Activist Legion Partners finds two possible ways to create value at Clear Channel Outdoor

Business: Clean the duct outdoors is an out-of-home advertising company that offers a variety of advertising services, including billboards, street furniture, transit displays and airport displays. It also sells street furniture equipment, provides cleaning and maintenance services, and manages public bicycle programs. Clear Channel is divided into the following segments, which account for the following percentage of revenue: Americas (45%); Airports (10%, in the US and the Caribbean); European-Northern (23%); Europe-South (19%); and Other (3%, includes Latin America).

Stock Value: $661M ($1.37 per share)

Ownership percentage: 5.08%

Average price: $1.98

Comment from the activist: Legion is an activist investor whose managing directors are Chris Kiper, formerly of the Shamrock Activist Value Fund, and Ted White, formerly of the European activist fund Knight Vinke. The Legion prefers to do its active work behind the scenes, resorting to proxy combat if friendly discussions don’t go well. The firm has significant experience with consumer retailers.

Legion sent a letter to Clear Channel’s board expressing concern about the scope and pace of the company’s current strategic review process. The firm also argued that the board should consider a broader strategic review process, including potential divestitures of other non-core assets and a selection of US assets or a sale of the entire company.

CCO is one of the largest and highest quality out-of-home (“OOH”) advertising companies. The OOH business has long-term growth prospects and a strong case for billboard assets in particular. Clear Channel effectively has two lines of business – Americas and Europe, each with very different business models and valuations. The European business works on fixed-term contracts with municipalities, which are redeemable when they expire. Because of this, the European business trades at around 8 times earnings before interest, tax, depreciation and amortisation. Most of the US business is company-owned billboards, which trade at around 13-15 times EBITDA, respectively. What’s more, these billboards are going digital, which will allow for roughly four times the revenue and six to 10 times more EBITDA per billboard. However, this conversion requires the consent of each municipality and will not be a quick process.

Despite its market-leading position, Clear Channel’s stock has severely underperformed since its spinoff from iHeartMedia in May 2019. CCO currently trades 79% below its pre-deal share price and 65% below its post-separation peers. CCO’s underperformance has been attributed to several factors, but mainly to the company’s high leverage and suboptimized conglomerate structure, which exacerbates volatility and increases complexity. This has led to a misunderstanding by the market of the intrinsic value of the underlying assets, which should be significantly higher than the current share price implies. Legion Partners conducted a sum-of-the-parts analysis based on adjusted EBITDA estimates for 2024, which represents a 230% increase ($3.57 implied valuation compared to $1.08 as of May 12). The firm believes this could be unlocked as the company moves to a US-only play and reduces leverage. Legion saw private market multiples for OOH assets firm, although multiples for publicly traded OOH peers have recently been squeezed given concerns of a potential macroeconomic slowdown. Legion believes industry consolidation is an active pursuit for any OOH player given the rapid synergies.

Legion has been actively engaged with the company over the past two years and most recently held a meeting with management on May 12, where Legion expressed concerns about the pace and scope of the company’s strategic review process. In particular, Clear Channel is prioritizing the sale of assets within Europe-South, despite the fact that a significantly larger part of the business is Europe-North. Moreover, since this European strategic review began in December 2021, Clear Channel has announced the sale of businesses in Italy, Spain and Switzerland. This is relevant because, as a fixed-contract business, value declines as contracts approach maturity. Accordingly, Legion is working to accelerate the sale of its European business.

Legion sees two potential ways to create value here. First, the company could sell its European and Latin American businesses and become a pure US play. While there is little value for Europe-South and Latin America, Legion estimates that the Europe-North business could generate $500 million to $600 million in sales, which could be used to break even. Additionally, while the sale of Europe-South and Latin America may not generate significant revenue, it will eliminate distractions and allow management to focus on the US’s crown jewel asset. Since the sale of the European business will not be enough to optimally liquidate the balance sheet, Clear Channel may also consider selling selected US assets. Legion would like to see management implement this plan as it explores a potential sale of the entire company. Such a sale will be more complicated and perhaps less profitable than another plan, but it will have the benefit of certainty.

The CCO first announced its strategic review of its European business in December 2021 and achieved little. It’s unclear why this is and what the jam is, but if it continues, the Legion will want to be in the boardroom to get a better view. The Legion has shown in the past that it does not hesitate to request a proxy if it deems it necessary. We have no doubt that if the firm does not want to go down one of the two paths outlined by the board, Legion will be looking for board seats. As the nomination window does not open until January 4, 2024, the firm has plenty of time to make this decision.

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