Investor pressuring Regent
Regent Communications is the latest radio company to come under pressure from an investor who wants to cash out. Riley Investment Management is calling for the company to hang out a for sale sign. The investment company is not shy about going public with its efforts to pressure the management of publicly traded companies. It recently fought the acquisition of Mesaba Airlines by Northwest Airlines, claiming the valuation was "grossly inadequate." As it stands now, though, the airline deal has been approved by a federal bankruptcy judge and is set to go to closing. As for Regent, Riley said in a letter to CEO Bill Stakelin and the board of directors yesterday that the radio group would be worth 50-100% more than its current stock price if it were sold to a financial buyer or, on the high end, a strategic buyer (a bigger radio group). According to an SEC filing, which included its letter, Riley owns 2,525,018 shares of Regent, or 6.5% of the radio company's outstanding shares. There was no immediate response from Regent.
Read the letter.
Riley Investment Management, LLC
11100 Santa Monica Boulevard, Suite 810 Los Angeles, CA 90025
Phone (310) 966-1445 Fax (310) 966-1096
April 4, 2007
Regent Communications, Inc.
William Stakelin & Board of Directors
2000 Fifth Third Center
511 Walnut Street
Cincinnati, OH 45202
Dear Sirs:
Riley Investment Management owns approximately 7% of Regent Communications' common shares. We are writing you to express our view regarding the most efficient way to maximize shareholder value. We have been encouraged by the Company's strong operational performance and recent strategic acquisitions. However, we acknowledge that Regent Communications' value is consistently been overshadowed by negative public sentiment to the terrestrial radio broadcasting market in general. We also believe that Regent Communications' small size relative to its public company costs makes it difficult for the Company to realize value as an independent public entity. We therefore believe that selling Regent Communications may offer the best alternative to realizing shareholder value. On the low end, we believe that a sale to financial buyers would yield a price of $4.50 per share or approximately a 50% premium to current stock price. On the high end, we believe that a sale to strategic buyers could yield a price of over $6.00 per share or a 100% premium. As large shareholders of Regent Communications, we would like to discuss with management our views on options with respect to the sale of the Company. We currently sit on the board of five public companies and have had great success in helping our companies navigate through strategic alternative review processes.
As we are sure you are aware, over the past several years Regent Communications' stock price has declined substantially from well over $10 per share to $3 per share currently, a loss of over 70%. Despite posting consistent organic growth rates which have outpaced the terrestrial radio industry's average, Regent Communications' public market value has continued to decline. Furthermore, the board of directors' attempt to increase shareholder value by buying back approximately 3.6 million shares in 2006, at an average price of $4.8 per share, has not materially affected Regent Communications' stock price. We also recognize that the recent acquisition of the Buffalo market stations, which operate at Broadcasting Cash Flow margins of above 50% and that are estimated to add 300 to 400 basis points to Regent Communications pro-forma blended station operating margin in 2007, has added substantial value to the Company but again has been ignored by the public markets.
More importantly, taking into account Regent Communications' public costs in relation to its small revenue base, we believe that the Company should not remain an independent public company. With revenues of around $100 million, Regent Communications spends an estimated $2 to $2.5 million to remain public or roughly 8% of its EBITDA. As a private company or part of a larger public entity, Regent would benefit from eliminating these expenses and could also deploy the capital to grow the business further. Applying an EBITDA multiple of around 11.5x to this level of cost saving, inline with the valuation multiples ascribed to Regent Communications' closest publicly traded comparables, would imply unlocking $23 to $28 million of value.
Consequently, we believe the board of directors should pursue selling Regent Communications' assets to larger radio station operators. Examining recent deal multiples conducted in Regent Communications' markets, it seems clear to us that the Company is worth substantially more to strategic buyers, who can benefit from the elimination of fixed corporate overhead, while running at overall lower gearing levels. Taking into account the negative outlook ascribed by public markets to the radio market in general, it is our view that Regent Communications will be hard pressed to yield better returns to shareholders in the foreseeable future while remaining an independent publicly traded company. We believe that such strategic alternatives offer shareholders the best prospects of maximizing value on their investment, value that cannot be realized by remaining an independent public company. We would welcome the opportunity for discussions with the board of directors and senior management team, and look forward to your feedback.
Sincerely,
John Ahn
Principal
Riley Investment Management LLC
RBR observation:
Riley can hardly be called a patient or long-suffering shareholder as far as Regent is concerned. Over two million of the shares it holds were bought in March 2007, including 1,189,344 bought March 28th for 2.95 per share. Forcing a sale for its estimated 4.50-6.00 per share would give Riley a hefty return on a short-term investment. Riley is certainly right about one thing, though, Sarbanes-Oxley compliance has made it prohibitively expensive for small companies like Regent to maintain publicly traded stock. There has been a lot of talk on Capitol Hill about providing some relief, but so far it has only been talk.
