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900202.11000/6834008v.9
Hearing Date: March 9, 2010 10:00 a.m.
BLANK ROME LLP Counsel to Virtus Capital LLC and Kenneth S. Grossman Pension Plan The Chrysler Building 405 Lexington Avenue New York, New York 10174 Marc E. Richards Andrew B. Eckstein (212) 885-5000
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
In re: CITADEL BROADCASTING CORPORATION, et al.,
Debtors.
Chapter 11 Case No. 09-17442 (BRL) Jointly Administered
OBJECTION OF VIRTUS CAPITAL LLC AND KENNETH
S. GROSSMAN PENSION PLAN TO THE DISCLOSURE STATEMENT FOR THE JOINT PLAN OF REORGANIZATION OF CITADEL
BROADCASTING CORPORATION AND ITS DEBTOR AFFILIATES PURSUANT TO CHAPTER 11 OF THE BANKRUPTCY CODE
900202.11000/6834008v.9
PRELIMINARY STATEMENT
Virtus Capital LLC and Kenneth S. Grossman Pension Plan (the “Shareholders”) hereby
object to the proposed Disclosure Statement filed by the Debtors, Citadel Broadcast Corporation,
et al. (“Debtors” or “Citadel”) on or about February 3, 2010, (the “Disclosure Statement”).1 As
discussed more fully below, not only does the Disclosure Statement not contain “adequate
information” as that term is defined in section 1125(a) of the Bankruptcy Code, but it contains
outdated, inaccurate and misleading information designed to promote acceptance of the Debtors’
Plan; a plan which severely and misleadingly undervalues the Debtors and their assets and
prospects, and significantly short-changes the Debtors’ creditors and equity holders in favor of
the Debtors’ Bank Lenders and Senior Management.
As discussed more fully below, both the Debtors and the broadcast industry as a whole
are in the midst of a significant turnaround. Yet the Debtors, by virtue of their pre-petition lock-
up agreement with their Bank Lenders, are on course to race through confirmation of the Plan
which understates value to the detriment of a number of constituencies. The Debtors are not
hemorrhaging funds. To the contrary, the Debtors are paying interest to their Bank Lenders and
stockpiling cash, even in the historically slowest revenue period of the year for the broadcasting
business. The only rationale for racing through the plan confirmation process is to enable the
Bank Lenders to seize all of the upside at the expense of creditors and holders of Interests. This
process should be slowed down, so that accurate, comprehensive and current information may
serve as the cornerstone of the Debtors’ plan of reorganization.
1 Capitalized terms not defined herein have the same meaning ascribed to them in the Debtors’ Disclosure Statement and/or “Debtors’ Joint Plan of Reorganization” (the “Plan”).
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A. THE DEBTORS’ DISCLOSURE STATEMENT IS INACCURATE AND PROVIDES MISLEADING INFORMATION
The Plan Significantly Understates Enterprise Value and Equity Value
• The revenue projections set forth in the Disclosure Statement fail to reflect
a broadly-recognized, substantial turnaround underway in the broadcast
industry and need to be updated. These projections cannot be relied upon
by creditors and investors seeking to evaluate the proposed Plan.
• On the cost and expense side, the projections omit substantial savings that
would otherwise be recognized by using bankruptcy to reduce costs
through contract renegotiations and rejections. The Shareholders believe
meaningful cost savings have already been put in place, or will be put in
place shortly, that inexplicably have not been disclosed in the Disclosure
Statement or built into the financial projections.
• The trading multiples used in the Debtors’ valuation analysis is already
outdated. The broadcast turnaround has been broadly recognized and the
public market valuations for broadcast companies have improved
dramatically over the past several months and in fact continue to improve
on a daily basis. The financial analysis needs to be updated to reflect the
increase in current trading multiples to provide adequate disclosure to
creditors and shareholders.
• The valuation analysis in the Disclosure Statement fails to include two
comparable companies in the “Peer Group” which are among the most
comparable companies in the radio broadcasting industry and that are
among those most comparable to the Debtors. The same valuation analysis
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includes companies in the Peer Group that are clearly much poorer
comparisons. The Disclosure Statement needs to explain the reason, if
any, for these apparently erroneous exclusions and inclusions, and disclose
the impact on market multiples and valuation resulting from those
selections. This seems to be a clear example of preferential cherry-
picking.
• Because the revenue projections and changes in valuation metrics have not
been updated to reflect the broadcast industry’s turnaround, the Disclosure
Statement does not adequately disclose or reflect the valuation that would
result therefrom. Such information would demonstrate that there is
substantial enterprise value in excess of the Debtors’ secured indebtedness
and therefore general unsecured creditors in this case should be paid in full
and shareholders should receive a meaningful recovery.
Perhaps most significantly, the Disclosure Statement does not explain to creditors and
shareholders why the Debtors are proceeding with a plan at this time – when broadcast revenues
are turning around and a recovery is under way. Creditors and shareholders need to understand
the reason that the Debtors are opting not to avail themselves of the ability to operate in chapter
11 and use the tools and protections Congress intended to enable them to restructure, reorganize
and turn around their affairs in bankruptcy to maximize value for all constituencies, and are
instead using bankruptcy process to compromise the rights of creditors and shareholders without
providing adequate information.
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B. INADEQUATE DISCLOSURE
FCC Trust Issues
• The Disclosure Statement fails to adequately describe the pitfalls and risks
stemming from the Debtors’ attempts to employ a trust to avoid FCC
foreign ownership restrictions, and the consequences of such action or the
timing attendant to such delay.
