Cumulus Media: A Riddle, Wrapped In A Mystery, Inside An Enigma (NASDAQ:CMLS)

A puzzling situation

It’s unusual to see a company simultaneously enact a poison pill defense against a potential hostile takeover and embark on a debt restructuring. This makes Cumulus Media’s (NASDAQ:CMLS) situation particularly intriguing.

The Context

Cumulus Media reported 2023 results last February, 27, 2024.

Q4 and FY 2023 results were basically in line with expectations – CMLS total revenues for the year were $844.5 million, a decrease of 11.4% compared to 2022, and EBITDA shrank to $90.7 million.

In addition, the company announced an exchange offer and consent solicitation to address its 2026 debt wall.

In 2023, Cumulus used its operating cash flow, along with excess liquidity, to buy back $7.2 million of stock and $44 million in face value of debt at a discount to par.

With limited visibility into 2024 radio ad bookings, due to an uncertain macroeconomic environment, CMLS management may have seen their options for dealing with the company’s 2026 debt maturities as becoming more and more limited.

As a result, a debt restructuring through negotiations with creditors might have appeared the only viable solution to remove financial insecurity and give the company more room to execute a much-needed turnaround.

A few days before announcing 2023 results and the exchange offer, Cumulus Media adopted a limited-duration shareholder rights plan in response to the significant accumulation of its stock by Renew Group Private Ltd., a Singapore-based company owned by Manoj Bhargava.

During meetings with members of the company’s leadership, Renew Group revealed its intention to increase its ownership to 20% of CMLS shares – a strong vote of confidence into Cumulus Media’s future.

We investigate both the debt exchange offer and Renew Group’s move in an effort to decipher what might be happening at Cumulus, in light of these seemingly contradictory actions.

Exchange offer and consent solicitation

Cumulus Media’s proposed debt restructuring seeks a double solution: reducing its total debt and extending its maturity to 2029.

Here are some highlights from the proposed transactions:

an offer to exchange any and all of the Issuer’s outstanding 6.750% Senior Secured First-Lien Notes due 2026 for new 8.750% Senior Secured First-Lien Notes due [March 15,] 2029

[Rate of exchange/”Early Tender Time”]: $800.00 principal amount of New Notes per $1,000 principal amount of Old Notes tendered

[an offer] to exchange Old Term Loans for new senior secured term loans borrowed under a new credit agreement

the consummation of the Term Loan exchange is conditioned on participation from at least 50% in principal amount of the Old Term Loans

According to CMLS 10-K (pg. F-22), as of December 31, 2023, trading prices for its Term Loan 2026 and the 6.75% Senior Notes were 76.00% and 66.75%, respectively, signaling a clear situation of distress.

S&P has already anticipated (registration required) that it will consider “the proposed debt restructuring as distressed because the company’s lenders will receive less than they were originally promised”.

S&P also noticed that “Cumulus plans to realize an original principal discount of over $130 million through the proposed transaction (assuming full participation)” and that “[i]n addition, both of Cumulus’ proposed debt issuances provide it with the ability to elect payment-in-kind (PIK) interest for up to two semi-annual interest payments over the life of the debt”.

We see the decision by the company to include a PIK option as an extra safety net in case market conditions continue to deteriorate.

Here is a quick visualization of the proposed exchange, assuming full participation:

author chart, company’s data

We previously noticed that, in late 2023, the price of CMLS debt was hovering between 66 and 76 cents per dollar.

This proposed restructuring is offering a slight premium to market prices, and higher interests for an extended time. CMLS would end up paying a similar amount of interest per year.

The fact that the new notes “will benefit from a guarantee from, and security interest in, the assets held by an unrestricted subsidiary that generated nearly 50% of Cumulus’ EBITDA in 2023”, combined with the “better safe than sorry” attitude of most debt investors, should hopefully result in a favorably accepted transaction.

Current dynamics of the traditional radio industry

The COVID-19 pandemic significantly impacted how people listened to radio. Millions of workers who used to tune in to local radio during their commutes were forced to stay home, leading to a sudden drop in listenership.

At the same time, businesses cut back on advertising spending, further hurting the radio industry.

