Radio One Corp. is the largest radio group targeting African-Americans in the country, and it’s got an excellent record by acquiring underperforming radio stations and turning them around. It’s contemplating whether to buy a significant amount of 21 radio stations (including 12 established urban stations in the top 50 markets and 9 stations from other companies) to be divested by one of the nation’s biggest owner of radio stations, Clear Channel, due to its merge with the other biggest owner, AMFM. Radio One would benefit from the acquisition in the sense that its size would be doubled and its national platform be built, its revenue increase significantly, and having the possibility to go through planned expansion into other businesses, if acquired stations are well integrated. Using the DCF model with appropriate assumptions, the valuation of the 21 companies is $1.228. This is confirmed to be reasonable by valuation using transaction and trading multiple (1.266 on average). The decision to be made for Radio one is whether it should pay premium for the acquisition and how much if it should, given that market is speculating on the acquisition with stock price up to an unusual 30XBCF high. Based on our analysis, we propose a bidding offer between 19xBCF and 20xBCF according to the valuation assuming 5% constant growth rate after 2004, though the price can be higher considering synergy and potential raising growth rate given the economic condition.
1) Why does Radio One want to acquire the 12 urban stations from Clear Channel Communications in the top 50 markets along with the nine stations in Charlotte, NC, Augusta, GA and Indianapolis, ID? What are the benefits and risks? The decision to purchase those stations is relying on a diverse set of expected opportunities: * Covering new markets as the media leader with an African-American audience, the largest and fastest developing US minority group (e.g.: Los Angeles from Clear Channel; Charlotte, Augusta, and Indianapolis). * Reaping the benefits of synergy through capacity utilization and cost reduction. Costs would for instance decrease due to programming syndication, reduction in duplicate staffing, and creation of national representation agreements. * Attaining a strategic size and increasing significantly its revenues by offering attractive packages to advertisers that can be broadcasted on the whole network of stations with a TV-like reach. * Facilitating a transition towards other media such as cable and Internet. * Taking advantage of the economic context: Clear Channel has to sell in the short term nearly 100 radio stations to comply with the FCC regulation and only Radio One has the required experience and capital to buy 12 urban stations targeting African-Americans. This should convert into a discount for the acquirer. * The radio network business doubled since the FCC relaxed regulation, which means that the industry is growing. So it is a good time to increase the size of Radio One.
Nevertheless the attempt to purchase 21 stations is also implying some risks: * We don’t have enough information about the nine targeted stations from Charlotte, Augusta and Indianapolis: those stations could turn out to be far from the traditional audience of Radio One. Transforming those stations into successful African American stations could thus be costly and long. * Such a huge investment could dramatically increase the indebtedness of the company. This could worry the creditors, deteriorate its credit rating and increase its financing costs. * The consolidation wave that is occurring at the end of the 1990s is increasing the purchase price of radio stations. The probability to pay too much is higher in this context. * Radio One has never acquired so many stations at the same time: cutting costs and changing them to urban formats could reveal difficult with limited resources to implement Radio One strategy in 21 stations...
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