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Shares of Cumulus Media (CMLS) hardly moved on the back of the news of renewed deal activity. While operational performance is improving after the 2011 Citadel mega-deal, I remain on the sidelines.

The large debt position incurred following that deal and the very poor long term track record, also in terms of merger and acquisition activity, make me worried. Therefore, I remain on the sidelines.

The Deal

Cumulus Media announced that it will acquire Dial Global in a $260 million deal. Cumulus will spend $45 million for the equity in the firm, and will furthermore repay $215 million in debt held by the company.

With the deal, Cumulus acquires a leading provider of premium content and original programming for radio stations. The deal should result in over $40 million in cost synergies as well as incremental revenue growth opportunities.

Dial produces programming to some 8,200 radio stations. In exchange for the programming, the company receives commercial air time which is sold to national advertisers.

The Dial Global business generated revenues of $217 million over the past year on which it reported adjusted EBITDA of $26 million. This deal values the business at 1.2 times annual revenues and 10 times EBITDA.

At the same time, Cumulus announced the sale of 12 small & mid-sized radio markets, including 53 ratio stations to Townsquare Media in an unrelated $238 million cash deal. The divestiture of the radio markets is part of its effort to divest non-core and non-cash flow generating assets.

The divested radio stations generate $64 million in annual revenues, but reported adjusted EBITDA of almost $33 million. This values the purchase price at 3.7 times annual revenues and 7.2 times annual EBITDA.

While the swap seems dilutive to adjusted EBITDA, Cumulus anticipates to generate $40 million in additional EBITDA thanks to synergies. This should bring the price tag of the Dial assets down to just 4.0 times adjusted EBITDA.

Both deals are expected to close by the end of the year, given that Cumulus receives regulatory approval. Cumulus expects to realize $40 million in annual synergies within two years after closing, with an estimated 50% to be realized within the first year after closing.

Valuation

Cumulus ended its second quarter with $46.2 million in cash and equivalents. The company operates with $2.66 billion in total debt, for a high net debt position. Cumulus has furthermore access to liquidity from its $150 million revolving credit facility.

Revenues for the first six months of the year came in at $522.5 million, up 1.1% on the year before. Net earnings came in at $18.1 million which compares to a modest $4.0 million loss in the comparable period last year.

Based on the second quarter performance, annual earnings of $100 million should be attainable going forward on revenues of around $1.05 billion

Trading around $4.75 per share, the market values Cumulus at $930 million. This values equity in the business at roughly 0.9 times annual revenues and around 9-10 times annual earnings going forward.

Cumulus Media does not pay a dividend at the moment.

Some Historical Perspective

Long term holders in Cumulus have seen terrible returns as shares have given up roughly three quarters of their value over the past decade. Shares traded around $20 in 2004 and have steadily fallen to levels below $1 in 2008. Shares have seen a modest rebound and are currently exchanging hands around $5 per share.

Between the calendar year of 2009 and 2012, Cumulus has more than quadrupled its annual revenues to $1.08 billion. After reporting modest profits in 2010 and 2011, the company has reported a net loss of almost $33 million over the past year.

The acquisition-driven growth strategy has resulted in severe dilution as the number of outstanding shares increased from merely 40 million in 2009 to around 180 million outstanding shares at the moment.

Investment Thesis

The investor section on Cumulus' website proudly presents that since 1998 the company has grown as a result of roughly 150 merger & acquisition transactions. This has made the company the second largest operator of radio stations in the country with over 500 stations.

Yet this acquisition-based growth strategy has resulted in severe dilution with shares trading some 90% from their highs of around $50 in 2000. The $2.5 billion acquisition of Citadel Broadcasting in 2011 has not yet paid off as the synergy estimates are being spend on debt and interest repayments.

Yet Cumulus had some promising news regarding that deal. It now expects $65 million in annual synergies from the deal, above the previously guided $50 million. These synergies which are accretive to second quarter earnings of $27 million can be used to pay down the $2.6 billion debt position. The leveraged balance sheet takes a toll on the income statement, as Cumulus pays some 6.75% in interest on its average debt position.

The latest deals are largely cash neutral and could boost EBITDA by another $30 million allowing the firm to accelerate its deleveraging efforts. This on itself should have the other beneficiary effect, namely lower interest rates on the remaining debt position.

At the moment Cumulus earns over a $100 million per annum, while spending almost $200 million in annual interest payments. As such, assuming that operating improvements are used to repay debt, the company could bring nice accretion to shareholders.

Despite the nice deals and the improved situation overall I remain a bit cautious. The high relative and absolute debt levels are a clear worry, so is management's M&A track record. After making some 150 deals over the past 15 years, shareholders have lost a great portion of their investment.

I remain on the sidelines on the back of these concerns.

Source: Cumulus Media - Debt And Poor Track Record Remain A Concern