Unlike other sectors that have fully recovered, traditional radio is still struggling. This is partly because advertisers are increasingly shifting their budgets to digital platforms, which offer them better targeting, measurement, and reporting tools.

The radio station business is forecasted to decline in the next few years, although at a relatively slow pace.

S&P Kagan Research can help us understand and visualize the headwinds in the industry:

Kagan Research projects a decline in US radio ad revenue of 0.9% to $11.86 billion in 2024. That is roughly $1 billion higher than radio ad revenue in the pandemic ad recession of 2020 but still approximately $2 billion lower than pre-pandemic levels.

source: S&P Kagan Research

On the positive side, radio advertising remains a powerful tool for reaching audiences, as “radio’s lower ad cost, community outreach and relatively high return on investment compared to other media should help maintain its ad share in its local markets”.

iHeartMedia (IHRT), Audacy (OTCPK:AUDAQ) and Cumulus Media represent the three largest players in the sector.

All of them have already been through a court-supervised restructuring, with Audacy being now in the process to re-emerge from bankruptcy.

A review of Audacy’s Disclosure Statement may reveal valuable data points confirming current market expectations (EXHIBIT E, pg.6):

Revenue for fiscal year 2024 is forecasted based on third-party radio market data, projecting spot market declines of -1.1%, -2.7%, -3.2% and -3.4% in 2024, 2025, 2026, and 2027.

These predictions seem in line with S&P Kagan Research forecast of low single digit decreases in total revenues for the next few years.

However, 2024 should benefit from political advertising – here is AUDAQ’s commentary about the next few years:

In addition, Management expects political revenue to fluctuate with mid-term and presidential election cycles ($33 million, $9 million, $27 million, and $10 million in fiscal years 2024 through 2027, respectively).

Cumulus Media momentum: a look at its trajectory so far

Despite all headwinds, Cumulus Media continued to navigate through pandemic and post-COVID years, achieving some significant financial progress.

Through 2020 and 2021, the company sold the bulk of its non-strategic assets, including its D.C. land, and its tower assets.

Since the beginning of 2022, CMLS retired over $130 million in face value of debt, bringing total debt down to $676 million, the lowest it’s been in over a decade.

The company strategically sold off a few non-core stations in 2023, securing attractive pricing and multiples, with limited impact to its EBITDA level.

To resume, in a difficult environment, Cumulus reduced fixed costs, recovered EBITDA margins, and improved its free cash flow generation.

If successful, the debt exchange could represent the company’s last major financial step toward executing its turnaround.

Cumulus Media national business accounts for approximately 45% of total revenues, while local business, primarily consisting of local spot, local digital marketing services, local podcasting, and local streaming, represents approximately 50% of total revenues.

The local ad market remains “still relatively strong,” according to S&P Kagan Research and CMLS management commentary.

Digital (which includes digital marketing services, streaming and podcasting) is the fastest-growing area of the company, and provides Cumulus Media with new ways to capitalize on its longstanding radio relationships.

In aggregate, digital generated $146 million of revenues in 2023, or 17% of total turnover, with a decent 3% year-over-year increase. Momentum seemed to spread into Q4, where digital represented 18% of CMLS total revenues, an increase of 5% from the prior year.

While we highlighted some positive progress achieved by the company, the market has primarily focused on a limited set of key data when valuing CMLS shares:

• a company operating in an industry that hasn’t fully recovered since the 2020 shock, with significant headwinds ahead (declining revenues forecasted for the next few years)
• Cumulus debt burden, with its 2026 large debt maturity
• the company’s micro-cap status (market cap under $100 million), that restricts investment for some institutional players.

CMLS decline in share price is mainly a reflection of this narrative, especially if we elect to show it, since CMLS received an indication of interest in acquiring the Company for $15.00 to $17.00 per share in May 2022:

In very simple words, today CMLS shares are priced for bankruptcy.

Cumulus faces a potential hostile takeover attempt

On January 23, Renew Group reported beneficial ownership of approximately 10.01% of CMLS outstanding shares. According to Cumulus press release, in meetings with members of the company’s leadership, Renew Group revealed its intention to acquire 20% of CMLS shares.

Manoj Bhargava, an Indian-born American billionaire, is better known as the founder of the 5-hour ENERGY shot and for his philanthropist activity.

