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As I mentioned in my article about Entercom Communications Corporation (NYSE:ETM), it had not acquired a radio station for over 3 years, until the first quarter this year. In January this year, ETM made a relatively small acquisition (comparing to its past) that amounted to 9 million dollars. Although relatively small, this is a meaningful amount of money to the company - 12% of yearly FCF.

In the past we saw that acquisitions did not improve the top line by a noticable extent (see table on previous ETM post), making these acquistions terms questionable. Considering it had not purchased a single station for almost 3.5 years, I thought I should dig deeper into this purchase to see what guided management to break a long silence in the station acquisition area, and to see if things had changed. Maybe after a very big crisis, management is more careful with the price it pays for stations.

As I expected, information was not abundant. Nothing, absolutely nothing was mentioned in the company’s 10-Q reports. I then reverted to the 8-K press releases that accompanied the 10-Q.

In this press release you can see that the acquisition is mentioned. Here you can see that ETM acquired 98.5 K-FOX in San-Jose from Clear Channel Communications. A short research will show that this is a well known station with 20 years of history, but does it justify the lucrative price? Was it a smart purchase?

I searched the internet long and wide and could not find any financial data regarding this station. Not revenue, pricing, nothing. Not even in Clear Channel reports itself. I sent an email to the station manager asking for ad pricing information, but got no reply. What’s even more annoying is that the company did not supply shareholders with information about it to judge for themselves if the company’s moves are wise or not. The company is traded for about 200 million dollars, 9 million dollars investment accounts for 4.5% of the company's equity worth right now. As a shareholder, I would like to know why management thinks investing in another radio station is better than buying back 4.5% of the shares or distributing a dividend that would yield 4.5%.

As I was considering turning to emails to company’s management, I thought of a nice solution: ETM reports its covenants compliance calculation – and in the calculation we can see a pro-forma estimation of this station operating income! Details Ladies and Gentlemen, details. In the covenant reports published since the purchase: First quarter and Second quarter, we can see that, pro-forma, if the station would have been present at ETM’s portfolio for a year, it would have generated operating income between 1.875 million dollars and 1.344 million dollars.

For a 9 millions dollar investment, we get a pre-tax yield between 20.83% and 14.93%, not bad. So, wouldn’t ETM be better off by using these 9 million to repay its debt? Lets see: ETM’s debt bears about 3.4% interest per year. Repaying it will yield 3.4% a year, pre-tax, by saving interest payment on these 9 million dollars, or about 306K dollars, pre-tax. On the other hand, buying KFOX (wiki) will yield at least 15% or over 1.3 million dollars pre-tax, given the numbers above.

Considering the numbers, this was a smart purchase. Shareholders are better off with the purchase, since the acquisition's yield is the highest:

  • Dividend will yield only 4.5%, one time, if money will be distributed.
  • Share buyback will yield shareholders 4.71% (inverse 4.5%).
  • Repaying debt will yield 3.4%
  • Buying the station will yield at least 15% (according to latest, lowest numbers)
It is clear that managment acted prudently in this case. The only question left is whether ETM would be able to maintain the station's cash flow for at least 6.5 years (untill investment repays itself using lower estimate).

Source: Entercom's Purchase Of 98.5 K-FOX: Shareholders Are Better Off