Wells Fargo Securities bond analysts Bishop Cheen (pictured) and Davis Hebert don’t expect radio to enjoy the same level of post-recession recovery in 2011 as television and outdoor, but they are optimistic about low single-digit growth. And they even think that station trading may pick up. (But then, how could it get any slower?)
Will 2011 bring a real recovery to radio?
“It all depends on local, in our view, which as we noted in our general advertising outlook, is expected to underperform national. Despite 2010’s growth year (+6%), our long-term view of radio remains one of caution, as we think the industry faces more secular pressure (relative to TV and outdoor, for example) and sees limited political advertising, which provides a bump in cash flow for local broadcast TV in each election year. Although online streaming and HD radio have potential, they have not been money-makers yet, in our opinion. In 2011, we forecast radio industry revenue will be up 2%-3% year-over-year, which would place industry revenue at $17.3 billion, still well below the $19.5 billion seen in 2008 and the peak of $21.7 billion reached in 2006,” Cheen and Hebert said in their semi-annual advisory to investors on the entire range of companies that they follow in the high-yield bond market. (Heaven forbid that we would ever use the term junk bond!)
After cutting costs during the recession, broadcasters aren’t expected to go wild with spending. That means that any increase at all in revenues will transmit to bigger gains in earnings before interest, taxes, depreciation and amortization (EBITDA) and broadcast cash flow. Highly leveraged radio groups will continue to focus on using free cash flow to reduce debt, the analysts wrote, particularly those facing debt maturities in the next two to three years. They list Entercom, Cumulus, CMP Susquehanna (the name on the bonds of Cumulus Media Partners) and, the biggest of all, Clear Channel. “After a bevy of amendments in 2009 and 2010, these companies are no longer facing defaults, however, and should generate sizeable free cash flow this year on moderate capex [capital expenditures] and limited returns to shareholders,” Cheen and Hebert wrote.
Will there be real action in station trading this year? The analysts note that the $505 million deal by Hubbard Broadcasting to buy 17 stations in four markets from Bonneville International is the first significant M&A transaction in more than three years in radio. “We think the cash flow multiple is in the low 8X area,” they wrote, which agrees with what RBR-TVBR has been hearing as well.
Cheen and Hebert note that an offer was made by Cumulus Media to acquire Citadel Broadcasting even before the Bonneville-Hubbard deal was announced. They calculate that multiple at about 8.3X 2010 EBITDA or 8.1X projected 2011 EBITDA. The offer was rejected by the Citadel board, although the analysts note the pressure from some shareholders to negotiate a sale, and they say it at least indicates that the M&A environment is thawing.
“What is on the block? The giant leveraged buyout of Clear Channel had the company looking to sell some 50-plus radio stations (placed into a trust in 2008), but that has certainly been stalled. Those stations could reappear on the block, while CBS Corp. could look to unload some of its midmarket stations in an effort to concentrate its radio assets in larger markets. In 2008, CBS announced it wanted to sell 50 of its 140 radio stations, but pulled them off the block when the credit crunch froze M&A. Deal chatter in the trades suggests that CBS is looking for 10X cash flow, but the bids were below 8X. We also understand that CBS is looking to divest of the stations as a tax hedge,” Cheen and Hebert wrote of the possible radio deals.
RBR-TVBR observation: The whole question of whether M&A will open up this year comes down to whether the standoff between would-be-buyers and would-be-sellers has been resolved by the Hubbard deal with Bonneville. The bar has been set at 8X. Are other sellers going to accept that, or remain hunkered down until prices move higher?
Vote: That’s the RBR-TVBR poll question this week, so make your opinion known at RBR.com.