectively, they’re just swapping the debt into an ownership position in the company. There will be $350 million of debt, and the owners of the new company will be the debt holders. The way that [the creditors] get made whole is if the company is successful in turning it around because they own the company at this point.

There are other questions like: Who’s going to be the CEO and CFO? Are David Field and Richard Schmaeling going to stay? What’s the board going to look like? All of those questions will need to get hashed out.

I know there were rumors floating around that they might sell Cadence13. Is that something that you think might still be on the table for them? Or do they need to hold onto that digital business?

I think that Cadence13 was a strategic mistake. There were lots of ways for them to get into podcasting, and Cadence13 is just a rep firm, right? They’ve tried to get into making their own podcasts, but what it mainly does is partner with other podcasts to help them sell their ads, which is fine, but it’s kind of a low-margin business. And a couple of the biggest Cadence13 clients just left, like Malcolm Gladwell and Crooked Media. What happens is, you cut this deal with someone, and then maybe their podcast is super popular. Then, they either want a better deal from you because now they have more leverage or someone else gives them a better deal.

Audacy has admitted that their margins on podcasting are very low. So it wouldn’t surprise me if they tried to sell it. I don’t know what kind of bid there is for an asset like that. If anything, I think they struggled to sell it because I don’t know if there are too many buyers for it right now.

So then, if the rep business is so low margin, is it worth it for them to try and make original content?

They have been talking about that for a long time. And then Cadence13 started to go down that path as they tried to make these premium podcasts. That was fine in 2021, when money was everywhere and you could just do all these projects, but I don’t think that there was a smashing success there.

What I think they’re trying to do more of is podcast-broadcast crossover. So like, I listen to WIP — an Audacy Philadelphia sports station. If there’s a 6AM to 10AM show, they can chop off 15-minute clips and make those available for people to listen to throughout the day as if it were a podcast. That’s part of their podcast-broadcast strategy. And then there are podcast extensions, like the radio personalities having a podcast sort of on the side or just making their whole show available in podcast format. And then, they’ll do some co-production stuff with MLB, for example. There are things they can do, but it’s up in the air whether it’ll ever pay off. They have to put the money into the right buckets.

Is there a way to make terrestrial radio work in the long term? Or is this something that’s just a bit of a doom spiral?

No, I believe that there is. I do. I think that the business needs to transform and make itself better and give advertisers what they want in 2024, not what they wanted 20 years ago. That means better data, better ability to target audiences, better ability to tie campaigns to actual events like you can do with all of these digital channels. So there’s a lot of work that needs to be done, but I don’t believe that terrestrial radio or digital extensions — whether it’s podcasts or streaming radio — are doomed… There’s a way to make this work, and I think they have a much better chance of it with a more reasonable debt load that gives them the flexibility to invest in the things they need to.