• The Disclosure Statement fails to disclose the significant foreign
ownership of the Lenders by hedge funds and private equity buyers as well
as the commercial banks among the Lenders. The result of the Plan –
conversion of said debt to equity – may result in foreign ownership that
may be in violation of FCC limits and therefore this existing group of
Bank Lenders may never be able to close with FCC Approval under the
structure contemplated in the Plan.
Executive Compensation Package
• The Disclosure Statement sets forth the amount and extent that Plan
Securities will be given to Debtors’ Senior Management, but fails to
disclose which individuals will be covered by the Executive Incentive
Program.
• Currently the Plan provides that the Equity Incentive Program will provide
for a certain percentage, not less than 7.5% and not to exceed 10%, on a
fully diluted basis of the issued and outstanding New Common Stock.
Based on the existing understated values at which the Bank Lenders and
Senior Management are to secure equity of the Reorganized Debtors, if the
Reorganized Citadel were valued according to industry experts, the new
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equity of the Reorganized Debtors will be approximately $1.8 billion;
which means Senior Management will receive a staggering sum of
between $135 and $180 million of value. Even assuming the Debtors’
own depressed values for the new equity of $1.1 billion, Senior
Management will receive an equally indecent sum of between $82.5 and
$110 million. The Shareholders submit that the amount of compensation
given to Senior Management is totally inappropriate under the
circumstances here.
BACKGROUND
A. THE DEBTORS’ BANKRUPTCY PROCEEDINGS
1. On December 20, 2009, the Debtors filed voluntary petitions for relief under
Chapter 11 of the Bankruptcy Code. The Debtors have continued in the management and
possession of their assets as Debtors in possession.
2. On February 3, 2010, the Debtors caused their Plan and Disclosure Statement to
be filed with the Court and moved for approval of the Disclosure Statement.
3. A hearing on the Disclosure Statement is currently scheduled for March 9, 2010.
B. THE SHAREHOLDERS
4. The Shareholders collectively own approximately 7 million shares of publicly
traded stock in the debtor, Citadel Broadcasting Corporation, classified in Class 8 under the Plan.
5. Premised upon outdated valuation, projections and performance information
going back to the third-quarter of 2009, the Plan, devised to justify a issuance of 90% of newly
issued equity of the Reorganized Debtors to the Debtors’ Bank Lenders, proposes to fully
extinguish the present holders of equity Interests to their severe prejudice and detriment and not
pay unsecured creditors in full.
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6. The Plan is crafted in accordance with the Plan Support Agreement executed by
the Debtors and the Bank Lenders months ago, shortly after commencement of an industry-wide
recovery, broadly recognized by many third parties, including industry researchers, consultants,
financial experts, peer companies and others. In the subsequent months, the industry’s and the
Debtors’ turnaround has continued unabated. Reliance on the pre-recovery financial data in the
Disclosure Statement misleads parties into believing that the Debtors are hopelessly insolvent;
justifying the prejudicial treatment to unsecured creditors and holders of Interests.
OBJECTIONS
7. The Shareholders object to the Disclosure Statement because it fails to provide
“adequate information,” as that term is defined under 11 U.S.C. § 1125.
I. STANDARD FOR APPROVING DISCLOSURE STATEMENT
8. Section 1125 of the Bankruptcy Code, as amended, provides that a disclosure
statement must, among other things, contain “adequate information.” That term is defined, in
pertinent part, as:
Information of a kind, and in sufficient detail, as far as is reasonably practical in light of the nature and history of the debtor and the condition of the debtor's records, including a discussion of the potential material Federal tax consequences of the plan to the debtor, any successor to the debtor, and a hypothetical investor typical of the holders of claims or interests in the case, that would enable such a hypothetical investor of the relevant class to make an informed judgment about the plan, but adequate information need not include such information about any other possible or proposed plan and in determining whether a disclosure statement provides adequate information, the court shall consider the complexity of the case, the benefit of additional information to creditors and other parties in interest, and the cost of providing additional information[.]
11 U.S.C. § 1125(a)(l) (emphasis added).
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9. This disclosure requirement is “crucial to the effective functioning of the federal
bankruptcy system.” Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355, 363
(3d Cir. 1996); see also In re Oneida Motor Freight, Inc., 848 F.2d 414, 417 (3d Cir. 1988) (“The
preparing and filing of a disclosure statement is a critical step in the reorganization of the
Chapter 11 debtor.”). The importance of adequate information is underscored by the reliance
creditors and courts place on the information the plan proponent provides in the disclosure
statement in determining whether or not to approve the proposed plan of reorganization. See
Ryan Operations, 81 F.3d at 362; Oneida, 848 F.2d at 417. Without “sufficient financial and
operational information to enable each participant to make an ‘informed judgment’ whether to
approve or reject the proposed plan,” the proposed disclosure statement fails to meet the
requirements of Section 1125(a)(l). In re Civitella, 15 B.R. 206, 208 (Bankr. E.D. Pa. 1981).
