Radio One Case Study
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, IN? What are the benefits and risks?
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
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