- Part A Corporate Valuation Date: 21-09-2009 Instructor: Dr. Oliver Spalt Course: 323058
Faculty Economics and Business Administration, Tilburg University
P.W. Segers J.J.T.M. Zegers
1. Radio One’s opportunities and risks with respect to their acquisition policy We have identified four main benefits and five major risks with respect to the desired acquisition of 12 urban stations along with the nine stations in Charlotte, Augusta and Indianapolis. Potential benefits: 1. After the acquisition of the 12 urban stations, Radio One becomes the market leader in the African-American segment. The market leader is usually the most attractive negotiator for advertisement companies since it targeting the audience largely. Therefore, the acquisition can increase Radio One’s advertisement revenues. 2. Radio One describes in its strategy plan the intention to expand its business activity scope in the long run. The acquisition of the 12 urban stations provides greater opportunities for Radio One’s planned expansion into a broader scope of media, such as internet, cable radio and recording. Therefore, the acquisition affects the realization of its strategy positively. 3. The acquisition can create some synergies for Radio One since the 12 target radio stations are in the same line of business as the existing radio stations. Potential synergies can be realized by cutting costs and improve efficiencies. One straightforward way to do this is by merging some of Radio One’s departments, for instance marketing, finance, and etcetera. 4. The African-American audience can be characterized as a high growth market segment with 60% faster population growth and 150% faster income growth than the general population. The acquisition enables Radio One to provide radio services in much more markets for the African-American audience. In this way, Radio One can attract more African-Americans which will become a very profitable market segment in the future. Potential Risks: 1. An important risk factor is the level of cannibalization of Radio One’s own audience when it decides to acquire 12 urban radio stations with a similar target group and radio format. 2. It is questionable whether the business culture of the 12 target urban stations is in line with Radio One’s existing business culture since Clear Channel Communications is a much larger company than Radio One. When this is not the case, the implementation of the 12 urban stations in Radio One’s company can fail and desired synergies should not be achieved1. 3. The acquisition of 12 urban stations is suitable for Radio One’s strategy to expand its business scope. However, Radio One has no expertise in the cable, internet and recording industry. A lack of expertise is one of the major reasons for acquisition failures2.
4. Clear Channel Communications has the obligation from FFC to divestiture some radio stations. Radio One has to ask themselves the question why Clear Channel Communication just want to sell those radio stations. Are there maybe ‘skeletons in the closet’? Or maybe, the expectations of those 12 urban radio stations are substantially lower. 5. The simultaneous acquisition of 12 stations from Clear Channel Communications and 9 stations from other companies can have some consequences for Radio One’s credit rating. Rating agencies such as Moody’s and Standard & Poor’s can cut down Radio One’s credit rating when they have doubts about the creditworthiness after the acquisition. A lower credit rating affects substantially higher interest payments for Radio One.
2. Radio One’s offer based on a discounted cash flow analysis To determine a price for the 12 urban stations from Clear Channel Communications along with the other nine stations we have to make some assumptions (Appendix 2.1). We determine a ratio for corporate expenses and depreciation & amortization based on exhibit 6 & 9. Corporate expenses were...