Radio one analsys
1) Why does Radio One want to acquire the 12 urban stations from Clear Channel Communications in the top 50 markets along with nine stations in Charlotte, NC, Augusta, GA, and Indianapolis, IN? What benefits and risks?
The Reasons for acquiring the 12 urban stations from Clear Channel could be the following:
- Bigger African American Base: It would draw more African-American listeners than any other radio broadcaster and cover more African-American households than any other media vehicle targeting the audience. Plus those 12 stations include a media company (BET Holdings) which targeted the African American population by its media “Black Entertainment Television”.
- Greater advertising revenue: This acquisition will increase the size of the company and in particular the African American base ,hence would bring greater advertising revenue since in the past the company had been successful in bringing more advertisers by convincing them about the spending power of afro American community ,thus would build a platform for the company’s planned expansion into other forms of media, including cable, recording industry, and Internet.
- It would give Radio One an opportunity to take advantage of acquiring stations in the top markets and thereby able to get a nation wide minority monopoly advantage and leveraging the fast population and the income growth among the minority which is Radio One’s primary target market.
- Generate additional Advertising revenue as a result of large size of a particular minority group which they primarily catered.
- Better working Economies of Scale through pricing power, capacity utilization and cost reduction by programming and by controlling work from one place throughout the nation , for example centralizing of functions like Human resource management , accounting, finance , legal etc.
- They haven’t had any large deals like the one which is offer in the case and hence there could be risk in over valuation for the deal.
- They have to shed more cash out of their pockets as the working capital will not be sold with the stations.
- Risk of reputation of the brand image of Clear Channel in the markets were they are present, if it is not perceived by the listeners as good the Radio One will have to work a lot on developing the image.
- They do not have enough cash in the books to undertake the transaction.
2) What price should Radio One offer based on a discounted cash flow analysis? Are the cash flow projections reasonable?
- Tax Rate is 40%
- Broadcast Cash Flow has been considered as 55% of the total revenue, this assumption was based on the historic BCF of Radio One.
- We have considered the Corporate Expense Margin , the working for the same is as below as :
| |Pro Forma: | |Projections: | | | |
|Existing Broadcasting Cash Flow|42,534 |51,038 |59,598 |68,538 |78,820 |90,643 |
|Corporate Expense Margin |6.0% |6.0% |6.5% |6.5% |7.0% |7.0% |
|Existing Market Corporate |2,552 |3,062 |3,874 |4,455 |5,517 |6,345 |
|Expense | | | | | | |
| | | | | | | |
|New Market Corporate Expenses |3,448 |2,938 |3,026 |3,480 |3,608 |4,149 |
|New Market Corporate Expense |5.8% |4.5% |4.0% |3.9% |3.5% |3.6% |
|Margin | | | | | | |
|Year |Corporate Expense Margin |
|2,001 |4.00% |
|2,002 |3.90% |
|2,003 |3.50% |
|2,004 |3.60% |
|2,005 |3.60% |
|2,006 |3.60% |
|2,007 |3.60% |
|2,008 |3.60% |
- There were Net Operating Losses in the initial years which we have carry forwarded it to the next years and calculated the Losses
- Net Operating Losses Carried forwarded and the working of the same is as below:
|Operating Losses |2001 |
|Beta Assets |0.82 |
|Market Risk Premium |7% |
| | |
|CAPM |11.93% |
Based on the above assumption the Projected Cash Flows are as below:
Operating Results: |2001 |2002 |2003 |2004 |2005 |2006 |2007 |2008 | |Net Revenue |128,313 |144,460 |159,985 |175,820 |189,007 |201,292 |211,357 |219,811 | |Less: Operating Expenses |57,741 |65,007 |71,993 |79,119 |85,053 |90,581 |95,110 |98,915 | |Broadcast Cash Flow |70,572 |79,453 |87,992 |96,701 |103,954 |110,711 |116,246 |120,896 | |Less: Corporate Expense |5,080 |5,604 |5,660 |6,328 |6,803 |7,245 |7,607 |7,911 | |EBITDA |65,492 |73,849 |82,331 |90,373 |97,151 |103,466 |108,639 |112,985 | |Less: Depreciation |90,000 |90,000 |90,000 |90,000 |90,000 |90,000 |90,000 |90,000 | |EBIT |(24,508) |(16,151) |(7,669) |373 |7,151 |13,466 |18,639 |22,985 | |Less: Taxes |0 |0 |0 |0 |0 |0 |0 |5,714 | |NOPAT |(24,508) |(16,151) |(7,669) |373 |7,151 |13,466 |18,639 |17,270 | | | | | | | | | | | |Free Cash Flow Calculation | | | | | | | | | |NOPAT |(24,508) |(16,151) |(7,669) |373 |7,151 |13,466 |18,639 |17,270 | |Add: Depreciation |90,000 |90,000 |90,000 |90,000 |90,000 |90,000 |90,000 |90,000 | |Less: Changes in Working Capital |20,530 |2,584 |2,484 |2,534 |2,110 |1,966 |1,610 |1,353 | |Less: Cap-ex |4,410 |4,410 |4,410 |4,410 |4,410 |4,410 |4,410 |4,410 | |Free Cash Flow |40,552 |66,856 |75,437 |83,429 |90,631 |97,090 |102,619 |101,507 | |
PV of FCF |36,230 |53.364 |53,796 |53,154 |51,588 |49,374 |46,623 |41,203 | |
Sum of Preset Value of Free Cash Flows: USD 385,330
Terminal Value of FCF: USD 1,331,246
Present Value of Terminal Value: USD 540,364
Total Value as per the DCF analysis: USD 925,694.
The projections in the cash flow particularly the net revenues is slightly on the higher side which increases the actual value of the company, hence we have considered a low growth rate in the Revenue of the new markets.
3) What price should Radio One offer based on transaction and trading multiples analysis?
BCF Multiple is 18.1 as per the Exhibit 8, hence the valuation comes to
18.1x* 70572 = USD 1.27 bn
EBITDA multiple as per the Exhibit 8 is 19.4, hence the valuation based on the same comes to:
19.4x*65492 = USD 1.27 bn
Clear Channel is expecting 20X BCF, hence based on the BCF value of our forecast, the value of the company is coming to:
20x* 70572 = USD 1.41 bn.
4)Assuming that Radio One’s stock price is 30x BCF, can it offer as much as 30x BCF for the new stations?
The price 30xBCF in this case is the price when the radio one’s stock is at all time high.
As soon as the news of acquisition opportunity came the stock shot from mid 40’s to $97.
It seems 30xBCF is suggested in the case since that is Radio One’s current multiple. Radio One’s stock is trading at such multiple since analyst must be speculating at Radio One’s deal with Clear Channel.
Since the analysts are already expecting the deal to done so there is a lot of probability that the price to be paid in accordance to 30xBCF can be more than the actual value of the 12 stations to be acquired.
5) What should Radio One offer for the new stations?
• DCF valuation suggests the assets are worth around $0.9bn
• Multiple analysis suggests a valuation of approximately USD 1.27 bn
• Clear Channel expects a valuation based on 20.0x BCF or about $1.4bn
Also, considering the fact that the stations which are in the top 50 markets and the availability of the same is a rare possibility and hence Clear Channel could sell the stations in different pieces, but since the market in the stations which are up for acquisition is aligned with that of Radio One, and also since this acquisition would give them an advantage of :
- Increasing the size of the business.
- Larger National footprint which would give Radio One additional Advertising Revenue.
- Meaningful platform for the company’s planned expansion into other forms of media, including media, recording industry and internet.
Based on the above analysis we feel that they should try to get this deal for a multiple of 19x BCF which comes to USD 1.27 bn, which is also considering the fact that the average price is in 1999 as given in the case study is 18-20x BCF.