However, since August 2023, Bhargava has been building a diverse media empire. This involved acquiring stakes in various companies and verticals, including:

• Print and online media: through a majority ownership of The Arena Group, Inc. (Sports Illustrated, Parade magazine, Men’s Journal, The Street, HubPages, Surfer, etc.)
• Television and radio broadcasting (both production and distribution): through the acquisition of two national TV networks (SportsNews Highlights and NEWSnet… news as it used to be), 50 over-the-air television stations, over 50 independent affiliates and dozens of streaming and cable outlets, and through significant stakes in the #2 and #3 radio broadcasters: Audacy, Inc, and Cumulus Media.
• Digital advertising delivery: through the acquisition of iMedia Brands, which includes iMedia Digital Services, a global video advertising platform that monetizes over 200-million monthly users for its online publishers.

Of interest to CMLS shareholders, Bhargava acquired $60 million (face value) of Audacy’s first-lien debt, which will be converted into shares of AUDAQ’s NewCo after bankruptcy.

This investment is likely to make Bhargava a significant shareholder of Audacy’s, next to Soros.

However, Soros is set to retain major control of the reorganized company, as disclosed in AUDAQ’s third supplement to the Plan Supplement for the joint prepackaged plan of reorganization:

[Audacy’s] Board initially shall be composed as follows:

1. David Field
2. the First Lien Ad Hoc Group … shall be entitled to nominate 5 directors … provided, that [X] the Soros Equityholder … shall be entitled to appoint [A] 3 of the 1L Directors … and [B] 4 of the 1L Directors at any time when the Soros Equityholder and its affiliates hold 50.1% or more of the outstanding Common Stock on a fully diluted basis in the aggregate; and [y] the holders of the Class A Shares other than the Soros Equityholder shall have the right to nominate the 1L Directors that the Soros Equityholder does not have the right to nominate

[edited for clarity, emphasis added]

Does Manoj Bhargava’s interest in CMLS shares signal a potential turning point for the company?

Though Manoj Bhargava’s exact plans for each of his media investments remain unclear, he has actively provided some general insights through public statements.

In a video interview with TheStreet, Bhargava said he’s investing in Media mainly to have a platform to promote his own products:

“Basically, I make stuff, I sell stuff. So Media becomes part of it. In other words, the guy in the middle is media, for me to reach the customers that we sell to.

Instead of buying spots, we’ll be getting into the media side of it.”

Bhargava’s interview was mainly focused on his deal with The Arena Group – where, as we noticed, he took majority ownership.

As part of the transaction, The Arena Group received a five-year guaranteed advertising commitment of approximately $60 million from a group of consumer brands also owned by Bhargava, including 5-hour ENERGY – a very direct and effective way to support the company.

We know a direct approach like this might not be feasible with Cumulus and Audacy, but Manoj Bhargava’s contrarian approach to the industry is intriguing for our analysis:

So we’re going to bring a whole new sort of a 1950s vibe to this thing where, you know, where there used to be the Colgate Palmolive hour.

And that old idea that the advertiser was working directly with the producers and saying what we need to do versus there’s six guys in the middle.

New is not necessarily better. And so they threw kind of the baby out with the bathwater.

Mattel was built by sponsoring the Disney show. And I’m sure at that time somebody said, you’re just going to concentrate on one show. What about all the other people? And they didn’t. They said, no, we’re just going to do the Disney show. And they built this giant company off that one show.

[edited for clarity]

Later on in the article, we will dig into Bhargava’s capacity to use demographic segmentation and customer-focused marketing as very successful tools to gain shares in a very saturated market.

Bhargava’s investment in CMLS shares is an interesting vote of confidence – the same investor hasn’t hesitated to take a position in Audacy’s debt to reach his target, owning a share of that radio company, too.

We contacted Renew Group and asked if the company has also taken a position into CMLS debt, without receiving an answer.

Bhargava could obviously have made the wrong choice – the total amount of money invested by Renew Group to reach a 10% ownership in CMLS is relatively low, after all, amounting to $6.8 million only.

We believe Bhargava’s interest in accumulating a significant position in CMLS shares presents a chance for management to engage in discussions about a mutually beneficial strategic cooperation, moving beyond the defensive posture of the poison pill.

