Business: Clear Channel Outdoor is an out-of-home advertising company that offers a variety of advertising services, including through billboards, street furniture displays, transit displays and airport displays. It also sells street furniture equipment, provides cleaning and maintenance services and operates public bike programs. Clear Channel is broken into the following segments, which account for the following percentage of revenue: America (45%); Airports (10%, in the U.S. and Caribbean); Europe-North (23%); Europe-South (19%); and Other (3%, includes Latin America).

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

Percentage Ownership: 5.08%

Average Cost: $1.98

Activist Commentary: Legion is an activist investor whose managing directors are Chris Kiper, previously of Shamrock Activist Value Fund, and Ted White, previously of European activist fund Knight Vinke. Legion prefers to do its activist work behind the scenes, resorting to a proxy fight if amicable discussions do not go well. The firm has significant experience with consumer retail companies.

Legion sent a letter to Clear Channel’s board, expressing concern with the scope and pace of the company’s current strategic review process. The firm also argued that the board needed to consider a broader strategic review process, including potential divestitures of other non-core assets and select U.S. 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 business moat, especially among billboard assets. Clear Channel effectively has two business lines – Americas and Europe, each with very different business models and valuations. The European business works on fixed limited-term contracts with municipalities, which are rebid at maturity. Because of this, the European business trades at around a multiple of 8 times earnings before interest, taxes, depreciation and amortization. Most of the U.S. business is billboards, which the company owns, and accordingly trades closer to 13 times to 15 times EBITDA. Moreover, these billboards are in the process of being converted to digital, which will allow each billboard to generate approximately four times more revenue and six to 10 times more EBITDA. However, this conversion requires the approval of each municipality and will not be a quick process.

Despite its market leading position, Clear Channel’s shares have seriously underperformed since its separation from iHeartMedia in May 2019. CCO is currently trading 79% below the pre-deal share price and 65% below its peers since the separation. CCO’s underperformance has been linked to several factors, but is largely driven by the company’s high leverage, which amplifies volatility, and the sub-optimized conglomerate structure, which 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 what is implied by the current stock price. Legion Partners conducted a sum-of-the-parts analysis based on 2024 adjusted EBITDA estimates which implies an upside of 230% (implied valuation of $3.57 compared to $1.08 as of May 12). The firm thinks this could be unlocked as the company transitions to a U.S. pure play and reduces its leverage. Legion highlighted that while multiples for publicly traded OOH peers have compressed recently given potential macroeconomic slowdown concerns, it has seen that private market multiples for OOH assets are robust. Legion thinks that given quick synergies, industry consolidation is an accretive pursuit for any OOH player.

Legion has been actively engaged with the company for the past two years and most recently, had a meeting with management on May 12, where Legion expressed its concerns with the pace and scope of the company’s strategic review process. Specifically, Clear Channel has been prioritizing the sale of assets within Europe-South, even though the significantly larger part of the business is Europe-North. Moreover, since this strategic review of Europe began in December 2021, Clear Channel has announced the sales of businesses in Italy, Spain and Switzerland. This is concerning since as a fixed-contract business, the value goes down the closer the contracts get to maturity. Accordingly, Legion is pushing for an accelerated pursuit of a sale of the Europe business.

Legion sees two potential paths to value creation here. First, the company could sell off its European and Latin American businesses and become a U.S. pure play. While there is little value to Europe-South and Latin America, Legion believes that the Europe-North business could fetch $500 million to $600 million in a sale, which could be used to de-lever the company. Additionally, while selling Europe-South and Latin America would not yield significant proceeds, it would get rid of a distraction and allow management to focus on its crown jewel U.S. asset. As a sale of the European business would not be enough to optimally de-lever the balance sheet, Clear Channel could also consider selling select U.S. assets. Legion would like to see management pursue this plan while also exploring a potential sale of the entire company. Such a sale would be more complex and possibly less lucrative than the other plan, but it would have the benefit of certainty.

CCO first announced its strategic review of the European business in December 2021 and very little has come to fruition. It is unclear why this is and what the logjam is, but if it continues, Legion will want to be inside the boardroom to get a better look. Legion has shown in the past that it has no hesitancy in soliciting proxies if it feels that is necessary. We have no doubt that if the firm is met with reluctance by the board to commence one of the two outlined paths, Legion will seek board seats. But the firm has plenty of time to make that decision as the nomination window does not open until Jan. 4, 2024.

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