Radio has turned the corner

Radio revenues are reported up two months in a row in both New York and Los Angeles.  The broadcasters I am talking with are, for the most part, telling the same story.  The radio business is improving.

The overhang of workouts and bankruptcy deals has been absorbed into the market.  The depressed pricing inherent in these types of transactions has pretty much run its course.  Balance Sheets today are much healthier than those from five or six years ago.

Bottom line:  Radio has turned the corner.

While multiples are still mostly between 6x and 7x, look for fewer deals in the 5s and more pushing 8x.  The bias is now clearly to the upside.

If you would like to confidentially discuss station pricing and opportunities, the Media Services Group suite will once again be at the Encore beginning on Sunday.  Please get in touch if you would like to get together.

George
Media Services Group

What was the multiple?

Broadcast cash flow multiples have always been the top discussion topic with radio and television station buyers, sellers, bankers and brokers.  Particularly in the convention bars.  But, “caveat emptor!”  There are a myriad of ways to cause an “apples & oranges” comparison.  Here are a few thoughts to help you match your apples to other apples:

• Take all discussions on multiples with a grain of salt, whether directly with the participants or in published reports. Unless you have seen the financial statements and the asset purchase agreement, you do not really know the multiple.
• The multiple to the seller and the multiple to the buyer are usually very different on the SAME transaction; just ask them. Case in point: on a transaction some years ago, my client, the seller, thought that he got a 20x multiple. The buyer thought that they bought at 12x. They were both correct. The price and the cash flow at the time of the signing of the APA suggest that the seller was correct. The actual and pro forma cash at the closing, following a long LMA, suggest that the buyer was correct.
• BCF multiples can be based on a) trailing twelve months, b) calendar year, c) projected, d) reconstructed with expense savings pro forma, or e) any combination.
• Published multiples are often estimates from uninvolved parties, or if from an involved party, reflective of the "spin" that he/she wants to create in the marketplace. Brokers are often asked for the multiple in a deal; most, like us, will not give them out. Some make up their own number which often bears little resemblance to reality.

• Often, a sale will bring a lower real multiple if several markets are involved (many times a seller could net much more, and a higher sale multiple, if they break up the markets and sell to strategic buyers).
• Sometimes the "true" multiple is buried in the weeds of the transaction, particularly if swaps are involved.
• How do you value the stock component of a deal if the consideration is a combination of cash and stock?
• How do you "adjust" the multiple to fair market value when there are tax considerations (such as 1031 like kind exchanges).
• "Distress" situations (bankruptcy and receivership) usually bring lower multiples than sales of healthy businesses.
• Stock sales bring lower multiples than asset sales (to compensate for the tax risk and lower basis).

• Multiples are often higher in cash flow deals where additional cost savings are obvious.
• Multiples are often higher when the seller is taking back paper.
• What is the multiple if there is no (or minimal) cash flow?

There are a lot of factors which enter into the "multiples" discussion. Take care to make sure that all involved parties are speaking the same language.  Ultimately the value of the station (or cluster) is worth what a willing buyer will pay and what a willing seller will accept.  A buyer should determine his/her price based on the value of the future returns, discounted at a reasonable estimate of the risk.  In the end, the marketplace determines the price.

George

Media Services Group


P.S.

Following this initial post, several additional examples of the "My Cash Flow Multiple" vs. "Your Cash Flow Multiple" argument surfaced:

• The treatment/allocation of corporate expenses in adjusting EBITDA back to BCF.
• Add-backs of "owner expenses" (i.e. whether or not they are truly operating expenses).
• Treatment of "inter-company" revenue such as traffic services and unwired nets (which often vaporizes at closing).
• Inclusion or exclusion of Accounts Receivable.

Wall Street's Wild Ride

A common discussion theme in recent weeks has been the impact of the ongoing stock market volatility/wealth destruction on station trading and values. While the gyrations have certainly exacted a psychological toll, I do not believe that they have hindered private market station trading and valuations. Yet.

At least so far, this has not been like Fall 2008, when the brakes were applied with full force. You will recall that at that time, there was some (genuine!) fear of a world-wide economic collapse. This time, the fear seems a little more future oriented (i.e. “we may still face major hurdles, but not this afternoon”). The bank weakness in Europe and the possible repercussions are bad, but not life-threatening. Likewise, the spending problem in Washington is curable once the politicians grow the backbone to actually deal with it.

I think the real and immediate fallout to broadcasters is the fear on Main Street created by this economic roller-coaster. Job cuts, taxes, over-regulation, and poor visibility are forcing companies to think twice before committing marketing budgets. The broadcasters have been pretty immune to these cuts so far, but that immunity will not last much longer.

Station trading, while up over the last two years, remains tepid. The banks are mostly hunkered down on the sidelines and the current turmoil may result in them staying there longer than they might have otherwise. That will most definitely hinder station trading and pricing. The deals that are currently getting done tend to fall into two broad categories: 1) Distress sales and 2) Seller financed small market transactions. Look for that trend to continue.

Our view on multiples continues to be in a range of 6x – 8x, with the few deals which are actually getting done falling in the mid-7s. If the chaos on Wall Street continues and the “double-dip recession” prospect increases, look for the multiples to drop. But it hasn’t happened yet.
 
Bottom line: the damage so far is mostly attitudinal (read “fear”). But if capital continues to vaporize, we’re in for a long, difficult second half. And as for visibility, we’re already flying on instruments. Main Street cannot and will not ignore Wall Street forever.

George
Media Services Group

New poll on radio station pricing added to blog

Let's try a little experiment. I am asked daily about station trading market pricing (after all, that is my day job). Station buyers and sellers want to know what stations are worth. So I thought it might be interesting to poll our readers on the subject. Though not scientific, it might prove interesting, as our readership tends to be station owners, managers, staff and other folks interested in the broadcast trading market.

To participate, find the poll on the upper right-hand-side of the blog and pick your choice (ranging from five times to nine times).

Here is a related post on the subject of station pricing ("What's it worth?"): http://georgereedradiotv.blogspot.com/2009/10/whats-it-worth.html

Thanks in advance for your participation!

George
Media Services Group

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?

George
http://www.mediaservicesgroup.com