Content is King For Westwood One

Distribution was the focus of the entertainment industry for much of the past 15 years. The large entertainment conglomerates took advantage of looser ownership regulations and technological advances to acquire more television and radio stations, cable and satellite subscribers, and internet portals. However, with the rapid proliferation of digital media, it appears this era has come to an end for now, and many of the companies leading the acquisition binge, most notably Rupert Murdoch's News Corp (NWS), are now sellers of these very assets. The focus now is on sources of news and entertainment to feed all of these hungry appetites in the digital realm and fill all of the new distribution channels available. At a level never before seen, it appears as though content is king once again.

Media and entertainment investors should be extremely wary of companies that do not produce or control the content that they rely on, and should look for those companies with an opportunity to capitalize on the vast digital media landscape. Among these, one battered and beaten name stands out, Westwood One (WON), a venerable syndicator of radio, television and interactive content whose shares saw an incredible -78% drop during the last twelve months. It is currently trading at $1.53 per share as of the January 10th close.

Westwood One had been run under the auspices of major shareholder CBS Corporation (CBS) until they formally redefined their relationship and terminated their management agreement last October 2, 2007. Earlier this week, they hired a new CEO, Thomas Beusse, to replace Peter Kosann, the CBS employee who had previously held that position. The company has also been working with advisors to evaluate strategic options since last year.

In a note to investors on January 9, 2008, Bear Stearns analyst Christopher Ensley reiterated his Peer Perform rating on the company, noting that "we believe the CEO announcement is a clear positive that will enable WON to address credit issues that are weighing heavily on the stock". According to Ensley's note, WON has a bank covenant that steps down to 3.5x at the end of Q1 2008, but he believes that leverage increased to 3.6x at 12/31/07 based on Q4 guidance. Therefore, a waiver will be necessary from WON's lenders which Ensley feels will be easier to obtain with the new CEO in place.

Beyond these corporate developments, what is more encouraging is WON's underlying business, the recent state of network advertising, and the expanded opportunities for WON in the HD Radio and new media space.

Simply put, WON's operations suffered significantly as the disinherited stepchild of the CBS Corporation, particularly after the exit of former CEO Mel Karmazian and "King of All Media", Howard Stern to Sirius Satellite Radio (SIRI). Though separately traded companies, the nature of their comingled structure caused Westwood One to rely heavily on the strength of the CBS Radio Stations for its own success. Under the domain of Karmazian, radio was a key focus for CBS; however, once Leslie Moonves took the reins as CEO, the radio business clearly took a back seat to the fortunes of other divisions in the company, and Westwood One felt a significant brunt of those changes.

Additionally, for too many years prior the company had been overly focused on share buybacks and dividends and did not invest properly to keep their programming pipeline adequate. Consequentially, they allowed a number of new entrants into the marketplace to gain vital market share. They also made significant cutbacks in staffing that greatly impacted their sales efforts. With a new fully dedicated management team and a new corporate focus on growth, WON should be able to regain a strong footing in the marketplace. It also finds itself in the advantageous position of being through its corporate realignment phase while its two largest competitors, Premiere Networks and ABC Radio Networks, remain in corporate purgatory. Premiere's future is unclear while it waits out parent company Clear Channel Communications (CCU) pending acquisition by private equity firms Bain Capital and Thomas H. Lee Partners. ABC Radio Network was acquired last year by Citadel Broadcasting as part of their larger purchase of ABC Radio, but last December Citadel announced it had hired two investment banks to act as advisors on the divestiture of some of those assets. In the future, Westwood One could be a nice platform company for any private equity investor looking to roll up these other assets should they become available.

Beyond the mergers and acquisitions front, the core network radio business is showing surprising strength of late, and is one of the few bright spots in an otherwise bleak radio advertising marketplace. On December 3, 2007, the Radio Advertising Bureau announced in their Quarterly and Year to Date report that "Network Radio was the clear frontrunner in 3rd Quarter 2007 with a 9% revenue gain" and "From a year-to-date perspective, Network Radio posted a healthy 5% growth". They highlighted automotive and retail as the main drivers of this growth with retail spending growing 42% in 3rd Quarter and 21% year to date, and automotive spending increasing 70% for the same quarter and 42% year to date.

In another industry report, TNS Media Intelligence reported on December 12, 2007 that while radio ad spending overall remained "soft" and was down for the first nine months of the year, the network radio sector saw modest gains. These reports offer some encouragement that Westwood One might not be experiencing the same levels of reduced demand from advertisers as being more widely reported for the overall radio sector.

In addition to their core business, long term Westwood One stands to be a key beneficiary of the radio industry's expansion into HD Radio multicasting. This new technology, now distributed nationwide and slowly building its base of receivers in the marketplace, allows FM broadcasters to offer CD quality sound and up to three additional digital channels on their current FM band. While they must replicate their current analog signal on one of those channels, they will be left with a great deal of capacity for other content. Given the challenges stations are experiencing after years of no overall revenue growth, these broadcasters may find it more economical to purchase syndicated network content rather than invest in new local talent for these nascent channels. This strategy would be very similar to the roll out of independent UHF television in the 1970s and 1980s that gave birth to the television syndication business as we know it today.

Finally, the company is finding success as it continues to grow the interactive portion of its Metro Networks division which provides traffic, news, sports, weather reports and information programming to over 2200 radio and television stations. On January 9th, they announced the launching of their 200th RealTraffic website with technology partner Maptuit, and their plans to make the feature more robust in the future by targeting personal navigation devices in vehicles.

Westwood One, despite all of the trauma it has put investors holdings its shares though over the past year, seems like it has finally reached a point of inflection, and the shares should regain ground once they put these final issues related to their credit agreements to bed. Over the past three months they have accomplished a tremendous amount in their management restructuring, and long term are positioned on many fronts to take advantage of the digital news and entertainment landscape.

Disclosure: none

Comments

[serio7:]

nice article. references recent analyst and industry comments that I haven't read anywhere else.

2008 Jan 14 12:29 AM

[Radioanalyst:]

Nice call- stock is up 22% today.

2008 Jan 15 03:31 PM

[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