What was the multiple?


George ReedBy George Reed, Media Services Group

Broadcast cash flow multiples have always been the top discussion topic with radio and television station buyers, sellers, bankers and brokers.  Particularly in the convention bars.  But, “caveat emptor!”  There are a myriad of ways to cause an “apples & oranges” comparison.  Here are a few thoughts to help you match your apples to other apples:

* Take all discussions on multiples with a grain of salt, whether directly with the participants or in published reports. Unless you have seen the financial statements and the asset purchase agreement, you do not really know the multiple.

* The multiple to the seller and the multiple to the buyer are usually very different on the SAME transaction; just ask them. Case in point: on a transaction some years ago, my client, the seller, thought that he got a 20x multiple. The buyer thought that they bought at 12x. They were both correct. The price and the cash flow at the time of the signing of the APA suggest that the seller was correct. The actual and pro forma cash flow at the closing, following a long LMA, suggest that the buyer was correct.

* BCF multiples can be based on a) trailing twelve months, b) calendar year, c) projected, d) reconstructed with expense savings pro forma, or e) any combination.

* Published multiples are often estimates from uninvolved parties, or if from an involved party, reflective of the “spin” that he/she wants to create in the marketplace. Brokers are often asked for the multiple in a deal; most, like us, will not give them out. Some make up their own number which often bears little resemblance to reality.

* Sometimes the “true” multiple is buried in the weeds of the transaction, particularly if swaps are involved.

* How do you value the stock component of a deal if the consideration is a combination of cash and stock?

* How do you “adjust” the multiple to fair market value when there are tax considerations (such as 1031 like kind exchanges).

* What is the multiple if there is no (or minimal) cash flow?

* The treatment/allocation of corporate expenses in adjusting EBITDA back to BCF can have a massive impact on the BCF multiple.

* Add-backs of “owner expenses” (i.e. whether or not they are truly operating expenses) often lead buyers and sellers to different conclusions as to the multiple.

* Treatment of “inter-company” revenue such as traffic services and unwired nets (which often vaporizes at closing) can result in a much higher “real” multiple.

* Are Trade Expenses and Trade Revenue both “below the line?”

* Inclusion or exclusion of Accounts Receivable.  While they are normally excluded in an asset sale, sometimes they are included, lowering the “real” multiple.

General rules of thumb:

* Often, a sale will bring a lower real multiple if several markets are involved (many times a seller could net much more, and a higher sale multiple, if they break up the markets and sell to strategic buyers).

* “Distress” situations (especially involving bankruptcy or receivership) usually bring lower multiples than sales of healthy businesses.

* Stock sales bring lower multiples than asset sales (to compensate for the tax risk and lower basis).

* Multiples are often higher in cash flow deals where additional cost savings are obvious.

* Multiples are often higher when the seller provides seller financing.

There are a myriad of factors in the “multiples” discussion. Take care to ensure that all parties are speaking the same language.  Ultimately the value of the station (or cluster) is worth what a willing buyer will pay and what a willing seller will accept.  A buyer should determine his/her price based on the present value of the future returns, discounted at a rate commensurate with the risk.  In the end, the marketplace determines the price (and the arguments about the multiple continue).

Originally published in George Reed’s Radio/TV Station Trading Views (http://georgereedradiotv.blogspot.com/)

George Reed is Managing Director at Media Services Group (http://mediaservicesgroup.com). He has been actively involved in the broadcasting industry since 1972. He co-founded Media Services Group in 1989. Reed’s practice includes radio/TV station and tower brokerage, valuations, investment banking, and workout restructuring consulting. He has served as an expert witness in State and Federal courts concerning station valuations, and as a court appointed Receiver. He owns and operates six radio stations in Charlottesville, VA (Monticello Media), a cell tower company (USAntenna) with towers in Alabama, Georgia, and South Carolina, and Inside Towers newsletter. Reed received his B.B.A degree from Mercer University and his M.B.A. from Georgia State University’s Executive MBA program. He is a past President of National Association of Media Brokers and serves on the Board of Directors of the Georgia Association of Broadcasters and the North Carolina Association of Broadcasters.