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.

2009 Radio Station Trading Multiples

In January of 2008, we drew a lot of comment (most of it negative) in the radio trade press when we released our expectations for radio station trading multiples for the year. We predicted that stations would trade in a range of 7x to 9x Broadcast Cash Flow (“BCF”), which at the time, sounded very low. Those multiples represented the lowest levels in well over a decade.

Our crystal ball worked. In fact, much of 2008’s station trading occurred in a 7x to 9x range, though deteriorated toward the lower end of the range as the year wore on.

However we were wrong on our second point: we predicted a turnaround by mid-year. What we (and apparently everyone else) missed was the impact on the credit markets of the sub-prime debt debacle.

OK, so what happens this year? The following is my opinion, and not necessarily Media Services Group’s (it is my blog, isn’t it?). I think that we are in a 5x to 8x environment, likely for the rest of the year, and perhaps longer. Until the credit markets thaw, I do not see marked improvement. Trading will be sluggish at best. At lot of balance sheets have to be re-jiggered to show more equity and much less debt.

Radio is going to have to reinvent itself in order to flourish in the digital world. And unlike newspapers, I predict that it will. Once the capital structures have been repaired and the business embraces new media, then, and only then, are you likely to see revenue growth. That top line growth, if coupled with low interest rates, will result in multiples expansion. I look for a return to an 8x to 10x world. While that is nothing like we saw in the “go-go” years, it beats the heck out of what we’re seeing now. And it will create a lot of value for smart entrepreneurs who held their noses and invested in the medium when it looked like the buggy-whip industry.

At least, that’s my opinion. What's yours?

George