RADIO DEALS AT THE READY Paul Heine and Tony Sanders – Billboard Privately held Susquehanna Media exiting the radio business after more than 60 years. Emmis Communications exploring the sale of its TV stations. Clear Channel Communications—the poster child of consolidation that married radio and the concert business—splitting up. The Walt Disney Company is reportedly considering a sell-off of its radio division. Viacom is moving toward separating its growth engine (cable and movies) from its "value" division (radio and TV).
What is going on here? After a lengthy slumber, is an acceleration of radio deal-making on the horizon? Will Susquehanna provide the price baseline for what stations can fetch in today's devalued marketplace? Does Clear Channel and Viacom reshuffling assets to restimulate investor interest signal the end of multiplatforming?
While Wall Street analysts and media brokers forecast more mergers and acquisitions ahead, they are not predicting the same intensity level or prices the industry experienced in the go-go '90s.
Leland Westerfield, a radio analyst for Harris Nesbitt, anticipates "a vastly larger dollar amount of radio assets traded than a year ago, perhaps double 2004 levels." His prediction is rooted in the reality that radio has not participated in the advertising recovery under way across other media during the past three years, which has in turn led to "multiple compression" or lower station values. "That has unnerved many potential sellers who have been holding out for a full-blown radio revenue recovery, who are increasingly worried it may never occur," Westerfield says.
The belief that slowing top-line industry growth will provide the catalyst for increased station trading is one shared by broker Elliot Evers. His Media Venture Partners recently brokered a $13 million deal for a small-market cluster. The seller had acquired the stations three years earlier for roughly $17 million.
"Radio isn't as forgiving an environment as it used to be," Evers says. "If you made a mistake, either operationally or by paying too much, you don't have the overall industry growth as a tide that rises your boat with everybody else's and masks whatever operational challenges you find yourself faced with. As people adjust to the slowing top-line growth in the industry, that's going to lead to more stations being sold."
Barrington Research analyst Jim Goss says increased deal flow is dependent on "sellers getting more realistic in their expectations and/or somewhat greater momentum in ad revenue increases."
INVESTORS LOOKING FOR RETURNS
"The deal flow has to get more active than it has been; it's been almost zero for a while," adds Doug Ferber, senior associate of brokerage firm Star Media Group. "Some of the private equity company funds are up and now their investors are looking for a return."
Meanwhile, Ferber is witnessing the return of private equity players—such as Veronis, Suhler, Stevenson, which financed the $30 million purchase of modern rock KEDJ Phoenix last month—and newcomers "that were reluctant to get into the business because they felt the price was too high."
During his company's May 4 earnings conference call, Citadel chairman/CEO Farid Suileman spoke of a "dilemma" for publicly traded companies.
In a heated-up station-trading environment, the cash-flow multiples sellers can command for their properties can be far above those multiples the public stock market can afford to pay, in part because Wall Street has assigned lower cash-flow multiples to companies like Citadel, Clear Channel and others. That makes it easier for private equity firms—not subject to the same level of scrutiny as their public brethren—to enter the bidding for a company that is on the block.
"Private values are higher than public," Suleman said, "and that creates a dilemma when you're a public company. You're dealing with scarce assets." The difference between the asking price a group like Susquehanna might command, and the value of those assets once incorporated into a new, public group, could have a "dilutive" effect, Suleman said.
"We went public to make acquisitions and we're not going to make acquisitions that are going to be dilutive," Suleman said.
Radio stocks have suffered so much, Stanford Group managing director Frederick Moran says, that "managers are more likely to focus internally instead of externally unless they can get a sweetheart deal, because they don't want to run the risk of damaging their stocks any further."
Moran believes consolidation will only get more difficult, not easier, during the next couple of years because there is no real impetus for smaller, private companies to get out.
Radio stocks were down 20% last year, and were off 10% in the first four months of 2005. Yet most buyers are looking for valuations at multiples of cash flow "that are at a premium of where radio companies are trading," he says. However, even with minimal growth, private companies are not struggling because radio is a high free cash-flow-producing business.
"Private companies, or even small publicly traded companies, have the wherewithal to stay the course and wait for a public market recovery before they consider selling out," Moran maintains. "They don't have a high degree of debt and unless they are worried that valuations may collapse in the next few years, there's no financial pressure on them to sell."
WHO'S SELLING? WHO'S BUYING?
In this environment, who are the most likely buyers and sellers? In addition to Susquehanna, one analyst pegs Regent, Beasley and Next Media as the likeliest sellers and Entercom, Cumulus, Cox and Spanish Broadcasting System as the most obvious buyers.
The two largest companies are not expected to expand. Clear Channel is too big from a regulatory standpoint to make significant acquisitions and Infinity has publicly indicated it wants to sell some of it smaller-market radio stations.
Entercom has "the balance sheet" to acquire more stations but "does not have the trading multiple," according to Moran. "At 11 times cash flow, they'd be diluting themselves with any acquisitions. They would have to have a very compelling property to get interested as a buyer."
Moran says the same applies to most of the other smaller publicly traded companies, as they are currently trading at comparative low double-digit multiples of cash flow.
"We like to think that everybody is a seller at some point," Star Media's Ferber says. "Even Clear Channel is rumored to be considering shaving off some of the stuff that isn't providing a lot of revenue and cash flow." |