Cumulus Media Shines in a Beaten Down Industry

Simply put, the broadcasting radio sector has seen better days. Just yesterday morning, Jeff Smulyan, Chairman & CEO of Emmis Communications (EMMS) stated in the opening comments of his fiscal Q3 quarterly conference call that "this is the worst point in the history of the industry". Emmis saw its stock drop an astounding -54% in 2007, but it was hardly alone.

Last year, virtually every major radio broadcaster saw significant declines in share price with Citadel Broadcasting (CDL) down -79%, Westwood One (WON) down -72%, Salem Communications (SALM) down -45%, Cox Radio (CXR) down -25%, and the list goes on and on.

Only two names really stood out from the crowd over the past 12 months: Clear Channel (CCU) and Cumulus Media (CMLS). While both also saw losses in their share prices as well (Clear Channel down -3% and Cumulus down -25%), each has potential for gains fueled by pending private equity buyouts, and in the case of Cumulus, management and long-term company prospects.

As most investors already know, Clear Channel Communications is the dominant player in the radio sector with more than 1100 stations in the United States, but they also have an international division, television stations, and outdoor properties that trade under a tracking stock (CCO). It is an extremely large and diverse company with many pending transactions.

In November 2006, they announced they were seeking to go private in a still pending deal involving Bain Capital and Thomas H. Lee Partners at $39.20 per share. The current premium of about $4 per share may seem attractive to some, but it should be noted that just this week the Financial Times reported growing skepticism over this deal closing.

Cumulus Media, Inc., on the other hand, is the second largest radio operator in the United States in terms of total number of stations, and is also in the midst of a pending bid to go private being led in this case by certain members of company management and Merrill Lynch (MER). Adding to the double digit drop the stock saw at the end of 2007 due to the increasing risk spread on the deal, the first days of 2008 trading have been absolutely ruthless to this stock.

With Tuesday's closing price of $5.86, it would appear that investors seriously doubt current market conditions will allow this deal to close at the $11.75 price announced on July 23, 2007, just months before the current credit crunch began to take its toll on the broader markets. However, believers stand to double their money from here if the deal does close as announced, and even a modification of the deal or a reduction of the take-out price could bring substantial upside to patient investors.

The most interesting thing about Cumulus Media, though, is that even if the deal to go private doesn't culminate, patient investors still could have an opportunity to benefit long-term from owning these shares. What separates Cumulus from the rest of the pack is simply its management, led by Lewis W. Dickey, Jr., one of Radio Ink Magazine's Most Powerful People in Radio and its 2003 Radio Executive of the Year. He and his team of A-Player executives have managed to hold onto the company's entrepreneurial spirit and vision for the future, a rare find once a company reaches this size in any industry.

Beyond the current proposed deal to go private, at what was then a 40% premium for investors over the July 20, 2007 closing price, Cumulus management has continually shown a clear willingness and desire to maximize shareholder value to its fullest over the years. In October 2005, along with The Blackstone Group (BX), Thomas H. Lee Partners and Bain Capital, they announced the formation of Cumulus Media Partners, LLC, a private partnership where Cumulus Media acts as manager and owns a 25% stake of the entity used to complete the $1.2 billion acquisition of Susquehanna Radio, which was then the largest privately held radio operator in the United States.

More importantly, this exemplary management team has also demonstrated that not only will it readily do acquisitions to grow the company, but it will also maintain financial discipline in overly competitive bidding wars. This was clearly evidenced in their reported dropping out of the bidding process for ABC's Radio Group, which was acquired by Citadel Broadcasting last year at an astounding price of $2.7 billion.

Cumulus's commitment to growth doesn't appear to be just in terms of acquisitions, though. They also appear to be highly focused on organic growth. The company continues to grow its share of the advertising marketplace, and has a number of new initiatives intended to help it grow even further, despite the core radio advertising business in general remaining stagnant.

Most recently, they launched a new online job search and career services site, Cumulus Jobs.

Finally, Cumulus has one quality that an investor should look for as much as any other: the company's executives have significant 'skin in the game'. Its CEO, Lew Dickey, and his family members are amongst the largest owners of the company, and have real incentive to maximize share value for everyone. As Jim Cramer always says, "only buy the best of breed".

Despite the radio industry's current malaise, Cumulus Media certainly stands out among the crowd and looks to be a best of breed stock here. If an investor has an appetite for contrarian plays and a stomach for the roller coaster that is the current credit market, there is a case to be made for going long Cumulus Media.

Disclosure: Author has previously met with Cumulus CEO, Lewis Dickey, and other executives mentioned in this article, and may have business relationships with Cumulus and/or other radio broadcasting companies in the future. He currently doesn't own shares in any of the companies mentioned in this article.

Comments

[J.P. Hannan:]

Thanks for all of the email feedback I got on this one. Please keep them coming.

2008 Feb 29 12:06 PM

[CurrentAsset67:]

Mr. Hannan, are you the Controller and Vice-President of Cumulus Media, as this press release in July 2009 suggests?

phx.corporate-ir.net/p...=

If you are, and if you held that position at the time you authored this article, why did you not fully disclose that in your piece?

Jul 02 11:59 AM