10. “Adequate Disclosure” presumes that the disclosure is not inaccurate or
misleading. In re Adelphia Communications Corp., 352 B.R. 592, 600 (Bankr. S.D.N.Y. 2006);
In re Century Glove, Inc., 860 F.2d 94 (3d Cir. 1988). “[A]n adequate disclosure determination
requires a bankruptcy court to find not just that there is enough information there, but also that
what is said is not misleading…it is inconceivable to me that I or any other bankruptcy judge
would regard any disclosure as adequate if known to be inaccurate or misleading.” Adelphia,
352 B.R. at 600.
11. The Disclosure Statement lacks adequate disclosure of the most current and
accurate information of a kind and in sufficient detail to enable parties in interest (and any other
similar holders of Claims or Interests) to determine the proposed treatment of their interests and
make an “informed judgment whether to approve or reject the proposed Plan.” Indeed, the
Disclosure Statement and the Plan contain misleading information and/or omit material facts that
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should be available to holders of Claims or Interests. In order to bring the Disclosure Statement
into compliance with Section 1125 of the Bankruptcy Code and to make the Plan confirmable
under the Bankruptcy Code, the Disclosure Statement and Plan must be modified and updated or
the Disclosure Statement should not be approved.
12. As explained by the court in In re Eastern Maine Elec. Coop., Inc., 125 B.R. 329,
333 (Bankr. D. Me. 1991), the process of evaluating a disclosure statement usually involves two
stages of analysis. First, “[i]f the disclosure statement describes a plan that is so ‘fatally flawed’
that confirmation is ‘impossible,’ the court should exercise its discretion to refuse to consider the
adequacy of disclosures.” Id.; see also, In re Beyond.com Corp., 289 B.R. 138, 140 (Bankr. N.D.
Cal. 2003) (explaining that disclosure statement may not be approved when the underlying plan
is patently unconfirmable); In re Cardinal Congregate I, 121 B.R. 760, 764 (Bankr. S.D. Ohio
1990) (“The Court believes that disapproval of the adequacy of a disclosure statement may
sometimes be appropriate where it describes a plan of reorganization which is so fatally flawed
that confirmation is impossible.”) Indeed, as the proposed treatment of holders of Claims and
Interests is premised upon flawed, outdated and misleading information as set forth in the
Disclosure Statement, it is accordingly fatally flawed. The Disclosure Statement should not be
approved in its current form.
II. INACCURATE FACTS, OUTDATED FINANCIAL INFORMATION AND PROJECTIONS SERVE TO ARTIFICIALLY SUPPRESS VALUE AND PRECLUDE APPROVAL OF DISCLOSURE STATEMENT
A. REVENUE PROJECTIONS ARE VASTLY UNDERSTATED
13. Radio broadcasting is emerging from two years of cyclical decline and is
experiencing double-digit revenue growth in the first quarter and is clearly on pace for
significant growth for the year. In contrast, the Debtors’ projections call for negative revenue
growth in 2010.
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14. Katz Media Group, Inc., a leading national advertising company that represents
over 4,000 radio stations has reported on broadcast radio’s first quarter 2010 year-over-year
national revenue trends2:
• Broadcast radio’s January 2010 actual national revenue was 26% higher than
January 2009.
• Broadcast radio’s first quarter 2010 national revenue is pacing 19% ahead of first
quarter 2009.
15. CBS Corporation reports broadcast revenue results and pacings consistent with
Katz’s report on revenue growth:
“TV stations were the first to see signs of the recovery, which started to benefit Radio in the quarter. And in December Radio had its best month of the year for revenue, led by the Automotive category which was up high single digits. While Q1 is not finished yet, radio stations are pacing up mid-single digits with our top 10 markets showing low teen increases, driven by several advertising categories.” -Joe Ianniello, CFO, February 18, 2010, Earnings Call (emphasis added)
16. Entercom Corp. (a company comparable with the Debtors) concurs on the upward
trend:
“Now looking ahead we are increasingly optimistic about 2010 and 2011 based upon a number of indications of recovery and demand in the ad market and in light of easy comparative results after two ugly years of cyclical economic decline. The fact is that the potential exists for very substantial revenue gains over the next couple of years as we recover from the deep declines in ad spending that have impacted all forms of media. The combination of economic recovery, easy comps, and an improving competitive position relative to other media offer the potential for solid growth in the years ahead.” -David Field, CEO, November 2, 2009, Earnings Call
“Business conditions improved significantly during the fourth quarter and this positive trend has accelerated into the first two
2 As reported by Radio-Info.com on 2/10/2010
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months of 2010.” – David Field, CEO, February 23, 2010, Earnings Call (emphasis added)
B. REVENUE IS EXPECTED TO GROW SIGNIFICANTLY IN 2010
17. Recent industry data and guidance reflect that 2010 revenue growth for the
Debtors will be substantial. There is no known current industry data to support the Debtors’
projections that negative 0.3% revenue growth is reasonable.
18. Pacings reported for the radio broadcast industry for the first quarter of 2010
indicated that the industry will achieve double-digit growth on a year-over-year basis for that
period, with Katz Media reporting 26%, 11% and 13% national revenue growth in January,
February and March, respectively.3 It is highly reasonable to assume continuity of first quarter
trends at least into the second quarter of 2010. Therefore, it is reasonable to assume the Debtors
will experience year-to-year revenue growth in excess of 10% for the first six months of 2010.
19. Although it is harder to project or to assume continuity of year-over-year trends in
the second half of 2010, for the following reasons it is entirely logical to believe that revenues
for the third and fourth quarters of 2010 should continue to be strong.
• 2010 is an active election year, meaning that broadcasters will realize significant
incremental political advertising revenue over 2009, which was not a political
year.
• Political advertising revenue is expected to be realized beginning with primary
season in the late second quarter of 2010.
