1) Why does Radio One want to acquire the 12 urban stations from Clear Channel Communications in the top 50 markets along with nine stations in Charlotte, NC, Augusta, GA, and Indianapolis, IN? What benefits and risks?
The Reasons for acquiring the 12 urban stations from Clear Channel could be the following:
- Bigger African American Base: It would draw more African-American listeners than any other radio broadcaster and cover more African-American households than any other media vehicle targeting the audience. Plus those 12 stations include a media company (BET Holdings) which targeted the African American population by its media “Black Entertainment Television”.
- Greater advertising revenue: This acquisition will increase the size of the company and in particular the African American base ,hence would bring greater advertising revenue since in the past the company had been successful in bringing more advertisers by convincing them about the spending power of afro American community ,thus would build a platform for the company’s planned expansion into other forms of media, including cable, recording industry, and Internet.
- It would give Radio One an opportunity to take advantage of acquiring stations in the top markets and thereby able to get a nation wide minority monopoly advantage and leveraging the fast population and the income growth among the minority which is Radio One’s primary target market.
- Generate additional Advertising revenue as a result of large size of a particular minority group which they primarily catered.
- Better working Economies of Scale through pricing power, capacity utilization and cost reduction by programming and by controlling work from one place throughout the nation , for example centralizing of functions like Human resource management , accounting, finance , legal etc.
- They haven’t had any large deals like the one which is offer in the case and hence there could be risk in over valuation for the deal. - They have to shed more cash out of their pockets as the working capital will not be sold with the stations. - Risk of reputation of the brand image of Clear Channel in the markets were they are present, if it is not perceived by the listeners as good the Radio One will have to work a lot on developing the image. - They do not have enough cash in the books to undertake the transaction.
2) What price should Radio One offer based on a discounted cash flow analysis? Are the cash flow projections reasonable?
- Tax Rate is 40%
- Broadcast Cash Flow has been considered as 55% of the total revenue, this assumption was based on the historic BCF of Radio One. - We have considered the Corporate Expense Margin , the working for the same is as below as : -
| |Pro Forma: | |Projections: | | | | |Existing Broadcasting Cash Flow|42,534 |51,038 |59,598 |68,538 |78,820 |90,643 | |Corporate Expense Margin |6.0% |6.0% |6.5% |6.5% |7.0% |7.0% | |Existing Market Corporate |2,552 |3,062 |3,874 |4,455 |5,517 |6,345 | |Expense | | | | | | | | | | | | | | | |New Market Corporate Expenses |3,448 |2,938 |3,026 |3,480 |3,608 |4,149 | |New Market Corporate Expense |5.8% |4.5% |4.0% |3.9% |3.5% |3.6% | |Margin | | | | | | |
|Year |Corporate Expense Margin...