Tuesday, July 14, 2009

Radio stations are worth 3x BCF. Today.

I have a theory. It is based on over 20 years of carefully observing radio station sale prices. Anecdotal, yes. But I believe it to be valid (and given the time and data, am certain that it would be validated using correlation analysis).

Radio station "stick" cost-per-pop multiples track Broadcast Cash Flow multiples.

For many years, Media Services Group has tracked stick prices (the price of a facility with little to no Broadcast Cash Flow). The measure which we have found to be accurate over time is the value of the cost-per-pop. This value of the multiple is determined by dividing the purchase price of a stick by the population covered by the station's (FM) 60 dBu coverage contour (We use a similar method for AM facilities using the 2.0 mVm contour).

Here's the interesting thing. The cost-per-pop at any given time is almost always equivalent to the cash flow multiple in use at the same time. In other words, if stations are selling at 10x BCF, sticks trade at $10 per pop. In the heady days following deregulation, BCF multiples moved into the high teens to 20x; cost-per-pops for FM sticks were running high teens to 20x, a perfect correlation.

I recently analyzed FM stick sales for the first few months of 2009. They averaged just under $6 per pop. Cash flow deals, few that there were, were running around 6x. This pattern has been consistent for at least two decades.

Today, The New York Times sold WQXR-FM in New York for $45 million. WQXR reaches 15 million people in its 60 dBu contour. Do the math: $3 per pop.

So if my theory holds, radio stations are now worth 3x BCF. All markets are dynamic; they move up and down. And the station trading market (whether based on cash flow multiples or cost-per-pop multiples) has always, and will continue, to move up and down. But I believe that at this moment, we in the radio business live in a 3x BCF world. Time will tell if I am correct.

Those are my thoughts. What are yours?


The New York Times to Sell WQXR


Tuesday, July 7, 2009

Buying Your First Station

Over 22 years as a media broker, I have received hundreds of calls for advice on, “How do I buy my first radio station?” Perhaps not surprisingly, the volume of those calls dropped off as prices escalated in the late 1990’s. Now that stations have become much more affordable (read “cheap”), the inquiries are returning. It is once again possible for an entrepreneur to get into station ownership.

I will touch on some FAQ’s in this post which have come up consistently from first-time-buyers. The success rate for would-be buyers is no doubt pretty low. However, all owners were, at some point, first-time-buyers. The most vexing question in the process:

“How do I raise the money without having a deal, and how can I get a deal without having the money?”

This is the proverbial “chicken and egg” question. I maintain that you have to raise the money (equity) first. Without an equity commitment, brokers, sellers and lenders simply will not take you seriously. If you see any deals at all, they will be those left after every other real buyer has already passed.

“How do I raise the equity?”

Unless you have a gold-plated resume with a solid management track record, you are probably not going to get the attention of institutional private equity investors. In fact, in the current environment, you might not even get a returned phone call.

Your best bet is “angel” investors. Work your network of connections. Hit the “Doctor, Lawyer, Dentist” circuit in your area. Use LinkedIn ( http://www.linkedin.com ) or other networking tools to connect with people looking to invest their money. This is a real “shoe leather” process, but likely determines whether or not you will own a radio station.

“What is the difference between debt and equity and why does it matter?”

Debt is a loan, usually secured by assets and personal guarantees. The money is less expensive than equity. Pricing is generally based on a negotiated number of basis points over LIBOR or the Prime Rate. Terms are usually five to seven years.

Equity is ownership. Equity is riskier than debt, so equity investors expect a higher return on their money. In the event of a liquidation, the debt holders generally get their money first; anything left over (usually nothing) goes to the equity holders. Pricing reflects this inherent risk. In the go-go days, equity investors were looking for internal rates of return (IRR) in excess of 30%; more recently, returns were in the mid to high teens. Most equity wants to “cash in” within five years.

Before the current economic chaos, banks would typically loan 5x – 6x cash flow on a deal. The balance of the purchase price (together with working capital) was funded with equity.

