Cumulus Buying Salem or Radio One or Going Private

So what is Lew Dickey up to?

Get the feeling that there is an end game going on and the industry, shareholders and Wall Street are being distracted?

Try this one on for size.

That new Cumulus Investment Partners, the currently unfunded, publicly touted new venture with Crestview, is a smokescreen for eventually retiring Cumulus debt and taking the company private.

Private is in -- Jeff Smulyan finally worked a deal with investors and shareholders last week. But more on Emmis in a moment.

Dickey, who has earned the nickname "Tricky" Dickey, looks around at buying Salem and/or Radio One with play money -- the new unfunded $1 billion investment partnership.

One insider telling us:

"I heard through the Atlanta grapevine that Cumulus made an offer for both Salem and Radio One a couple of weeks ago and was turned down by both. They offered 3x cash flow".

If Dickey offered 3 times cash flow, he'd be pushing the benchmark for purchasing radio properties to a new low. It would be a severe blow to the industry in which he operates.

From what I can gather, Salem and Radio One are not for sale -- at least not as of today. Dickey is famous for having loose lips about how he's going to buy Citadel and Regent -- you can probably name the company -- at least that's what some of his employees claim.

The worst kept secret in the world is not that Cumulus is going to buy a competitor.

It's that they are always bragging that they are buying someone.

It seemed strange that Cumulus, which owes more debt than it can repay next year, made a big public announcement recently that Cumulus and the investors who helped them buy Susquehanna, Crestview, were recently reunited and it feels so good.

Crestview never said it was putting any money into the billion dollar jumping jackpot for use in purchasing other companies or more stations.

Cumulus, upside down on its own debt, couldn't dare say it was going to ante up money for this cockamamie investment partnership -- not while it can't repay its current debt.

So, here's what I think.

Dickey and Cumulus posture that they are shopping for radio stations to grow their empire but in reality they have another plan in mind.

Raise money to take Cumulus private.

Dickey is speaking up now because radio stocks are beginning to rebound from record lows and it behooves him to buy back the company (with help from investor friends) while the value is at its lowest.

CMLS traded at $4.88 a share when it closed Friday. It has been under $3 in the past year.

The price is right.

The timing -- perfect.

The Citadel, Regent, Lincoln Financial rumors are just plants.

Why wouldn't Lew Dickey want to go private?

He's wrecked the public model of a local radio company. He could play all day and all night with a private company where financial figures would not have to be disclosed and the number one priority would be The Dickeys.

Far fetched?

Maybe not.

The current trend is to take radio groups private -- the public experiment having failed. No new deregulation is likely, cash flow should pick up with the economy so the only other major reason for borrowing money is to pay off debt.

Citadel seems to love the pre-packaged bankruptcy plan it is close to culminating -- the original investors give back most of the company and the creditors take over but the same management gets new employment contracts. Now, what's not to like?

Same with Regent.

And with other upside down companies that will not be able to pay for the debt they accrued in the past.

But the Cumulus plan is death with dignity in a way.

The company fails -- acts like it is in acquisition mode (itself kind of hilarious) then decides that the best use of investors money is to pay down debt and go private.

No one sees it coming.

This works for many reasons.

No more humiliation for the failed Dickey boys. They can withdraw and declare victory.

Later, if the industry comes back sufficiently beyond a short-term advertising bubble, Cumulus can buy other investors out and the Dickeys can even expand their personal stake.

Without the need to buy another company, who needs more capital?

Without someone to save the company from running up against their loan covenant next year, they are the ones who need to raise more capital. If Cumulus and Crestview actually said that to prospective investor, it would likely go over like a lead balloon. Better to talk about buying a competitor or two while raising money.

You and I know that the radio industry will have to redeploy its talent, content creating ability and marketing expertise to the mobile Internet or radio's growth days are over.

Meanwhile, 3x cash flow -- which is at the low end of what the standard will be in my view (3-5 times) is a death knell for deals.

Why sell unless you're upside down?

Why buy when you're already saddled with debt?

Emmis CEO Jeff Smulyan wanted to take his company private before it was fashionable, but greedy shareholders prevented it. Emmis was not ever going to be a major player and the public funds they used to expand a little bit were costing them too much. Now, Emmis can go private. Smulyan can keep a few stations -- sell the others like it's 1999.

So keep your radar aimed at some of the odd things that will be shaping the future of the radio industry the rest of this year.
  • Privatization.
  • Low multiples discouraging the sale of existing stations (other than fire sales).
  • No plan at all from any broadcaster to become part of the digital future.
It's insane, but it's happening in a radio market near you.

It doesn't take a genius to see that the future of content is on mobile media so conversely I guess that means that radio is run by a bunch of geniuses because they're looking in the wrong place when it is so apparent that the consumer revolution is driving the growth of the mobile Internet.

The recession didn't kill radio.

The debt radio groups piled up really didn't do it, either.

But the industry's stubborn determination to buy and sell instead of build and run will leave it a bystander in the biggest entertainment growth industry since, well -- broadcasting itself.

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