IHeartMedia Accused of Using Unit Like Piggy BankLaurel Brubaker Calkins
Suit says subsidiary acts for parent company not shareholders
Claim follows iHeart victory in dispute with senior lenders
IHeartMedia Inc. shouldn’t be allowed to treat its Clear Channel Outdoor Holdings unit like a piggy bank and siphon off revenues to repay debts, according to a shareholder suit.
Gamco Asset Management Inc., which owns almost 10 percent of the outdoor-media subsidiary’s publicly traded shares, accused CCOH’s board of violating a duty to protect its shareholders by always acting in the best interest of the parent company at the expense of the subsidiary.
Gamco particularly complained about an agreement that automatically routes daily CCOH revenues to iHeart. The deal leaves the outdoor unit “‘unable to exploit business opportunities” and with a “virtually uncollectible receivable" from its parent company of $640 million, Norman Monhait, Gamco’s lawyer, said in Thursday’s filing in Delaware Chancery Court..
The outdoor media company’s board considers Gamco’s suit to be without merit and “takes seriously its responsibilities to the company and to all CCOH stockholders,” Wendy Goldberg, iHeart’s spokeswoman, said in an e-mailed statement. “The board established a special committee of independent directors in 2013 for the specific purpose of monitoring the intercompany note between CCOH” and its iHeart parent.
Gamco backed iHeart in the recent Texas trial between the company and some of its senior lenders, who lost a battle to declare defaults on about $6 billion of notes after iHeart shifted 100 million CCOH shares to a unit beyond the lenders’ reach. The judge agreed with iHeart and Gamco that the share transfer was permitted under company loan terms. But, in a separate filing in the San Antonio case, Gamco said iHeart’s valuation of that deal at $500 million was “wrong.”
IHeart, the largest U.S. radio-station owner, has scrambled to stay current on roughly $20.8 billion in debt accumulated in 2008, when the company was acquired by private equity giants Bain Capital Partners LLC and Thomas H. Lee Partners LP. Almost $8.5 billion of these debts will come due in the next three years, according to data compiled by Bloomberg, leaving iHeart in “financial desperation,” Monhait said.
IHeart lawyers told the judge in the Texas case that the lenders’ default threats could’ve triggered immediate calls on as much as $12 billion in borrowings, potentially tipping the company into bankruptcy. While iHeart insists it hasn’t missed any debt payments, Monhait said it is “alarming” that the company recently added a pair of turnaround specialists to its board.
“It appears that the iHeart defendants are already preparing for bankruptcy, which would freeze iHeart’s ability to repay” the money it owes the outdoor media unit, Monhait said in asking for a speedy trial. “IHeart is abusing its position as CCOH’s controlling stockholder in an attempt to stave off its own financial demise and avoid forcing the private equity defendants to infuse iHeart with new equity capital.”
Gamco asked the Delaware court for a September trial of the complaint, which also names the company’s individual board members, Bain Capital and TH Lee as defendants.
The case is Gamco Asset Management Inc. v. IHeartMedia Inc., 12312-VCS, Delaware Chancery Court.