“What is Broadcast Cash Flow?”

Operating Revenue minus Operating Expenses (excludes interest, income taxes, depreciation and amortization).

“How does seller financing work?”

Typically seen most often in smaller market deals, the seller functions as the bank. The buyer puts up a down payment (which must be enough for the seller to pay off his lender if there is one) and gives the seller a note for the balance. Terms are negotiable.

“Will the banks make small loans? Define ‘small.’”

Banks generally preferred making loans greater than $10 million. Today you would be hard pressed to find a bank willing to make a loan to a broadcast company (let along a first-time-buyer).

The SBA guaranteed loans often come up. Yes, technically they are an option. But in the real world, the documentation and red tape involved usually stops the process dead in its tracks.

“I know broadcasting, but I don’t know anything about finance. Can I still get a deal done?”

Probably not. Either learn basic finance (that’s what night school is for) or pair up with a partner who has a financial background. If any of the terms I have used in this post are foreign to you, you have a long way to go.

I owned my first station two years after finishing my MBA.

“How are stations priced?”

Stations are usually priced as a multiple of annual Broadcast Cash Flow. Before deregulation, the multiples tended to range between 7x and 10x. Deregulation saw them spike at times into the 20’s (and sometimes based on projected cash flow as opposed to actual, historic cash flow). At this writing, they are probably in the 5x – 7x area, though with so few deals being completed, it is difficult to say for sure.

I intend to discuss pricing for “stick” deals in a future post. But a first-time-buyer can forget doing a stick deal.

“Is institutional private equity an option?”

In good times, maybe (see above). In tough times, no.

“How do I get a broker to work for me?”

Brokers only get paid when deals close. And, like real estate, they typically work for the sellers. For a broker to “carry your flag,” he/she has to be convinced that you are a “real” buyer (that you will show up at closing with a check in full). Commercial break: http://www.MediaServicesGroup.com

“I am a good programmer, but do not have any sales or management experience. Can I get a deal done?”

Probably not. Bring a solid manager onto your team.

“When do I get a lawyer involved?”

Early in the process, ideally before you present a letter of intent to a seller. Interview several, and hire the best you can afford. I recommend that you use FCC attorneys with transaction experience.

“What is the actual buy/sell process?”

After identifying a deal and raising the necessary capital, you typically submit a letter of intent to the seller. It defines the broad business terms of the deal, and is usually considered non-binding (use counsel!). Once the letter of intent has been signed by both parties, you 1) begin negotiating the formal purchase agreement (with counsel) and 2) conduct your due diligence (financial, technical, and legal). There is usually a 30 to 60 day window to complete these steps.

Money usually goes into an escrow account (and is at risk) upon the signing of the purchase agreement. 5% of the purchase price is a typical escrow deposit, though this varies. The assignment application (which includes the purchase agreement) is filed with the FCC. Barring objections, the FCC staff will typically approve the transaction within 60 to 90 days. You can close at that time; however the FCC grant does not become “final” for another forty days. Lenders often require buyers to wait for finality before closing.

“I don’t have any radio experience, but it looks like a great business. Can I finance a deal to buy a station?”

No. Unless you won the Lotto.

Monday, July 6, 2009

How I Approach a Broadcast Restructuring Project

The “growth” segment of our business at Media Services Group is restructuring/workouts. Broadcasting company workouts are a sad fact of life with today’s soft ad market, tight credit, slow economy, and over-leveraged balance sheets. Here is a capsule look at our firm’s approach to a station(s’) management engagement, whether we are appointed as a Receiver, Trustee, or hired in a Chief Restructuring Officer role.

Assess and Protect

Immediately upon arrival, we perform a thorough due diligence review, focusing first on the cash on hand, cash needed in the short-term, the quality of the receivables, and the level of financial and accounting expertise in-house. Necessary steps are taken to protect and preserve the working capital. Stem the bleeding and buy time; positive cash flow is lifeblood. If necessary, motivate customers to pay early and stretch terms with your vendors. Survival is a requisite to fight another day.

