After the Telecommunication act in 1996 significant consolidation occurred in the Radio Industry, thereafter Radio companies were able to obtain cost savings by acquiring multiple stations in one area and reaching economies of scale. The nation’s two biggest radio company - AMFM and Clear Channel – was just about to merge and in order to do so the FCC required them to divest 100 radio stations. This was an unprecedented growth opportunity for Radio One as 12 of these stations fitted perfectly their corporate strategy which was to „provide urban-oriented music, entertainment, and information to primarily African-Americans in as many major markets as possible”. Since under normal market conditions radio stations in the top 50 markets rarely became available for purchase, this was a perfect opportunity for Radio One to expand and implement further cost-savings through economies of scale, programming syndication, reduction of duplicate staffing and increasing advertizing revenues by becoming able to offer wider audiences and „package deals” for advertisers. This was also an opportunity to expand to new markets. Radio One’s bidding position was backed up by Chairman William Kennard’s advocacy at the FCC, which encouraged the sale of at least some stations to minorities, and since only Radio One had the experience and the capital among the potential buyers it had a strong position.
2, What price should Radio One offer based on a discounted cash flow analysis? Are the cash flow projections reasonable?
We decided to use the WACC method for the valuation of the new project, as * The new project was very similar to Radio One’s current operations * The project is not an LBO, and will trend towards a target capital structure * No major changes are expected in the industry’s operations (tax, kd, ke, etc). We calculated the free cash-flows as shown in Table 3. To conclude an overall price of 230721.6 we made the assumptions shown in Table 4. Our major problem was forecasting how the corporate expences would grow with the acquisition, and how to divide the company costs and deprechiation between the stations. We simply divided these costs between the stations equally. For the CAPX we assumed $100,000 yearly costs and the NWC requirements were calculated as EBITDA-OPEX.
3, What price should Radio One offer based on a trading multiple analysis? Broadcast Cash-Flow (BCF) - operating income before depreciation, amortization, local marketing fees and corporate expenses - is popular for measuring the performance of a radio station. To value the 21 stations by BCF multiples we looked at the deal Infinity pulled off with Clear Channel, where they purchased 18 stations with about a 21.5 BCF multiple (These are similar quality stations to the ones Radio One wanted to acquire). On one hand, as Radio One’s offer was probably backed up by the FCF initiative, they might have got a slightly better deal. On the other hand Radio One wanted to offer a preemptive price for the stations. We calculated how much Radio One pay for the 21 station all together, under 3 different scenarios. Minimum (using a *20 multiple), which does not guarantee a preemptive price, Medium (*25), which is probably close to a preemptive price, and Max (*30), which is just under the dilutive price for R1 shares. Table 1 shows our summary. We also presented how much Radio One should offer to each of the sellers: Davis Broadcasting (1 station in Charlotte), Shrink & IBL, LLC (5 in Augusta, 3 in Indianapolis) and Radio One (12 stations nation-wide). This analysis is shown in Table 2. Our conclusion is that the minimum price Radio One Should offer for the stations is 120M and the maximum is 180M.
4, What should Radio One offer for...