3 As reported by Radio-Info.com on 2/10/2010
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• The current political climate, plus the recent Supreme Court ruling on political
speech, have led industry participants to anticipate a big political advertising year,
combining both candidate advertising and issue-based advertising. 4
• Car advertisers have begun to return to radio advertising after a tough year of
restructurings and bankruptcies. With these companies now restructured, radio ad
spending has been increasing.
20. Citadel Radio’s 224 radio stations are comprised of 24 large market stations
(“Former ABC Stations”) and 200 middle and smaller market stations. The Former ABC
Stations are located in nine of the top 16 Designated Market Areas, as defined by Arbitron. As
set forth in the Disclosure Statement, the Debtors operate radio stations in each of Los Angeles,
New York Chicago, Dallas/Ft. Worth and San Francisco, which represent respectively, the top
five markets across the country. As evidenced by commentary from CBS Corp.’s CFO, large
market stations typically enjoy a higher proportional share of national revenue, thus positioning
the Debtors to meaningfully participate in the broadcast turnaround underway. Furthermore,
there is no reason to believe that increased political advertising will not be even greater in these
and the Debtors’ other markets this election year.
21. For these reasons, it would be reasonable to assume that the Debtors’ revenues
should grow by 8-10% during 2010. Certainly, based on information now available with respect
to the broadcast turnaround, such an assumption would be far more reasonable than the Debtors’
unsupportable “no growth” or “slight growth” scenario.
4 See generally, G. Palmer, New York Times, Feb. 28, 2010, Decision Could Allow Anonymous Political Contributions By Businesses, “[C]orporations will be able to spend unlimited amounts of money on advertisements expressly advocating for a candidate’s election or defeat.”; B. Baker, Wall Street Journal, January 22, 2010, Networks Decry Campaign Financing Ruling; The Supreme Court’s Defense of First Amendment Rights Is Viewed by the Media as “Opening Floodgates” to “Big Money.”
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• As further evidentiary support, independent research by Jefferies & Co. in early
January, published before double-digit pacing information for 2010 was available,
projected 4.2% revenue growth for the Debtors for 2010.5
Unfortunately none of this information is available in the Disclosure Statement, which as a direct
result, is materially deficient in providing accurate, important and necessary information to
Creditors and Interest Holders. And in fact, there is evidence that the Debtors were aware of
their conservative disclosures, and tried to hide the explosion in cash build-up and earning
growth from creditors, shareholders and the Court. In its 13-Week Cash Forecast, an essential
and important document filed by the Debtors on December 23, 2009, the Debtors estimated the
ending cash balance for January 31, 2010 to be $57.2 million. In fact, the actual cash balance on
January 31, 2010 is $80.2 million, an overage of $23 million. This is a “miss” in forecasting of
40% in just one month!
22. With such a profoundly higher cash balance – undoubtedly stemming from the
higher revenues falling directly to the bottom line in this high fixed cost, low variable cost
business – the Debtors should be rushing to amend their 13-Week Cash Forecast so that they can
deliver greater value to all their constituents. In fact, this is what the equities of the bankruptcy
process require of debtors seeking this Court’s discharge provisions. However, the Debtors have
made no effort to amend their flawed 13-week Cash Forecast and the Court need look no further
for a motivation than the approximately $100 million of compensation that will be taken from
shareholders only to be given directly to the same Senior Management who are prematurely
rushing the Debtors’ emergence from Chapter 11.
5 Jeffries & Company, Inc – Media Sector Update: 4Q09 Outlook - January 8, 2010
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C. EXPENSE PROJECTIONS DO NOT REFLECT SUBSTANTIAL SAVINGS OPPORTUNITIES AVAILABLE IN BANKRUPTCY
23. There are significant expense reduction opportunities that are inexplicably
excluded from the Debtors’ projections. Yet the Debtors are racing towards confirmation in
overdrive. This is hardly a wasting asset or a melting ice cube. In fact, based upon the Debtors’
actual performance reflecting a February 15, 2010 cash balance of $82.7 million, $18 million
greater than projected two months earlier, the cash on hand by April 30, 2010 may well exceed
$100 million. Curiously, the Liquidation Analysis uses a February 15, 2010 date which is a date
now past and not relevant to even a theoretical Liquidation Analysis which states cash on hand of
$82.7 million. Why did the Debtors fail to use the April 30, 2010 date which would create the
required “apples-to-apples” comparison with the proposed Emergence Date under a
reorganization plan? The inescapable conclusion is that a decision was made by the Debtors not
to show Citadel’s improved operations and performance being projected forward in the
Disclosure Statement.
24. There is absolutely no evidence that the assets of the Debtors are being
diminished by remaining in bankruptcy. In fact, the evidence is overwhelming to the contrary.
Since the bankruptcy filing on December 20, 2009, according to the Monthly Operating Report
(“MOR”) filed by the Debtors on February 25, 2010, the Debtors’ cash on hand increased from
$49,145,742 on December 20, 2009, to $80,220,953 on January 31, 2010. Presumably, today the
cash balances are even higher. Further, the Debtors turned a Net Income profit of $4,600,676 for
the 42 days from December 20, 2009 through January 31, 2010. Apparently, bankruptcy agrees
with these Debtors as both cash on hand and profitability (as measured by net income) have
grown for the short time Citadel has been a debtor. The Net Income generation should be of
particular interest as the existence of positive net income – particularly as here when it is
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generated by sheer revenues exceeding operating expenses without any accounting reversals or
reserves – is the surest sign that there is positive value for the shareholders.
