Wells Fargo sees upside for Cumulus


RBR-TVBR Analysis:

Cumulus Media has completed its major 2011 triple play – bringing the outstanding 75% of Cumulus Media Partners into the general fold, completing its acquisition of Citadel, and recapitalizing $1.4B in debt. Wells Fargo Securities analyst Bishop Cheen believes near-term leverage is manageable and that there is considerable upside potential heading toward the end of 2012.

Here’s how Cheen breaks down the new Cumulus: “Pro forma for the recap, Cumulus supports $1.5 billion of first-lien debt, $2.23 billion of secured debt, $2.9 billion of total debt, $3.03 billion of debt and redeemable preferred stock, and a total enterprise value of $3.51 billion, net of $119 million of cash.”

The key to getting to the “upside” will be using free cash flow to pay down debt. The trick will be generating EBITDA of $500M and $275M free cash flow with about $200M in interest expense and $25M in other expense, including capex.

Cheen said, “With an estimated $408 million of pro forma EBITDA at midyear, how would Cumulus manage to increase it about 25% in 18 months, especially in a challenged growth sector or broadcast radio? That is the question we focused on when we went through all of the company’s various investor presentations, SEC filings, press releases, earnings calls, and transcripts of speeches by management. We processed it all with our own familiarity of trends likely to affect the radio industry and its inherent economics. The following is one scenario for Cumulus upside.”

* Plus $52 million of expense synergies to be captured by year-end 2012
* Plus $20 million of efficient pricing and inventory (yield management as they say in the business) of the network and of clustered and adjacent markets
* Plus $20 million-$25 million via developing Traffic content. Currently, Clear Channel radio owns about 98% of the Traffic content business on broadcast radio. Cumulus Media’s CEO Lew Dickey has said that he believes a viable Traffic business on Cumulus could generate more than $300 million of incremental new revenue, which may take a couple of years to fully develop.
* Total near term upside: $92 million-$97 million, or pro forma $500 million-$505 million of EBITDA.

Cheen concluded, “We also note that, longer term, Dickey has said Cumulus should be able to generate $350 million of free cash flow, which we believe implies $550 million of EBITDA. In 2012, we estimate that some of the upside will come from more robust political ad spending which totaled $24 million pro forma in 2010. Our target is $30 million.”

RBR-TVBR observation: Agree with Cheen but an important key to the chain of success will be to see what digital strategy is implemented across the assets of Cumulus. Clear Channel has a big time head start. Cumulus needs to move quickly but methodically. Money can grow once Cumulus gets involved in a serious way with the digital media side. Caution: Analog minds do not develop digital strategies.

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