When Bad Things Happen to Good Radio

One of my readers broke down the bad news for me yesterday about the market capitalization of several radio companies.

Keep in mind that many radio stocks had already entered no man's land way in advance of the turbulent stock market. Capitalization is the price of the stock multiplied by the number of outstanding shares.

Citadel, for example, has a capitalization of $70 million. Keep in mind that they paid $2.7 billion (like in "b" billion) for ABC alone. Their debt ratio is through the roof.

Entercom comes in at $88 million. They are worth more than most radio groups but incredibly, not even worth $100 million after twelves years of consolidation if market price is considered.

Emmis' market capitalization is only $23 million. They own a few very big radio stations in the two largest American cities that on a bad day are worth far more than their total group public value.

Salem, the religious broadcaster, may be programming to a higher power but their market capitalization is a sinful $46 million.

Regent is at $28 million.

Don't start with satellite radio. Mel is saying he is confident he can refinance his expensive debt once he achieves economies of scale following the XM merger (i.e., firing XM people and service reductions).

One thing you have to say about the radio business -- we sure talk a good game. In fact, that this dog and pony show lasted as long as it did is the real story.

You can say a lot of things about the Mays boys of San Antonio, Texas but when it comes to timing, they are A#1. They still have a piece of the devalued Lee & Bain acquisition, but don't worry about them. They assembled their group in swift steps of acquisition right after 1996 and bought Jacor and AMFM to add to their smaller assets to build an 1,100 station behemoth.
Even though Randy Michaels did the heavy lifting when he came aboard, the Mayses profited. And they got out earlier this year saddling those poor suckers at Lee and Bain with all their debt

Didn't you think Lee & Bain were looking to get out? I'll bet they wish they had.

Mission accomplished -- really.

Except for one thing -- radio is really bankrupt. If a company's debt is so enormous, that meets Webster's definition of bankruptcy.

What I've been citing is the public market value and there is no getting around radio capitalization based on share price. But we all know that Citadel is worth more than $70 million. Unfortunately the private market is non existent and until some comps come to the fore, we won't know what Citadel is worth today in the private market.

We do know that most radio companies are loaded with debt. When they were assembling their groups in the early days of consolidation, no one was concerned about how these companies were ever going to pay down their borrowed debt -- or, more realistically at least manage it.

We have the Radio One sale to Bonneville in LA for $100 million most recently as a nice comp. But you likely couldn't get that price today.

The market can't be fooled. It's telling you what it thinks companies in each sector are worth. On the upside, when the private market is high on a sector, it is not unusual for the public price to reflect it.

Radio still has a few things going for it.

Stations have huge write-offs -- the value of the license, equipment, contracts, etc.

Cash flow is abundant even when sales revenues are off due to a souring economy.

In retrospect, radio should never have looked to Wall Street to go public. Radio's accounting doesn't lend itself to public money. (I'm putting aside how bad going public has been for the listening public during this discussion, but not forgetting it).

All of this is my way of saying that investors have pronounced radio dead. We're not alone, there's a lot of companies that the market has on life support right now.

The U.S. economy is obviously worse off than we've been led to think. Market forces are not apparently reassured by government intervention. And pardon me for mentioning hedge funds in the same breath because if we discover that pension funds and insurance money has been propping up hedge funds, then all bets are off. No amount of government intervention can save it.

Where does that leave us?

Back to zero.

valuations. Having to deal with real issues like unmanageable debt.

Then, we start over.

New buyers. New operators. New realities.

Perhaps this helps to explain why so many smart CEOs have snubbed their noses at the digital future. For them, it's the here and now that counts.

There is no future for a terrestrial radio as a group of public companies.

And there is no way to become a growth business again by leaving out the next generation -- the one that has been moving away from terrestrial radio and choosing Internet, mobile and cell phone options instead.

If there is any good news here it is this.

Once radio assets are transferred to new owners who presumably will use realistic accounting to run private companies, there is a window of opportunity for a lot of talented people to join the next generation's move toward the Internet already in progress.

Better late than never.

For those of you who would prefer to get Jerry's daily posts by email for free, please click here. IMPORTANT: First you must check your mail or spam filter to verify your subscription immediately after signing up before daily service can begin.
Thanks for forwarding my pieces to your friends and linking to your websites and boards.