25. The actual expense reduction opportunity cannot be known by the Shareholders,
but it appears reasonable to assume that at least a 6% cost reduction can be achieved in
bankruptcy, or $30 million annually, having a significant impact on value.6
26. The Shareholders readily acknowledge that in some circumstances, where a
debtor is unraveling for any number of reasons, a race to confirmation or sale is often critical.
By contrast, where market conditions, along with the debtor’s actual performance, are
improving, there is often benefit to stakeholders to permit the scope of improvement to fully
manifest itself before committing to a plan of reorganization that adversely affects certain
stakeholders.7 This Court on numerous occasions has allowed a debtor sufficient time and
opportunity to work though the myriad of issues and hurdles to accomplish a successful
reorganization. As this Court stated long ago in citing the Second Circuit holding in Johns-
Manville Corp., 801 F.2d 60, 62, “The purpose of the protection provided by Chapter 11 is to
give the debtor a breathing spell, an opportunity to rehabilitate its business and to enable the
debtor to generate revenue.” In re Ionosphere Clubs, 105 B.R. 773, 777 (Bankr. S.D.N.Y. 1989).
In many instances the debtor was not able to realize increased profitability so quickly after the
petition date. Here the Debtors’ performance, even in so short a period, has been remarkable.
Yet the Debtors are pursuing a Plan that does not pay Creditors in full, wipes out equity, and
6 It should be noted that the arguments made and comparisons to other broadcasters herein are all taken from publicly available information. The Shareholders have not been granted official status and have not conducted any due diligence of the Debtors’ operations beyond that which has been stated/published by the Debtors in public filings. 7 Consider the General Growth Properties case, where with the modest passage of time has resulted in increased enterprise value for the benefit of stakeholders.
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enriches Senior Management and the Bank Lenders in an unconscionable fashion. Surely that is
not the purpose of Chapter 11.
D. THE DISCLOSURE STATEMENT FAILS TO PROVIDE ADEQUATE DISCLOSURE OF RECENT, UNEXPLAINED FINANCIAL RESULTS
27. The Disclosure Statement fails to explain recent financial disclosures that indicate
that the Debtors may be accumulating cash at a rate significantly in excess of the Debtors’
projections or the reason for such accumulation.
28. The Debtors’ cash flow projection filed on December 23, 2009 estimated cash for
the week ending February 12, 2010 would be $64.7 million. However, upon the filing of the
Disclosure Statement on February 3, 2010, the Debtors stated, tucked away on page 86 of an 88
page filing, that “The cash balance as of February 15, 2010 has been estimated at $82.7 million.”
As noted, this is an $18 million improvement in the Debtors’ cash balance.
29. The Debtors’ actual cash balance as reflected in their MOR as of January 31,
2010 was $80.2 million, as opposed to their 13 week forecast projection of $57.2 million; a $23
million favorable increase.
30. The 13 week forecast projected $92 million of receipts from October 20, 2009
through January 29, 2010. The January MOR reflects that operational receipts were $98 million;
a $6 million favorable increase. This data is corroborative of an increase in revenue of at least
6.5%.
31. The 13 week forecast projected $72 million of disbursements for the period from
October 20, 2009 through January 29, 2010. The January MOR reflects that disbursements for
the period were $67 million for such period; $5 million less than projected. This data is
corroborative of a run-rate of expense and contract negotiation savings of at least $30 million per
year.
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32. The beginning cash balance on December 20, 2009, according to the 13 week
projection, was $36.5 million. The January MOR reflects that beginning cash was actually $49.2
million; over $12 million more than originally reflected. With the 13 week forecast having been
filed with this Court on December 23, 2009 – three days after the December 20, 2009 cash
balance was known – the question must be raised as to why the Debtors used an inaccurate
starting cash balance? This Court should not automatically defer to the Debtors’ judgment in
agreeing to wipe out shareholder interests, but should make the Debtors re-analyze the
company’s condition and report back to the Court with new projections.
33. The Debtors’ actual performance to date bears out that the Debtors’ performance
will continue to be far better than that projected to justify the Plan and should be addressed, and
not overlooked, in the Disclosure Statement. Respectfully, the Court should insist and require
the Debtors’ meaningful improvements in disclosure.
E. REVISED 2010 EARNINGS ASSUMPTIONS SUGGEST SUBSTANTIAL EQUITY VALUE
34. The adjustments to bring revenues and expense savings into line with actual
experience suggest potential 2010 operating cash flow often referred to as “EBITDA,” or
Earnings Before Interest, Taxes and Depreciation, increasing from Debtors’ low-ball estimate of
$209.7 million to a more realistic $269.6 million.
• These revised projections are based upon comments from industry insiders
referred to elsewhere in this objection and are applied to the Debtors’ business
structure.
• The revised projections include a reasonably conservative 8% year-over-year
growth rate for 2010 revenue, reflecting current trends.
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• The revised projections exclude incremental expense reductions that should be
available to the Debtors while operating under the protection of the automatic stay
($ in millions) For Year Ending December 31, 2010 Disclosure Statement
Projections Revised Projections Net Revenue $721.3 $781.4 Operating Expenses (491.8) (491.8) Corporate Overhead (20.0) (20.0) EBITDA $209.7 $269.6 F. OBSOLETE VALUATION METRICS NEED TO BE UPDATED
35. The Debtors’ advisor, Lazard, uses an obsolete range of 7.4x to 8.4x market
trading multiple of Total Enterprise Value (“TEV”) to last 12 month (“LTM”) EBITDA for its
“Peer Group” as of September 30, 2009. In the last month alone, significant changes in the
market for publicly traded radio broadcasting stocks have rendered this range of multiples
obsolete. Updating the enterprise value to a current March 3, 2010 date increases the mean
valuation multiple to 9.1x which is higher than any of the ranges used by Lazard.