Initially there will be a lot of meetings with staff to make sure that everyone is on the same page. Throughout the entire process, the lender(s) receive ongoing progress reports.

I also take a look at FCC compliance. This is an area where troubled companies can slip as things deteriorate, and problems require immediate attention. A review of all material contracts is another good idea (and should prompt a list of contracts which should possibly be renegotiated). This is also a good time to prepare an asset list of both tangible and intangible assets. It will come in handy when the business is ultimately put up for sale.

The final step in the “discovery” process is a thorough assessment of the people at the business. The operation should be “right sized,” which might even include adding to headcount. The turnaround manager must have a good gauge of the quality of his/her personnel.


Once all of the assets have been indentified and accounted for in the discovery process, and sufficient cash is on hand to sustain operations, it is time to focus on the turnaround itself. Key elements include:

  • Leadership
  • Top line (sales) increases
  • Operating efficiencies
  • Customer focus

The turnaround strategy should include setting challenging but achievable objectives with input from all team members. These objectives should be clearly articulated to the staff and stakeholders. People should be put into the right positions, often involving a realignment of responsibilities. It is critical at this time to establish a success–based culture. The “war” can’t be won outside the building until you have true believers inside.

In most cases, Interactive revenue represents the most immediate growth opportunity for distressed broadcast properties. New and inexpensive products should be developed, launched and sold. It is possible to do 5% of total revenue from Interactive in the first year.

All expenses should be closely scrutinized. PD’s should carry air shifts and GM’s and sales managers should carry lists (at least until the turnaround is accomplished).

Social marketing is an effective, yet inexpensive, way to market stations’ products. Make extensive use of Facebook, Twitter and blogs. Repurpose your content across as many platforms as possible.

The sales department must be trained and coached to “evangelize” the company’s products as customer solutions. This is often an area where digital offerings can come into play (i.e. sponsored email blasts, display ads, directories, streaming player sponsorships). Management should maintain contact with key customers (in addition to the AEs’ efforts), to ensure that the company is creating and delivering value.

This “execution” phase is where the turnaround specialist earns his/her fee. Focus is required to allow revisions to the plan to be made in real time as required. People deliver the success (or failure); lead, develop and mentor. Cost– cutting can be done by anyone; repositioning the company is where the rubber meets the road. If the top line cannot be fixed, all of cost-cutting in the world will not save the business.

Positioning For The Sale

After the bleeding has stopped, cash is under control, the staff has been “right sized,” and the turnaround is well underway, it is time to position the business for a sale (though this too is always subject to marketplace conditions; now is not a good time to sell a radio station).

A technical assessment should be conducted on the station facilities to see if there are any spectrum development opportunities. You may have a station which can move into a larger market; you need to know that before you sign the agreement to sell the business.

There also may be an opportunity to carve out tower assets and sell them separately (and at a higher net price) to one of the tower consolidators. Any non-core assets (such as excess real estate) could also potentially be sold separately.

This process should also provide complete visibility for the stakeholders. A virtual due diligence room should be prepared and a competent broker retained (we happen to like the fact that Media Services Group fills both the operator and the broker role with distinction). I recommend that management and staff be “in the loop” throughout the sale process. If they are left out, they will figure it out anyway!

Sale Process

A good broker will have an excellent estimate of the value of the business. A marketing plan should be developed and discussed. The lender should be on board with both the valuation and the marketing.

Here is where the commercial begins. At Media Services Group, our partners have a long history of successfully handling broadcast asset management assignments. Combined with our average 20+ years of brokerage experience, we are uniquely qualified to provide lenders and investors turn-key solutions. Half of us own stations. We are tuned in to what it takes to operate profitably in a tough environment.

Our valuation practice, headed by Bob Maccini, is one of the best in the business. We also have expertise with expert testimony; over half our partners hold advanced degrees.

In addition to the Media Services Group staff, we maintain a “bench” of qualified operators standing ready to assume market manager assignments. We are scalable for large assignments.