Why there is confusion about the Citadel Broadcasting price


RBR-TVBR analysis
When the finalized contract for Cumulus Media to acquire Citadel Broadcasting was announced this past Thursday Cumulus declared the price to be $2.4 billion and Citadel’s announcement said $2.5 billion. Who’s right? Both, actually. We’ll explain why.

The announced price per Citadel share was $37. The contract filed with the SEC shows about 47 million shares outstanding, so multiply 37 by 47 and add in about $700 million of net debt to be assumed (actually refinanced) and you come up with $2.44 billion.

But it is not that simple. The offer of $37 in cash or 8.525 shares of Cumulus stock is based on a stock price of $4.34, which goes back to when the preliminary deal was struck and the parties announced exclusive negotiations to produce a final contract. Since then the trading price for Cumulus shares on Wall Street has gone up.

It now becomes a numbers game for the investment funds that own nearly all of Citadel’s stock and warrants post-Chapter 11, by virtue of their purchase of the company’s debt instruments as it headed toward the restructuring in bankruptcy court. So long as Cumulus Media’s stock price is above $4.34 they will elect to receive all stock. But since the stock portion is limited to 151 million Cumulus shares, that will be prorated to $23 in cash and 3.226 shares of Cumulus stock for each share of Citadel stock. At the March 9th closing price of $5.10 for Cumulus, Citadel’s announcement noted that the deal had an implied value of $39.45 per share. Do the same math as above and you get $2.55 billion.

If the maximum stock compensation is elected by virtually all of the shareholders, the current shareholders of Citadel will end up owning 51% of the stock at Cumulus, compared to only 30% if they elect the maximum cash payment of $30 per share and 1.613 shares of Cumulus stock – which will only happen if Cumulus plunges back below $4.34 by the closing date late this year. In either case, we don’t expect many of the discounted debt vulture funds to hang around as shareholders of the nation’s second largest radio company. So look for heavy trading of Cumulus shares around the closing date.

Citadel hasn’t yet reported its Q4 and full year 2011 financial results, although that’s due any day now, so we don’t yet have a broadcast cash flow figure to use for computing a multiple. But, once again, there’s the question of whether you divide into $2.4 billion, $2.5 billion or a still higher number if Cumulus’ stock price goes even higher. On the other hand, Cumulus CEO Lew Dickey is no doubt anticipating that Citadel’s cash flow will just keep improving until the closing late this year. He’d been talking for over a year about trying to buy at eight times. Lew had to up his bid for Citadel when Entercom’s David Field came in as a rival bidder, but he still might get back close to that by the closing, assuming you want to use the $37 per share Citadel value based on the $4.34 Cumulus stock price of a few weeks ago.