Activist Legion Partners spots two possible paths to create value at Clear Channel Outdoor

Enterprise: Clear Channel Out of doors is an out-of-home promoting firm that gives quite a lot of promoting providers, together with by billboards, road furnishings shows, transit shows and airport shows. It additionally sells road furnishings gear, offers cleansing and upkeep providers and operates public bike packages. Clear Channel is damaged into the next segments, which account for the next proportion of income: America (45%); Airports (10%, within the U.S. and Caribbean); Europe-North (23%); Europe-South (19%); and Different (3%, contains Latin America).

Inventory Market Worth: $661M ($1.37 per share)

Proportion Possession: 5.08%

Common Value: $1.98

Activist Commentary: Legion is an activist investor whose managing administrators are Chris Kiper, beforehand of Shamrock Activist Worth Fund, and Ted White, beforehand of European activist fund Knight Vinke. Legion prefers to do its activist work behind the scenes, resorting to a proxy combat if amicable discussions don’t go effectively. The agency has vital expertise with client retail corporations.

Legion despatched a letter to Clear Channel’s board, expressing concern with the scope and tempo of the corporate’s present strategic overview course of. The agency additionally argued that the board wanted to contemplate a broader strategic overview course of, together with potential divestitures of different non-core property and choose U.S. property, or a sale of all the firm.

CCO is among the largest and highest high quality out-of-home (“OOH”) promoting corporations. The OOH enterprise has long-term development prospects and a robust enterprise moat, particularly amongst billboard property. Clear Channel successfully has two enterprise strains – Americas and Europe, every with very completely different enterprise fashions and valuations. The European enterprise works on mounted limited-term contracts with municipalities, that are rebid at maturity. Due to this, the European enterprise trades at round a a number of of 8 occasions earnings earlier than curiosity, taxes, depreciation and amortization. Many of the U.S. enterprise is billboards, which the corporate owns, and accordingly trades nearer to 13 occasions to fifteen occasions EBITDA. Furthermore, these billboards are within the means of being transformed to digital, which is able to permit every billboard to generate roughly 4 occasions extra income and 6 to 10 occasions extra EBITDA. Nonetheless, this conversion requires the approval of every municipality and won’t be a fast course of.

Regardless of its market main place, Clear Channel’s shares have significantly underperformed since its separation from iHeartMedia in Could 2019. CCO is at the moment buying and selling 79% beneath the pre-deal share value and 65% beneath its friends because the separation. CCO’s underperformance has been linked to a number of components, however is essentially pushed by the corporate’s excessive leverage, which amplifies volatility, and the sub-optimized conglomerate construction, which will increase complexity. This has led to a misunderstanding by the market of the intrinsic worth of the underlying property, which must be considerably larger than what’s implied by the present inventory value. Legion Companions carried out a sum-of-the-parts evaluation primarily based on 2024 adjusted EBITDA estimates which means an upside of 230% (implied valuation of $3.57 in comparison with $1.08 as of Could 12). The agency thinks this could possibly be unlocked as the corporate transitions to a U.S. pure play and reduces its leverage. Legion highlighted that whereas multiples for publicly traded OOH friends have compressed not too long ago given potential macroeconomic slowdown considerations, it has seen that personal market multiples for OOH property are strong. Legion thinks that given fast synergies, trade consolidation is an accretive pursuit for any OOH participant.

Legion has been actively engaged with the corporate for the previous two years and most not too long ago, had a gathering with administration on Could 12, the place Legion expressed its considerations with the tempo and scope of the corporate’s strategic overview course of. Particularly, Clear Channel has been prioritizing the sale of property inside Europe-South, though the considerably bigger a part of the enterprise is Europe-North. Furthermore, since this strategic overview of Europe started in December 2021, Clear Channel has introduced the gross sales of companies in Italy, Spain and Switzerland. That is regarding since as a fixed-contract enterprise, the worth goes down the nearer the contracts get to maturity. Accordingly, Legion is pushing for an accelerated pursuit of a sale of the Europe enterprise.

Legion sees two potential paths to worth creation right here. First, the corporate may unload its European and Latin American companies and turn into a U.S. pure play. Whereas there’s little worth to Europe-South and Latin America, Legion believes that the Europe-North enterprise may fetch $500 million to $600 million in a sale, which could possibly be used to de-lever the corporate. Moreover, whereas promoting Europe-South and Latin America wouldn’t yield vital proceeds, it could do away with a distraction and permit administration to give attention to its crown jewel U.S. asset. As a sale of the European enterprise wouldn’t be sufficient to optimally de-lever the stability sheet, Clear Channel may additionally contemplate promoting choose U.S. property. Legion want to see administration pursue this plan whereas additionally exploring a possible sale of all the firm. Such a sale can be extra advanced and probably much less profitable than the opposite plan, however it could get pleasure from certainty.

CCO first introduced its strategic overview of the European enterprise in December 2021 and little or no has come to fruition. It’s unclear why that is and what the logjam is, but when it continues, Legion will wish to be contained in the boardroom to get a greater look. Legion has proven prior to now that it has no hesitancy in soliciting proxies if it feels that’s essential. We have now little doubt that if the agency is met with reluctance by the board to start one of many two outlined paths, Legion will search board seats. However the agency has loads of time to make that call because the nomination window doesn’t open till Jan. 4, 2024.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.