Lazard Peer Group – Data Updated as of 3/3/2010 -($ in millions)
Company Name Market
Cap. Net
Debt TEV
LTM (“Last 12 Months”) Revenue
LTM EBITDA
TEV / EBITDA
Entercom Communications Corp.
411.5 766.4 1,177.9 380.5 99.1 11.9
Radio One Inc.8 177.6 646.9 830.1 280.6 81.9 10.1 Salem Communications 129.7 300.0 429.7 202.0 54.6 7.9 Saga Communications, Inc. 63.9 114.0 177.9 123.9 27.0 6.6 Mean 9.1x G. INAPPROPRIATE VALUATION METRICS
ARTIFICIALLY DEPRESS ENTERPRISE VALUE
36. The “Peer Group” of comparable companies used by Lazard is inappropriate.
8 Include Minority Interests and/or Preferred Equity at Market Price.
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37. Lazard excludes Emmis Communications Corp. (“Emmis”) and Cumulus Media,
Inc. (“Cumulus”), comparable companies that trade at higher multiples than the “Peer Group”
currently reflected in the Disclosure Statement and that are widely considered to be closely
comparable to the Debtors’, including by industry analysts at Jefferies & Co. and Capital IQ.9
Notably, Bloomberg, one of the industry standards for comparable company valuations, selects
both Emmis and Cumulus on its “Bloomberg Peers” screen as comparable companies to Citadel.
To exclude these two companies from this important valuation decision is sheer bias.
38. Lazard’s Peer Group analysis is skewed and incomplete. By substituting
Cumulus and Emmis, which are more comparable to the Debtors, for Radio One Inc. (“Radio
One”), Saga Communications Inc. (“Saga”) and Salem Communications (“Salem”), which are
not listed as a Bloomberg Peer for Citadel in Lazard’s analysis, a “Revised Comp Set” with a
12.1x TEV to EBITDA trading multiple results, even using obsolete trading prices from
February 3, 2010.
• Like the Debtors and Entercom, Cumulus and Emmis radio station portfolios
consist of large and mid-sized markets that diversify across popular music and
talk radio genres to maximize audience reach.
• In contrast, Salem’s format is Christian and Conservative Talk focused; Radio
One targets African-American audiences in urban markets; and Saga broadcasts to
small, rural markets. All three of these companies are geared to specific niche
markets.
• Larger and more diverse radio broadcasters like Entercom, Cumulus and Emmis
are more comparable to Citadel than smaller, niche focused companies, like 9 Source: Media Sector Update: 4Q09 Outlook; Jeffries & Co.; January
Source: Comparable Company Analysis, Capital IQ, Inc., a division of Standard & Poor’s, accessed February 2, 2010
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Salem and Radio One, particularly if given the reach of the legacy and industry
dominance of the Former or ABC Stations that Citadel acquired from Disney.
Table A: A Revised Comparable Set of Peer Companies – Data as of 2/3/2010 -($ in millions).
Company Name Market
Cap. Net
Debt TEV LTM
RevenueLTM
EBITDA TEV /
EBITDACitadel Broadcasting Corp. 12.5 2,060.1 2,072.6 723.7 197.3 10.5x Entercom Communications Corp.
331.4 766.4 1,097.8 380.5 99.1 11.1x
Emmis Communications Corp.10
45.2 333.8 524.5 276.2 32.0 16.4x
Cumulus Media Inc. 104.9 623.3 728.2 261.5 70.2 10.4x Mean 12.1x Mean (ex-Citadel) 12.6x
39. Simply adding Cumulus and Emmis to Lazard’s group of comparable companies
(without removing less comparable Radio One, Saga and Salem) results in a “Baseline Comp
Set” with a 10.4x trading multiple that is far more realistic than Lazard’s “Peer Group” and much
more conservative than the “Revised Comp Set”, again, even using obsolete trading prices from
February 3, 2010. Adding Cumulus and Emmis reduces the effect of bias in the valuation by
excluding these directly comparable companies.
10 Include Minority Interests and/or Preferred Equity at Market Price.
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Baseline Comp Set -Data as of 2/3/2010 -($ in millions).
Company Name Market
Cap. Net
Debt TEV LTM
RevenueLTM
EBITDA TEV /
EBITDACitadel Broadcasting Corp. 12.5 2,060.1 2,072.6 723.7 197.3 10.5x Entercom Communications Corp.
331.4 766.4 1,097.8 380.5 99.1 11.1x
Radio One Inc.11 181.4 646.9 833.9 280.6 81.9 10.2x Emmis Communications Corp.
45.2 333.8 524.5 276.2 32.0 16.4x
Cumulus Media Inc. 104.9 623.3 728.2 261.5 70.2 10.4x Salem Communications 123.1 300.0 423.1 202.0 54.6 7.7x Saga Communications, Inc. 59.6 114.0 173.6 123.9 27.0 6.4x Mean 10.4x Mean (ex-Citadel) 10.4x
40. An 11.0x valuation multiple, representing a midpoint between the Baseline Mean
of 10.4x and Revised Mean of 12.1x, is eminently reasonable to determine the Debtors’ value,
and certainly far more accurate than the artificially depressed and outdated 7.4x to 8.4x valuation
multiple used in the Disclosure Statement.
