Radio One Wants to Purchase

Radio One wants to purchase the 12 stations from ClearChannel for a couple of strategic reasons. The first is that such stations do not come available frequently, meaning that the opportunity is not likely to occur again in the foreseeable future. The advantages of the purchase would be a broader footprint, economies of scale in advertising, the cash flow and it would give Radio One the opportunity to become the dominant player in African-American radio. In the long run, this would give the company the size and free cash flow to pursue non-radio opportunities such as television.

The downsides of purchasing these new stations would be the challenges of integrating them into the current network. The leadership of these stations would need to be retained, otherwise Radio One's existing leadership might be stretched too thin to run the new stations effectively. In addition, Radio One runs the risk of stretching its cash flow too thin. The purchase can be done with stock, but the new stations require an injection of working capital. There is also the risk that the company overpays for the stations. Radio One needs to increase the BCF in order to make the deal profitable, and it can only do this if it improves listenership and controls costs.

2. If the stock price is 30x BCF, it cannot offer 30x BCF for these stations. There are a few reasons. The first is that at that level the deal becomes dilutive; Radio One needs to keep the; offer price below that point. The second reason is that the current stock price is not a reflection of the actual Radio One business. The stock was trading at 22.1 times BCF prior to the recent run-up. This more accurately reflects the strength of the ongoing business. While it is nice that the stock price has been subject to such a run-up, this run-up is largely speculative. After the acquisitions are made, the stock price will drop back down to a more normal multiple. It is the more normal multiple that Radio One has to keep in mind when considering the long-run dilutive effect of the purchase.

The rate at which Radio One should pay should reflect the future cash flows of the businesses it is buying. Normally, the company buys underperforming stations and then turns them around. That strategy allows it to take stations that are not doing well and bring up their performance -- this justifies a higher valuation than the current multiple on those stations. However, there is no evidence that the ClearChannel stations are underperforming. They are being divested to comply with antitrust regulations, which is an entirely different situation. RadioOne is, therefore, much less likely to add significant value to these stations.