Shareholders stand to get a 40.4% premium over Friday's closing price in the 1.3 billion bucks buyout announced before the market opened yesterday, with Cumulus Media CEO Lew Dickey, his family and Merrill Lynch Global Private Equity teaming up to take the radio company private. With that hefty premium, it seems unlikely that other bidders will emerge. Nevertheless, the directors of Cumulus and their independent advisors have 45 days to shop the company for a higher bid. The Dickey family and the early shareholders associated with Banc of America Capital Investors are pledged to vote their shares, approximately 13.6% of the total outstanding, in favor of the Merrill Lynch/Dickey bid or any superior bid which surfaces.
At least one Wall Street analyst likes the price from a seller's point of view, but wonders how the buyers can make the deal work. "The news is surprising to us given the company's fundamentals – declining EBITDA expectations in a tough revenue environment and leverage of 8.2x compared with an industry average of 5.1x," said Anthony DiClemente in a note to Lehman Brothers clients after the deal was announced. The analyst noted that EBITDA has declined for five of the last six quarters at Cumulus – and he is expected declines for the remainder of this year. "Despite the fact that business fundamentals remain challenged for general market radio broadcasters, this bid, on the heels of the pending Clear Channel buyout, demonstrates that private equity funds continue to consider these companies as potential takeout candidates, making it difficult for us to value our covered radio stocks on intrinsic valuation alone," DiClemente wrote.
SmartMedia observation: Lew and his brothers are radio guys through and through. Their late father was a station owner and his sons all grew up in the business. They clearly believe in the business and have convinced their new private equity backers that there is money to be made in radio. The stakes will be high, since a company that already has pretty high leverage is being re-leveraged with a structure to boost returns for new private equity investors. Cumulus shareholders will be paid a total of 508 million for their stock, although that includes the Dickey family stake that will be rolled back into the deal, with the rest of the 1.3 billion price tag in debt assumption.