41. Using an appropriate Peer Group to derive a current trading multiple, and revising
obsolete assumptions for 2010 revenue to reflect current information about the broadcast
turnaround, it is evident that the Debtors’ enterprise value significantly exceeds its total
indebtedness.
Table B: Valuation with Updated Multiple: Using Disclosure Statement Projections
2010 EBITDA $209.7 Updated Trading Multiple 11.0x Enterprise Value $2,306.7 Plus : Current Cash on Hand – 2/15/10 82.7 Current Total Enterprise Value 2,389.4 Less : Current Indebtedness (2,120.1) Implied Equity Value $269.3
11 Include Minority Interests and/or Preferred Equity at Market Price.
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Table C: Valuation with Updated Multiple: Using Revised Projections
2010 EBITDA (8% revenue growth) $269.6 Current Trading Multiple 11.0x Enterprise Value $2,959.6 Plus : Current Cash on Hand – 2/15/10 82.7 Current Total Enterprise Value 3,048.3 Less : Current Indebtedness (2,120.1) Implied Equity Value $928.2
42. And the implication for the use of artificially low multiples by the Debtors is
legally significant. If the true Enterprise Value of the Debtors is $2.389 billion, as shown in
Table B above, and the Debtors will confirm a plan with only $762 million of debt and 90% of
the remaining equity going to the Banks, that would provide total value to the Banks of $2.227
billion ($762 mm + 90% x ($2,389.4 - $762 mm) = $2.227 billion) for recoveries of 105%.
43. The picture is even worse if the Enterprise Value as shown in Table C turns out to
be the more accurate valuation. Under Table C’s values, the Banks would receive total value of
$2.819 billion ($762 mm + 90% x ($3,048.3 - $762 mm) = $2.819 billion) for recoveries of
133%. As constructed, this is exactly what the Plan does.
44. The Shareholders believe that the Plan, which purports to deliver greater than a
100% return to the Bank Lenders, is fatally flawed and that the Disclosure Statement supporting
the Plan cannot be approved.
45. That the Plan unfairly favors the Lenders is self-evident. The original bank loan
agreements called for the Banks to be paid interest of LIBOR plus 2.50%. Currently LIBOR is
no higher than 1.00%, so the original terms of the loans called for the banks to earn a 3.50% rate
of interest. On $2.120 billion of debt, that would amount to annual cash interest expense of
$74.2 million. Under the Plan, the Debtors will pay an 11% rate of interest on $762 million,
which will create annual cash interest expense of $84 million. While it appears that the Banks
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are reducing the Debtors’ indebtedness by two-thirds, they are actually increasing the Debtors’
cash interest burden. So why are the Debtors rushing into this Plan?
46. Of equal concern is that the low debt level and high interest rate on Citadel’s
proposed new bank lines is unsupportable by comparisons with other radio broadcasting
companies. Reviewing the data in Table A above shows that every comparable radio company
has Debt to EBITDA ratios of between 6x and 10x, with the median at around 8x. Citadel, under
the Plan, will have a Debt to EBITDA ratio of only 3.7x under the Debtors’ low-ball forecast and
would have a Debt to EBITDA ratio of only 2.8x under the Revised Projections in Table C. The
Plan has an incredibly high 11% interest rate placed on debt that would be on a company with an
industry-low Debt to EBITDA ratio of between 2.8x and 3.7x.
47. The Disclosure Statement fails to provide adequate information to demonstrate to
creditors and shareholders that there is substantial enterprise value in excess of indebtedness and
consequently creditors should be paid in full and shareholders should receive a meaningful
distribution.
48. The Debtors’ January MOR demonstrates that Citadel’s strong cash flow
generation continues to ensure the adequate protection of secured lenders. In fact, the evidence
to date confirms that Citadel will generate substantial positive cash flow for every month it
remains in Chapter 11, thereby increasing its enterprise value. As such, there is no justifiable
reason as to why the Debtors must rush through the chapter 11 process, forgoing the
restructuring tools afforded by the automatic stay and ignoring the broadcast turnaround
underway.
49. The broadcast radio industry is not experiencing a secular decline contrary to
what the Debtors assert:
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• Historically, radio has lost less market share than other advertising media.
• A JPMorgan Local Advertising Research Report published in 2009 confirms that
Radio has increased its share of local advertising expenditures throughout the last
decade12:
• Radio’s local ad share increased significantly from 14.1% in 1997 to a
projected 17.6% in 2009.
• Broadcast Television’s local ad share increased slightly from 23.1% in
1997 to a projected 23.4% in 2009.
• Newspapers share of local ad share decreased from 39.9% in 1997 to a
projected 29.3% in 2009.
• Long-term local advertising trends combined with the irrefutable evidence of the
strong radio turnaround currently underway discredit the claim that radio is
experiencing a secular decline, and argues for a more patient and relaxed timeline
than the pell-mell rush currently underway as manifested by the Plan.
50. The recent turnaround demonstrates that radio broadcasting has survived and
passed a cyclical downturn and remains strong and is recovering further. Creditors and
shareholders should be afforded the benefit of that turnaround in the form of increased time to
reorganize which will directly lead to increased recoveries for all stakeholders. Secured creditor
recoveries would not be compromised and adequate protection can be provided. Perhaps Senior
Management’s recovery may not be as rich, but that would be the only constituency prejudiced.
