Terrestrial Radio's Big Shrink (CDL, CMLS, EMMS)

The overall market seems to want to ignore terrestrial radio and delight in speculating about satellite. Most of the market place seems to agree with Howard and just says no to terrestrial:

I'm very flattered terrestrial radio can't let go of me. But I would throw up if I had to go back.

But peculiar things are going on with terrestrial radio. Owners are consolidating their positions. Smart private equity firms are participating in buyouts. The industry is disappearing from the public markets under a massive shrink.

Yesterday, Cumulus Media Inc. (CMLS) announced its intent to initiate a Dutch auction to buy back up to 11.5 million shares of its stock (about 24.1%.) Cumulus combined with partners Bain, Blackstone, and Thomas Lee had announced the acquisition of Susquehanna Radio assets at 13.0 times EBITDA just last October for $1.2 billion. Obviously, CMLS is seeing value a little differently than the capital markets.

Just on Monday, Emmis Communications Corp (EMMS) received an offer from its CEO to take the company private for $15.25 cash. The company since then has traded through the offering price.

Citadel Broadcasting Corp (CDL) announced in February its pending takeover of the ABC radio network for $2.7 billion or roughly 13.5 times EBITDA.

EMMS consists of both broadcasting and publishing assets, consequently a 13 multiple on EBITDA would likely be a stretch in valuation with publishing assets tending toward 8-9 times multiples. Nevertheless, management at EMMS has already sold off two television assets, the Orlando affiliate for $217.5 million and the Phoenix affiliate for $77.5 million in order to bring overall leverage down and ease the financing needs and costs.

The private equity buyers are endorsing capital structure with leverage ratios of 7 and 8 times equity. Companies like Entercom (ETM) have a leverage ratio of only 1.9 times and Westwood One (WON) only 1.8 times. Contrast this with Sirius (SIRI) at 6.4 times. For most of these companies, there is ample room for additional debt. Given the buyback programs that we are witnessing as well as the outright acquisitions of broadcast properties, there is decent interest in providing financing to the industry.

If terrestrial radio is so dead as evidenced by the low multiples to cash flow, the high free cash flow yields, and the terrible performance of the group, why is there so much buying interest by private equity interests and the major stakeholders?

Disclaimer: I, my family, and clients have a current position in Westwood One.