Conclusion: Don’t miss the forest for the trees

So far, we laid down many rational reasons why investors should stay away from CMLS shares: a priced-for bankruptcy, micro-cap company that is going through a debt restructuring, operating in an industry forecasted to be on a secular decline.

Let’s revisit the same data from a different perspective to see if we can identify, through a contrarian approach, some trends we might have missed.

We’d like to start by discussing the current state of the radio industry.

Unlike other traditional media, we see an opportunity for radio to succeed in a slightly new form.

The COVID-19 pandemic, with its immediate impact to radio consumption, might have accelerated a much-needed transition toward a slightly different business model.

Embracing innovation and capitalizing on its core strengths, we believe radio can reclaim its position as a powerful medium, by fine-tuning its overall offering.

Radio is still in its infancy when it comes to leveraging social media for exclusive content, audience interaction, etc.

By seamlessly integrating with streaming services, interactive apps, and social media, radio can become a dynamic and targeted platform for a more modern audience.

Radio thrives as a trusted source for local news, and local events. This creates a strong sense of community, which translates into listener loyalty.

Recent trends like podcasting are still in their infancy when it comes to realizing their full potential.

Gordon Borrell, CEO of the media consultancy Borrell Associates, believes that things “could change in the years to come”:

“I have a suspicion that podcasting at the local level will mushroom in the coming years. We are already seeing the early signs of it.

Audio-only is slower to develop because it’s not as alluring as video. But audio listening detached from traditional radio programming will evolve. It just needs time to get to the local level.”

CMLS management addressed this opportunity during its Q4 2023 earnings conference call, in an answer to a specific question from B. Riley Securities analyst Dan Day:

Mary Berner [CEO]

About a year ago, we refocused our effort on local podcasting. And generally, it tends to be around a local show. So for example, we have a very, very successful local podcast called Michigan Insider run with all the stations there. And we believe there’s opportunity, many of our programmers would very much like to do podcasting. And so we’re walking before we run, but we’re seeing initial success there. Because you’re absolutely right. listeners want to hear, hear from our talent. And it’s a way also to do extend the content that they hear on air. So that is an area of focus.

Borrell Associates survey says that “21% of radio buyers bought streaming audio [ads] in 2023.” According to Borrell “that number is forecast to jump to 29% this year”, representing the “first significant growth in streaming audio uptake on a local level.”

We are also relatively optimistic about the impact of political advertising in 2024.

Nielsen’s recently-released “Optimizing Political Campaigns To Win In November” notes that “Radio adds over 14 points of incremental reach beyond TV, CTV & Digital”:

Nielsen’s study also highlights how adding AM/FM to a media plan boosts voter reach by 17% – 15% more Democratic, 15% more Republican, and 23% more unaffiliated voters.:

Nielsen’s main takeaways are very positive for radio:

These few examples merely scratch the surface of the reasons why we could witness a renaissance in growth and relevance for radio.

Finally, for a better understanding of the sector’s attractiveness, we analyzed the motivations behind Soros and Bhargava’s recent investments.

We suspect Bhargava’s media interest is mainly tactical, driven by his desire for direct customer outreach.

His role in Cumulus Media may become relevant, especially if Renew Group reiterates its intention to increase its holding – something that Bhargava may not be able to achieve with AUDAQ due to the presence of a controlling shareholder, Soros.

Soros, on the other hand, may have a more strategic and long-term vision for the sector – having potentially acquired a controlling stake in Audacy at a fire-sale price, given the company’s post-bankruptcy valuation:

B. Enterprise and Equity Value

Based on the aforementioned analyses, the estimated range of Enterprise Value of the Reorganized Debtors, collectively, as of the assumed Effective Date, is approximately $600 million to approximately $800 million

source: Audacy’s disclosure statement, Ex. F – p. 2, edited for clarity

To conclude our analysis, CMLS exemplifies a high-risk, high-reward investment opportunity with the potential to deliver significant returns for patient investors over the long term.

We’re dealing with a real head-scratcher, with layers of uncertainty at every turn: a riddle, wrapped in a mystery, inside an enigma. Still, a very intriguing story.

