It was a big bet on the future of radio, but an ill-timed one. The Boston private equity giants Bain Capital and Thomas H. Lee Partners won an auction for the country’s largest radio station operator, Clear Channel Communications, in late 2006.
Now that gambit is likely to lead to a bankruptcy filing, one that could take place any day.
That’s because the two investment firms pulled off their acquisition through a leveraged buyout, the kind of deal that involves heavy amounts of debt. Loans were easy to get back then, before the credit market crashed. It was a tough deal to complete — taking nearly two years to close — for a price of nearly $24 billion, including the radio giant’s debt.
Bain and TH Lee contributed about $2 billion of equity to the deal, but borrowed most of the rest. Ever since, a cloud of $20 billion-plus in debt has hung over the company they acquired, now known as iHeartMedia.
“It’s going to be a business school case study of what not to do” in a leveraged buyout, said Mark Williams, a finance lecturer at Boston University. “They took on an unhealthy amount of debt, much higher than average . . . What they did is they bet the farm.”
Unfortunately for the two private equity firms, the Great Recession turned out to be deeper and longer than any other economic slowdown since the 1930s. Advertising budgets were hit hard. And even once the national economy began to mend, many advertisers still spent less on radio spots — as well as on the Clear Channel billboard business iHeart has a controlling stake in — and more on social media and other digital outlets.
IHeart made significant investments over the past decade in its own digital shift, for billboards and for streaming services, but the company also recently made as much as roughly $1.8 billion a year in debt payments, a burden that essentially gobbled up nearly all of its cash flow. Last month, iHeart missed a crucial payment deadline, triggering a complex series of negotiations involving its creditors and the private equity firms.
Bankruptcy, a long-discussed option, is now imminent. Creditors have set the end of the day on Monday as the latest deadline for a deal that would include a planned bankruptcy to restructure the company and winnow down much of the debt. But that deadline could be extended, as it has been before.
Analysts largely consider the bankruptcy process as a good thing for iHeart. It could finally free up the San Antonio company to focus its efforts on radio station operations — more than 850 stations, including 10 in Boston.
“Certainly these guys at the radio stations that we all listen to, they’ve probably been on a limited budget for a while because the parent is losing money,” said Joel Shulman, a finance professor at Babson College.
But Shulman said the process about to get underway won’t necessarily be easy on employees. He expects layoffs could be in the near future.
Another big change also might be in the works: Liberty Media, the parent of satellite radio company SiriusXM, wants to invest more than $1 billion in iHeartMedia. Liberty also has a stake in Pandora, the digital radio station company, and analysts see the potential to share the resources and reach of all three businesses.
Bain and TH Lee expect to stick around, too. Their controlling stake in the company will mostly be wiped out in a bankruptcy. But they are angling to keep a small amount of equity in the business, possibly a 1.75 percent stake.
Regardless, people with knowledge of the situation say the two firms still expect to roughly break even on their initial investment, in large part because they had bought iHeart debt at discounted prices.
But the bankruptcy could still be a black mark for the renowned private equity firms, which declined to comment.
“They hit a lot of home runs, but I don’t think this one was a home run,” said Mark Powers, a business lawyer at Bowditch & Dewey. “No matter how you slice it, it’s always a disappointment when your investment has to go to Chapter 11.”
Cumulus Media, the nation’s number two radio station operator, filed for bankruptcy protection late last year. Bruce Mittman, a Needham-based advertising executive who also co-owns about three dozen radio stations, said both Cumulus and iHeartMedia suffered under mountains of debt.
“They both operate very profitably,” Mittman said. “They were just leveraged . . . at such a ridiculous price, there was no way to ever pay back the debt.”Jon Chesto can be reached at email@example.com. Follow him on Twitter @jonchesto.