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Radio One

THOMAS GUILLOT MEHMED DIKME

Executive summary
Interests and risks of the acquisition from the divestment for radio one 2. DCF : hypothesis and computation 3. Multiple analysis 4. What should be the right price
1.

History

Found by Catherine Hughes in 1980, in Washington Largest radio group targeting African-Americans in the country founded in 1980 Grew from 7 stations in 1995 to 28 in 1999 (19 FM stations and 7 AM stations) Divestures following merger of two of the largest radio stations owners of the country would allow Radio One to acquire 12 established urban station in the top 50 African-American markets Radio one strategy is to provide urban-music, entertainement and information to a primarily african american audience.

Why this acquisition suits Radio One?

Radio One would cover more African-American households than any other radio broadcasters in the US, one of the fastest growing demographic in USA (they expect to experience 60% faster population growth than the general population between 1995 and 2010) and the largest minority group Acquired firms are expected to double Radio Ones revenue through advertising and allow the firm to grow faster in the future Opportunities for acquiring firms in the top 50 markets do not appear often, so the company will want to take advantage of this opportunity

This acquisition will lay the foundations for Radio Ones intentions to expand into new markets such as cable, recording industry and internet
The acquisition will increase the geographical influence of Radio One

Benefits and Risks of the acquisition


Benefits

Revenue is expected to double from additional advertising Current Economies of Scale will reduce costs at acquired firms (e.g. capacity utilization, reduction of duplicate staffing) Expected growth in assets Radio One will become the market leader in African-American orientated broadcasting The acquisition will lay foundations for planned market diversification in the future (cable, recording industry, internet)

Risks

Synergies are not obvious during the acquisition The company would need to provide the initial working capital as well as make annual investments of $100,000 in capital expenditures for each station Management issues may occur since the company will double its stations Servicing debt may be an issue, because the company is making losses Risk of redondances for the station in the same city

DCF assumptions
Method FCF: Using WACC

Risk-Free Rate Asset Beta Market Risk-Premium

6,28% 0,75 7,33%

10-Year Government Bonds [Ex.10] Average from Comparables [Ex.8] Average 10-year investment grade corporate bonds [Ex.10]

Initial D/V Initial Cost of Debt (E[rD]?) Debt Beta Initial E/V Equity Beta Initial Cost of Equity

15,4% 7,33% 0,25 84,6% 0,84 12,44%

Capital structure in 1999

Average interest rate for investment grade corporate bond


Given [Ex.8 - footnote]

Relever: A = D D/V + E E/V Using CAPM.

Pre-Tax WACC = rU Tax rate

11,66%

rU = rD D/V + rE E/V Assumed tax rate in the US at that time (like in Disney example)

34,40%

WACC

11,27%

Multiples Analysis
o Price based on trading and transaction multiple analysis o Trading Multiples:
o BCF, EBITDA, After-Tax Cash Flow

o Transaction Multiples:
o Recent radio transactions

Trading Multiples
BCF
Infinity Broadcasting: o Most similar to Radio One acquisition profile
o

Paid $1.4bn: 21.5x BCF (18 stations)

o Potential New Markets 2000 BCF=65.041 o 65.041*21.5=$1.398 bn

Trading Multiples
EBITDA
o No transactions based on EBITDA: use Industry Data o Average Radio Industry EDITDA Multiple: 19.4x o 61.679*19.4=$1.196 bn

FCF
o No transactions based on FCF: use Industry Data o Average Radio Industry FCF Multiple: 26.1x o 36.278*26.1=$0.947 bn

Transaction Multiples

o xxx

Can it offer as much as 30x BCF?


o Radio One Trades at 30x. o 30x 2000BCF(Year2000) =30x $65041 = $1.951 billion

($92 million for each station) o In a similar case, Infinity Broadcasting paid $1.4 billion, or about 21.5x BCF to acquire 18 stations ($78 million for each station), and Cox Radio paid $380 million for seven radios ($54 million for each station). o Radio One cant offer as much as 30x for the new station, considering Radio one offers 21.5x BCF ( like Infinity Broadcasting). o In that case, 21.5x 2000BCF(Year2000) = 21.5 x $65041 = $1.398 billion ($66 million for each station)

Question 5