As we noticed, it is rare to see a company simultaneously enact a poison pill defense against a potential hostile takeover and embark on a debt restructuring.

Investing in Cumulus Media’s shares right now can be seen as buying an option on the successful completion of the debt exchange.

Increased guarantees and a better interest rate suggest this deal might be seen as the lesser evil by most debt holders – we believe a majority of them should accept the exchange.

Assuming the restructuring goes through, we speculate CMLS could remove roughly $90 million of debt.

The company would then have less than $590 million of outstanding debt, with maturities spread to 2026 and 2029, mainly. Here is a quick look at CMLS debt decrease in the last few years:

With only 16.7 million shares of common stock outstanding, corresponding to a market cap of roughly $63 million, Cumulus Media EV would be roughly $570 million (deducted about $80 million of cash available), for a company owning more than 400 radio stations across 85 markets, and more than 9,800 affiliated stations through Westwood One, the largest audio network in America.

On top of broadcast radio revenues, CMLS has been developing a growing digital revenue stream, which is slowly becoming a significant contributor to the top line, as summarized in this chart:

Let’s take out our crystal ball and make a few speculations about 2024.

The company is not issuing guidance, but management stated, during CMLS latest conference call, that “our pacing for Q1 total revenue is currently down low single digits”.

In addition, Cumulus Media management expects that “political revenue should provide a slight tailwind in Q1”, but that “the benefits for political will be more evident in the back half of 2024”.

A slight low single-digit fluctuation, up or down, is a realistic possibility for CMLS revenues in 2024.

In a year, our perspective about Cumulus Media could be significantly more positive. We might see a company that:

• Halted its decline
• Embraced digital growth
• Holds valuable assets
• Potentially regains momentum
• is freed from the imminent pressure of a large looming debt repayment (its real “sword of Damocles”)

Should these positive developments come to fruition, CMLS market value could significantly surpass the estimated $570 million, translating to substantial gains for shareholders.

However, it’s important to acknowledge that market conditions and unforeseen circumstances could derail our estimated performance for 2024.

Investors seeking to reduce risk might prefer to wait for the results of the debt exchange, as it will allow them to base their investment decisions on a more complete set of data.

A successful debt exchange would eliminate uncertainty about CMLS near-term debt, paving the way for a significantly reduced debt burden, in addition to an improved cost structure, achieved in the last few quarters.

CMLS’s successful restructuring could also spark a resurgence of investor confidence, potentially bringing back those who abandoned the sector.

This would be coupled with a lack of options within the industry, as Audacy’s bankruptcy transitions the company to a private one, reducing the number of listed players.

Lastly, we’d like to add a few comments about Bhargava’s interest in accumulating a significant position in CMLS shares through his Singapore-based Renew Group.

We previously expressed our wish that CMLS management may move beyond the defensive posture of the poison pill, to embrace the strategy of positive discussions about a mutually beneficial strategic cooperation.

While it is true that Bhargava has amassed several media positions, including direct competitor Audacy, we laid down the reasons why we believe Bhargava will be limited in the influence he can have on AUDAQ, given the presence of Soros as a strong majority holder of that company.

Tactically, CMLS may only benefit from Bhargava diverting part of his company’s huge marketing spend toward Cumulus Media, too.

Strategically, Manoj Bhargava has a proven track record when it comes to approaching saturated markets with a revolutionary marketing approach.

The energy drink market was extremely competitive and already saturated when Bhargava planned to enter with a new product.

Red Bull and Monster represented the best known brands in the sector, and major manufacturers failed in their attempt to gain market share.

Bhargava’s Living Essentials developed a marketing plan based on a few key points of differentiation: two-ounce bottles, and a customer target toward a different demographic group.

The underlying theory was that you don’t need to be thirsty because you are tired, and that purchasers of energy drinks are not limited to below 25 years of age only.

You may read a more comprehensive 5 Hour Energy marketing analysis at this link.

For the purpose of this article, we only want to highlight that Bhargava’s marketing expertise and competitive acumen could prove useful in CMLS turnaround.

As a result, the company might be in a position to leverage a budget alongside deep marketing expertise to address its challenges, increase revenues and improve its market position/perception.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.