Interesting Music Industy Piece in the New York Times

Facing the Music of a Heavy Debt

Charles O. Prince III, the deposed chief executive at Citigroup, probably didn’t mean it literally when he equated the credit boom to a musical dance. Mr. Prince may not have been a great banker, but he certainly was prescient.

Just this week, the company that pioneered easy listening in elevators, Muzak, filed for bankruptcy protection; Sirius XM Radio began preparing its own Chapter 11 filing; and Clear Channel Communications, the nation’s largest radio station owner, tapped a last-resort credit line.

What common refrain — apart from filling the air with dulcet tones — unites these three companies? They are all viable businesses suffering from a surfeit of debt. Like Mr. Prince’s former employer, they failed to stop hustling on the dance floor when they should have.

Investors and creditors are now paying the piper. Their stories provide the overture to the restructuring opera just beginning in corporate America.

Take Clear Channel. The private equity firms Bain Capital and THL Partners paid top dollar to win shareholder approval for their $27.5 billion buyout of the company in mid-2007. The price was later renegotiated, but clearly not by enough. Clear Channel had over $19 billion of borrowings at the end of its most recent quarter. This week it tapped the remaining $1.6 billion of a credit facility, sending its more senior loans to trade at just 45 cents on the dollar.

Radio advertising is linked to the economic cycle. But Clear Channel’s troubles have been intensified in this recession by the onset of competitors like satellite radio and the iPod. Local radio advertising fell a staggering 21 percent in November from the same month a year earlier, according to the Radio Advertising Bureau’s most recent figures. National advertising was down 25 percent.

If Clear Channel had a more forgiving capital structure, it would be better able to tough it out. The company made nearly $500 million in the third quarter, reflecting a nearly 30 percent operating margin. The trouble is that interest payments swallowed $312 million of that. As the downturn worsens, Clear Channel edges closer to breaching its debt covenants.

Muzak and Sirius have too much debt for the cash they are generating and now face the added burden of a liquidity squeeze. In the current environment they cannot raise money to refinance debt.

Sirius, for example, needs to repay $175 million by next week. It could bring in an equity investor willing to pay off the debt in return for control of the company, and John Malone of Liberty Media is said to be in talks. Sirius has the promise to be a very valuable business. And it should be — one day. But for now, its debt is a heavy burden.

Sirius has nearly 20 million subscribers and, despite the slump in the car sales that drive new satellite radio subscriptions, is still growing rapidly. The company should double its subscriber base over 10 years.

On that basis, it’s possible to determine a net present value for Sirius. Investors currently rate satellite TV subscribers at about $1,000 each. Satellite radio subscriptions cost less than half those of television, so let’s assume each customer may be worth $450. At 40 million customers, that’s a total value of about $18 billion by 2019.

Of course, a dollar that might show up tomorrow isn’t worth that much to shareholders today. So let’s discount back the value of those future subscribers by 15 percent annually. By that calculation, Sirius should be worth about $4.5 billion now, compared with a current enterprise value of $3.2 billion.

Muzak also looks pretty resilient, based on its model of providing playlists to retailers, restaurants and other businesses. Sales through the end of September held flat at $142 million, generating $49 million of earnings before interest, tax, depreciation and amortization.

But it had to fork over $35 million to service its $465 million debt pile. Muzak might have been able to muddle through the downturn by cutting costs. The problem is that all of Muzak’s debt comes due this quarter. Even if it could have raised the money, the interest payments would have been crippling.

Like Sirius and Clear Channel, Muzak will still be around in a few years, filling the airwaves with softened versions of Led Zeppelin songs. It will just emerge with a balance sheet scrubbed clean of previous excess. It’s a song that’s likely to be in heavy rotation for some time to come.

ROB COX, LAUREN SILVA LAUGHLIN and ROB CYRAN