| Radio One, Inc.
Mr. Alfred Liggins III
From: Team 5
[ November 22, 2011 ]
Clear Channel Communications Inc. acquisitions
The recent merger between Clear Channel Communications Inc. and AMFM has presented a rare opportunity for Radio One, Inc. The proposed divestiture of Clear Channel will be the largest in the history of the industry. Radio One, Inc. can acquire 12 established urban stations in the top 50 markets, which rarely become available. Market analyst have already speculated on the possible acquisition, causing Radio One’s stock price to rise from the mid-$40s to $97 a share! The trading multiple is at around 30x’s the forward BCF, which is substantially larger than the typical trading multiple for radio companies. If the acquisition of the 12 stations does not go through, there may be a negative reaction from the market, causing share prices to drop significantly. We have reviewed the power ratios, which indicate how much of the total radio advertising dollars in a particular market is being captured by a particular station relative to its audience share. While many advertisers are still hesitant to pay as much for African-American listeners, the power ratios continue to rise each year. We believe this is due to the above average population and income growth for the African-American population. More advertisers are aware of the potential opportunity with advertising to Radio One’s demographic, and that is another benefit to the possible acquisition. Consolidation of radio stations has caused an increase in the purchase price of radio stations in recent years. Stations in 1999 are selling for 18-20x BCF as opposed to 1990 when they would sell for 10-12x BCF. The increase in price should continue as advertisers recognize the benefits of TV-like reach with package deals by broadcasters. The average BCF for the radio industry is 18.1x, which would make the price of the acquisition at $1.38 billion. At a BCF multiple of 20x the acquisition would be around $1.5 billion. Our stock price would suggest that Radio One could go as high as a 30x BCF, which would make a price of over $2.2 billion for the acquisitions. After performing a discounted cash flow analysis of the option to acquire the 12 Clear Channel stations, as well as the other 9 stations, we determined a present value of just over $1 billion. That shows that using the 30x BCF multiple would cause Radio One to overpay for the new stations. Anticipating offering at least 20x BCF is understandable considering the average in 1999 is 18-20x BCF. Radio One, Inc. should make the initial offer at 18.1x BCF which is the industry average. This would come to a price of $1.38 billion for the acquisition, which can be negotiated using a mixture of cash and stock issues. Radio One’s stock price is at an all time high, which helps with the amount of capital needed, and as exhibit 5 from the case shows, Clear Channel would be satisfied knowing that Radio One has a history of drastically increasing BCF. Clear Channel may require a higher BCF multiple, but will not be able to go too far above a multiple of 20x BCF. There are no other minority investors with the capital available to purchase the stations. This really limits Clear Channels ability to negotiate a higher price. Therefore, we believe that an offer of 18.1x BCF is legitimate, while allowing some room for negotiation.
Radio One, Inc. is the largest radio station targeting African-Americans in the country. The company was started by Catherine Hughes in 1980, when she and her husband raised enough money to purchase their first station. Since then, Radio One has enjoyed tremendous success by acquiring underperforming radio stations and changing them to urban formats. Radio One uses the purchased stations to pursue a clustering strategy, in which they acquire two or more stations to target different demographics within the...
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