Jump-Starting the Radio Deal Market

“Be greedy only when others are fearful” - Warren Buffet

Since late in the last decade, the radio industry has been confronting both cyclical and secular challenges.  Double-digit annual broadcast revenue growth rates vaporized.  Senior lenders have been selling off debt at 50¢ on the dollar.  Some of the medium’s most preeminent VC’s found themselves unable to realize any return at all on their investments.

In and of itself, broadcast radio is still a $14b a year industry.  But the real catalyst for potential dramatic future revenue growth is in the creation of local marketing service companies with a portfolio of legacy and digital media platforms that engage, influence, and motivate consumers more effectively than the competition.

Recent sales involving CBS/Palm Beach Broadcasting ($50m) and Connoisseur/Barnstable may be indications of the investment community’s renewed interest in radio as a value investment opportunity.

To be sure, attracting “new” capital to radio is critical to reigniting the moribund deal market.

However, there is a major hurdle here in that a real dichotomy in perception exists involving GAAP valuation metrics (EBITDA) and a range of alternatives unique to the radio business.  Techniques such as “Broadcast Cash Flow” and “Price per Population” were recently topics of discussion amongst members of the Linked In group “Radio/TV Station Buyers”.

Investors with little or no experience in the space are understandably reticent to embrace such exotic concepts. After all, an investment professional could not be considered overly risk averse if they were to insist that the only truly relevant measurement metric is free cash flow.  And it has been accurately postulated that “He who has the gold – Rules”.

Yet there is a valid case to be made that certain (i.e. corporate and one-time only extraordinary) expenses could be added back to determine “adjusted” cash flow for purchase price calculation purposes.

Media companies (notably Clear Chanel) successfully recapitalized on the basis of a financial measure known as OIBDA, which is calculated by adding interest, taxes, depreciation and amortization to the target company's net operating income, as opposed to EBITDA which adds-back net income.  Though it is still a non-GAAP measure, OIBDA is considered by many a more accurate indication of a business’ income from regular operations.

Of course the time value of money is also important to calculating ROI. There seems to be a consensus among finance pro’s that a valuation model based on benchmarks like discounted cashflow (or PV) analysis and even cap rates is useful.

But there is one somewhat intangible yet extremely important factor that only an experienced radio operator can bring to the vetting process – the skills necessary to determine Franchise Value. 

Absent a complete perspective on a deal’s true worth, unwitting investors might literally be buying into the proverbial pig-in-a-poke.

What’s your take? 

Please consider posting your comments below, or if you prefer eMail Paul.