iHeartMedia 2009 Annual Report Download - page 106

The concluded discount rate used in the discounted cash flow models to determine the fair value of the licenses was 10% for the 13
largest markets and 10.5% for all other markets in both the December 31, 2008 and June 30, 2009 impairment models. Applying the
discount rate, the present value of cash flows during the discrete projection period and terminal value were added to estimate the fair
value of the hypothetical start-up operation. The initial capital investment was subtracted to arrive at the value of the licenses. The
initial capital investment represents the fixed assets needed to operate the radio station.
The discount rate used in the December 31, 2008 impairment model increased 150 basis points compared to the discount rate used in
the preliminary purchase price allocation as of July 30, 2008 which resulted in a decline in the fair value of the Company’s licenses.
As a result, the Company recognized a non-cash impairment charge in approximately one-quarter of its markets, which totaled $936.2
million. The fair value of the Company’s FCC licenses was $3.0 billion at December 31, 2008.
The BIA forecast for 2009 declined 8.7% and declined between 13.8% and 15.7% through 2013 compared to the BIA forecasts used
in the 2008 impairment test. Additionally, the industry profit margin declined 100 basis points from the 2008 impairment test. These
market driven changes were primarily responsible for the decline in fair value of the FCC licenses below their carrying value. As a
result, the Company recognized a non-cash impairment charge in approximately one-quarter of its markets, which totaled $590.3
million. The fair value of the Company’s FCC licenses was $2.4 billion at June 30, 2009.
In calculating the fair value of its FCC licenses, the Company primarily relied on the discounted cash flow models. However, the
Company relied on the stick method for those markets where the discounted cash flow model resulted in a value less than the stick
method indicated.
To estimate the stick values for its markets, the Company obtained historical radio station transaction data from BIA which involved
sales of individual radio stations whereby the station format was immediately abandoned after acquisition. These transactions are
highly indicative of stick transactions in which the buyer does not assign value to any of the other acquired assets (i.e. tangible or
intangible assets) and is only purchasing the FCC license.
In addition, the Company analyzed publicly available FCC license auction data involving radio broadcast licenses. Periodically, the
FCC will hold an auction for certain FCC licenses in various markets and these auction prices reflect the purchase of only the FCC
radio license.
Based on this analysis, the stick values were estimated to be the minimum value of a radio license within each market. This value was
considered to be the fair value of the license for those markets where the present value of the cash flows and terminal value did not
exceed the estimated stick value. Approximately 17% and 23% of the fair value of the Company’s FCC licenses at December 31,
2008 and June 30, 2009, respectively, was determined using the stick method.
A
nnual Impairment Test to FCC Licenses
The Company performs its annual impairment test on October 1 of each year. The Company engaged Mesirow Financial, a third-
party valuation firm, to assist it in the development of the assumptions and the Company’s determination of the fair value of its FCC
licenses. The aggregate fair value of the Company’s FCC licenses on October 1, 2009 increased approximately 11% from the fair
value at June 30, 2009. The increase in fair value resulted primarily from an increase of $120.4 million related to improved revenue
forecasts and an increase of $195.9 million related to a decline in the discount rate of 50 basis points. The Company calculated the
discount rate as of the valuation date and also one-year, two-year, and three-year historical quarterly averages. The discount rate was
calculated by weighting the required returns on interest-bearing debt and common equity capital in proportion to their estimated
percentages in an expected capital structure. The capital structure was estimated based on the quarterly average of data for publicly
traded companies in the radio broadcasting industry. These market driven changes were responsible for the decline in the calculated
discount rate.
As a result of the increase in the fair value of the Company’s FCC licenses, no impairment was recorded at October 1, 2009. The fair
value of the Company’s FCC licenses at October 1, 2009 was approximately $2.7 billion.
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