12 JPMorgan North American Equity Research, 4/3/2009; Table 90, Estimated Local Advertising Expenditures
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III. INADEQUATE DISCLOSURE REGARDING FCC TRUST PRECLUDES APPROVAL OF DISCLOSURE STATEMENT
51. Exhibit C of the Disclosure Statement, FCC Considerations, goes to great lengths
advising that FCC Approval must be obtained by virtue of the Change in Ownership, in
connection with the Debtors’ emergence from Chapter 11. The Disclosure Statement discusses
the FCC Long Term Application to be submitted to obtain approval of the Transfer of Control
and the use of the FCC Short Term Application, should the Long Term Application be delayed
or protracted.
52. The Disclosure Statement cites to Section 310(b) of the Communications Act
which restricts foreign ownership or control of any entity licensed to provide broadcast services.
Foreign entities may not have direct or indirect ownership or voting rights of more than 25% in a
corporation controlling the license of a radio broadcast station. Because direct and indirect
ownership of Reorganized Citadel’s shares by non-U.S. persons or entities will proportionally
affect the level of deemed foreign ownership and control rights of Reorganized Citadel’s,
prospective shareholders, principally the Bank Lenders, will be required to provide information
to Citadel on their foreign ownership and control.
53. The Equity Allocation Mechanism is supposed to happen under the auspices of
the FCC Trust, a document which is described but not included. More importantly, it is unclear
by virtue of the makeup of the Bank Lenders whether the Reorganized Citadel, owned and
controlled by the FCC Trust, will exceed the foreign ownership limitations. This is a risk that is
hardly mentioned in passing and is impossible to assess today.
54. Further, given the level of foreign investors in most US hedge funds and private
equity funds, it is commonly expected that more than 25% of their investors be foreigners. This
is an inquiry that the Court should undertake and the Debtors should provide greater
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transparency of the proposed shareholder group. It is entirely possible that as the deal is
currently structured the Banks may exceed the 25% threshold today.
55. The Disclosure Statement states that the Holders of Senior Claims and General
Unsecured Claims will be issued Special Warrants which can be exercised for shares of New
Common Stock, subject to certain conditions, including provision of Ownership Certification.
But what happens if the level of Foreign Ownership exceeds the 25% threshold? These are risks
that should be elaborated upon, at the very least.
56. And what happens if during the time the FCC struggles with all the objections to
the ownership of Citadel by this group of investors, the Debtors continue to generate tremendous
cash flow, as they are currently doing, and it is clear that there is substantial equity value, yet the
Plan fails as a result of the FCC’s decision but the old shares have been cancelled? Then there is
one big mess. There will be the unprecedented situation of a class of shareholders wiped out
according to a Plan that is no longer confirmable, while simultaneously there is uncontroverted
evidence that there is or would have been substantial equity for these prematurely wiped out
shareholders. This is a scenario that this Plan could lead to but that this Court should not accede
to. And at the heart of the matter, this illustrates one of the many fatal flaws in the structure of
the Plan and should not be approved by this Court.
IV. INADEQUATE DISCLOSURE REGARDING EXECUTIVE COMPENSATION PRECLUDES APPROVAL OF DISCLOSURE STATEMENT
57. It is assumed that the Debtors’ Executive Management will participate in some
fashion by receiving Special Warrants for New Common Stock. Although the Plan contains
some discussion concerning the terms and conditions of such grants, there is no discussion as to
which individuals would be covered. Creditors and parties in interest are certainly entitled to
know pursuant to section 1129(a)(5) of the Code.
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58. As noted, the Plan provides that the Equity Incentive Program will provide no less
than 7.5% or greater than 10% on a fully diluted basis, of the issued and outstanding new
common stock to be given to Senior Management. Based on the Debtors’ understated valuation
model as discussed above, the New Equity of the Reorganized Debtors will be worth at least $1.1
billion. Hence, the Senior Management would receive New Common Stock of no less than
$82.5 million (7.5%) and up to $110 million (10%). This is completely unsupportable.
59. As noted, the Shareholders believe that the true value of Reorganized Citadel,
according to industry experts and the use of proper metrics, is approximately at least $1.8 billion.
Accordingly, under these more realistic metrics, the Equity Incentive Program would be valued
at between $135 million (7.5%) and $180 million (10%); even more staggering and nothing short
of unconscionable.
60. In these days of financial bail-outs and TARP, where management bonuses are
falling under greater scrutiny, the Bank Lenders’ assent to the proposed amount of compensation
to Senior Management at the expense of holders of Claims and Interests is shocking to the
conscience and inconsistent with today’s financial mores. The Reorganized Debtors will be
owned by the Bank Lenders. The Pay Czar, Kenneth Feinberg, would likely view these
windfalls to Senior Management with a highly jaundiced eye.
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CONCLUSION
For the foregoing reasons and under reservation of its right to supplement their
objections, the Shareholders respectfully requests that the Disclosure Statement not be approved
because the Plan is “fatally flawed”. In the alternative, the Shareholders respectfully request the
Court to require the Debtors to withdraw and amend the Disclosure Statement and provide a
reasonable period for filing objections prior to a disclosure hearing.
Dated: New York, New York March 5, 2010
Counsel to the Shareholders BLANK ROME LLP
By: _/s/ Marc E. Richards______ Marc E. Richards Andrew B. Eckstein The Chrysler Building 405 Lexington Avenue New York, New York 10174 (212) 885-5000