Broke Back Radio

Radio is broke.

But there is no way to know for certain.

The market cap on publicly-traded radio groups is so startlingly low as to be useless.
The cap for Citadel, for example -- is around $54 million dollars. And that includes all those major market ABC properties. That can't be right.

So Wall Street's own litmus test of value doesn't really work for radio.

Very little Wall Street does works for radio. The local radio business was a victim of investment bank greed during the heady times of the Nineties.

No radio station was ever really worth $100 million.

No multiple of streaming cash flow or any other metric would make a radio station's value that high. And at the same time, in smaller markets, many good local radio stations were not worth the profit for which some cagey radio pioneers cashed in when money came to town.

Of course, level-headed radio people knew this all along. Maybe investment banks knew it, too. But they don't care. They live in a world of fees. They make a fee for going to the restroom. Okay, maybe not that, but for almost everything else.

Investors didn't know, either.

Radio seemed like a good business to put their hard earned money into. And, there was an emotional bond as well. It's not copper mining -- it's radio.

When satellite radio was introduced the investment bank analysts talked it up pretty hot and heavy. It was the future, remember? I never saw the future in satellite radio when I published Inside Radio and some of these same analysts would take me to task for depressing their stock. Look at satellite radio's depressed stock today -- 16 cents -- a new 52 week low.

Today the problem in the radio business is that we all know stations and groups are in deep financial trouble.

Even before the economic downturn, radio had all it could do to crank out one or two points of revenue growth as an industry. With major goldmines like Los Angeles now going down for the count and some local markets hurting as much as 35 or 40 percent, the numbers upon which the original valuations were based are taking a dive.

So here's radio's business dilemma:

1. No equity. Look around. There's no investment money to buy anything including radio stations at a discounted rate.

2. No comparables. Without investment money, it's impossible to value radio properties. This is going to be very important because many radio groups are broke now. They owe more debt than they can repay and default is a foregone conclusion. Think of the dilemma their banks have. They can't get a real value on radio properties because of a lack of comps which means -- how do you balance value vs. debt -- at least how can you balance it with any certainty?

3. There can be no real benchmarks or comps until you sell some stations -- and that isn't going to happen probably for at least another year. Maybe longer. And when money once again becomes available, radio consolidators are not going to like the prices at which they'll be forced to sell their stations. The one comparable of late is the CBS fire sale of three Denver stations for $19.5 million -- many times under what CBS paid for them. The purchase by Jeff Wilks went for six time cash flow. Not too long ago, Denver was a 16-20 times cash flow market. Six times cash flow -- or lower -- could be the new standard to set the price on major market stations and companies like Wilks may be able to operate them at these purchase prices.

4. Banks don't really want Citadel back or Cumulus back -- or any debt ridden radio group. They are going to have the same problems selling off the assets. So, some radio groups may win a temporary stay of execution if they can win suspension of debt at the pleasure of their lender -- you know, the one that doesn't want to take back stations they can't sell.

5. This begs the question with what do you collateralize the new restructured debt. What's left of value to put up as a guarantee considering the radio station asset was valued at the time of acquisition at many times more than what they were worth?

Of course, the residue of all of this is -- as radio groups hobbled into an even more uncertain future -- one with more competition, no new next generation and impossible debt service -- how can radio groups find the money to compete?

Clear Channel's two private equity partners -- Lee Capital Partners and Bain Media -- already know they've got a turkey. They bought the largest radio group without knowing what they really bought -- which was a whole lot of local stations that defy nationalization.

Nonetheless they will proceed with tearing down the local radio model and replace it with Repeater Radio to cut costs. When you don't know the business that you bought and your top management is John Hogan and Mark Mays, you're screwed.

Radio stations were worth a lot to local listeners and to some operators who made some money. But it is not worth anything to investors as witnessed by the penny stocks that public groups have become.

The demise of radio and of the investment banks that took it down is quite ironic.

You see, as valuable as listeners might have considered radio, stations were never worth the inflated prices for which they were sold. That high intangible was just a belief in what some fee-sucking investment banks thought (or hoped) it was worth to them when money flowed like water.

The franchise value was driven up by the consolidation craze -- radio's neighborhood, in effect, got more expensive. Buyers thought their assets were worth more than they were and drove the prices up to unreasonable levels.

The irony is that a handful of inept, opportunist radio executives made consolidated radio a hot ticket but they also killed off their own investments and probably made it impossible for them to emerge without taking big losses.

One reason.

Even a great business is not so great that it can pump unlimited cash flow into unlimited debt commitments.

If you want to know why the major radio groups can't right the ship before it's too late, it's because it's already too late.

The back of radio has been broken. We have Broke Back Radio.

Its people have been squandered.

Its intellectual property neglected or destroyed due to incessant budget cuts.

And the investors who know they can't make their money back have no other option than to declare bankruptcy and move on to other victims when times get better.

Consider this explanation by author Tom Nadeau from Understanding Microsoft:

"The Fix is In.

Whenever professional gambling is considered, there is always the opportunity and the danger of a 'fix.' This means that the outcome of a sporting event has already been established in advance, or that the outcome has been strongly influenced in a certain direction with the help of unscrupulous insiders who intentionally adjust the flow of the game in one direction or another.

This is illegal, even in locations where gambling itself is officially
sanctioned and accepted. The essence of the 'fix' is to take what appears to be a contest of uncertain outcome, and to make sure that it is really not a gamble at all -- for the one holding the bettor's money. For the organizer of the wager, the outcome is a 'sure thing.'"

In the game of radio, consolidators held all the cards -- a virtual monopoly and unprecedented access to owning radio properties in U.S. radio markets.

Investment banks bet in advance on the "sure thing" -- deregulation that would allow continued consolidation.

These unscrupulous insiders controlled almost every important aspect of the radio game.

Together they took what appeared to be a contest of uncertain outcome and worked to make it not really a gamble after all -- for the investment banks holding the bettors money.

They took a "sure thing" and blew it.


In the end, they both didn't know the game they were playing.

And radio's audience, advertisers and loyal and talented employees also became losers by association.

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