Bishop Cheen at Wells Fargo Securities is an old radio guy who got into studying the industry’s finances decades ago. He and fellow high-yield bond analyst Davis Hebert have sent clients their insights from the 2010 Radio Show – and since they have to focus on hard dollars, their take is somewhat less rosy than the RBR-TVBR review.
“Recovery or head fake?” the analysts asked. “Radio is heading for its first big up year since 1992, with a 7-8% gain in its sights on a +6% first half. Is it sustainable ahead? That is indeed the question.”
Cheen and Hebert recited the list of sins that got radio into its current situation: “Too much debt, negative growth, sibling rivalry, analog myopia, supply/demand imbalance” and so on. And to fix those the business needs revenue growth, pricing power, media-mix relevance, digital renaissance, debt reduction, free cash flow management, long-term vision, better content — and “every radio group executive with whom we spoke or to whom we listened on the dais swore he had seen the light,” they noted.
The Wells Fargo analysts are sticking with their “underweight” view of the radio bond sector, citing such things as too many stations chasing too few ad dollars, the lack of new revenue streams and the lack of M&A activity. That lack of deal-making has made it difficult to even value stations, which is keeping lenders at arm’s length.
“Lenders said today’s debt levels for viable stations tended to be 40–50% loan to value on senior debt, although there was less clarity on what that value should be. Without station deal flow, there are not any meaningful comparables to affirm cash flow multiples and values. Thus, lenders have greatly reduced the funnel of deals they will consider, with most of those transactions being recapitalizations that extend maturities and lower overall exposure. The spreads on bid to ask continue to be very wide at 6x-12x cash flow. Although historically, multiples tend to come back to 10x, there is still a discount overhang in the industry based on prior disappointments as to industry turnarounds,” Cheen and Hebert wrote.
So, radio companies are still facing a capital challenge. “There have been fewer radio bankruptcies than initially anticipated a year ago, because of this year’s overall top line growth, which has convinced lenders to amend and extend, and allowed expense-focused operators more free cash flow to help reduce debt. That is the good news. The bad news is that entrepreneurial capital remains out of reach for most in the radio industry. Most of the funding is for recapitalizations in which senior lenders reduce their overall exposure in exchange for amending covenants and extending maturities. Still, larger balance sheets tend to be more blessed than smaller ones, because the high-yield market is not interested in new issues under $200 million. Radio companies with less than $200 million of debt are struggling to find flexible recap solutions without demonstrating new revenues, new audiences, new markets and new upside. As one veteran radio equity sponsor told us, the equity invested in many 1999 radio transactions is still underwater,” the analysts noted.
RBR-TVBR observation: Not much way you could disagree with their assessment. Radio disappointed the investment community and the bankers. We still hear some of those guys spitting out the phrase “Less is More” as a vile curse – and that misstep came before the national recession hit. Radio is going to have to post multiple years of growth and prove stability before the money is going to come rushing back in.