Terrestrial Radio-Down to Earth Valuations

Even someone my age can understand that regular terrestrial radio is losing share to satellite radio, iRadio, MP3, Ipods, Internet radio, etc. etc. etc.

Radio advertising has foundered in the new millennium. For the third consecutive year, radio lost share of the advertising pie as dollars went to Internet and cable. Prior to 2000, for decades, radio advertising grew at a fairly steady 6-7% pace with economic cyclical fluctuations and occasional banner years reflecting political election years. A great industry for years with franchise value defined by the possession of a broadcasting license, an F.C.C. sanctioned permit to steal.

Today’s Oprah announcement for XM only increases the XM, Sirius rivalry and of course the heated and generally misguided speculation about these two names. Is terrestrial radio completely irrelevant?

Radio listenership has declined in the last 5 years, but, AHEM, at about 1% a year. That’s slight erosion, not exactly dropping off a cliff.

Though clearly, advertising dollars are shifting to other media, I believe that some “smart” money is still backing terrestrial radio.

For example, the Disney sale of the ABC Radio network and stations to Citadel (CDL) was done at 16.5 times 2005 EBITDA. Citadel is not some bunch of crazies in my opinion, being 67% owned by Forstmann Leff, some of the brightest private equity people around.

Cumulus Media (CMLS) last fall acquired a substantial interest in a partnership that acquired Susquehanna Media, a privately held collection of radio stations at 15 times EBITDA. Cumulus’s partners in this enterprise include Bain Capital, Blackstone, and Thomas H. Lee (well until Refco, they were considered to be smart guys!)

Terrestrial radio will likely remain a no-growth industry forever until it suffers its final technological obsolescence and ultimate disappearance. However, in the interim, it does generate a tremendous amount of free cash flow. Capital expenditures will be minor, maintenance in their orientation, and perhaps some upgrades to High Definition radio to help maintain audiences. As well, radio networks will continue to provide content both to other stations as well as to new services like Motorola’s iRadio.

Stable free cash flows, relatively low capital requirements, and owners’ frustration with the public equity market’s low valuation for these assets, should lead to more and more acquisition activity, most likely through leveraged buyouts. When public equity markets ignore an industry that has terrific cash flow, LBO and private equity managers will step in as they already have.

Considering that recent deals have been done at 15-16.5 times EBITDA, let’s look at current public valuations of some of these companies:

Clear Channel (CCU) 10.6 times

Entercom (ETM) 10.6 times

Radio One (ROIAK) 12.1 times

Belo (BLC) 8.6 times

Westwood One (WON) 9.1 times

As well, it is interesting to note that the entire satellite radio business is trading at about $14 billion in enterprise value, compared to the entire terrestrial radio station business (top 7 companies) is trading at about $10 billion. The EBITDA of the entire satellite radio business (TTM) is negative $1 billion compared to the EBITDA of the terrestrial radio business of $800 million.

By way of disclosure, I, family members, and clients have a position in Westwood One.