Radio One's Proposed Acquisitions include 12 stations from Clear Channel. 6 stations from Davis. 3 stations from IBL LLC. How would all this affect Radio One? Overtrading? Market is clearly expecting substantial growth. What would you value Radio One at? Still making losses. But the public give it a multiple of 30x earnings!
Radio One's Proposed Acquisitions include 12 stations from Clear Channel. 6 stations from Davis. 3 stations from IBL LLC. How would all this affect Radio One? Overtrading? Market is clearly expecting substantial growth. What would you value Radio One at? Still making losses. But the public give it a multiple of 30x earnings!
Radio One's Proposed Acquisitions include 12 stations from Clear Channel. 6 stations from Davis. 3 stations from IBL LLC. How would all this affect Radio One? Overtrading? Market is clearly expecting substantial growth. What would you value Radio One at? Still making losses. But the public give it a multiple of 30x earnings!
EADA 2006 Group Discussion What would you pay for the radio stations? Key Issues Who is to make the decision? What is the decision to be made? What is the company? What is the industry?
Proposed Acquisitions 12 stations from Clear Channel. 6 stations from Davis. 3 stations from IBL LLC. = Total of 21 new channels.
How would all this affect Radio One? Overtrading? Market is clearly expecting substantial growth. Note 30 + P/E. Dilution of existing shareholders. Current Position 19 fm stations and 7 am stations. Growing Market. See Exhibit 3.
What would you value Radio One at? Still making losses. But the public give it a multiple of 30x earnings! Why? CCUs divestiture Certainly an opportunity to acquire many stations in the 50. Likely to be many bidders. Offers Radio One the opportunity to double its size! Offers Radio One substantial scale economies. Would create National coverage overnight.
So is this a real opportunity Lets have a look et the Risks and Rewards. Any Risks? So long as they are fairly priced. So long as Radio One can enhance the value. So long as the advertisers see the benefits of a global market. What could be the rewards. Economies of scale. National service could attract premium advertisement rates. Restrict competition. Evaluation the proposed acquisitions. Discounted Cash Flows. DCF techniques to evaluate the NPV and the IRR. Trading Multiples. Transaction Multiples. DCF evaluation. What discount factor to apply? WACC after acquisition. WACC of Asset Risk Free Rate = 6.3% ( Exhibit 10) Risk Premium = 7.2 By assumption Asset Beta = .82 ( Exhibit 8) Asset Return is therefore 12.2% Working Capital Required! Accounts receivable represent +/- 27% of sales. Accounts payable represent +/- 2% of sales. Net is 25% of sales. Say $30m. Will grow with business at say 3.5% Radio One Year BCF New Working Total Disc Present Markets Capital Cash FlowFactor Value Say 12.20% (From Exhibit 9) 2001 76,436 30,000 - 46,436 0.8914 41,393 2002 89,711 3,140 - 86,571 0.7946 68,789 2003 101,966 3,569 - 98,397 0.7083 69,695 2004 115,277 4,035 - 111,242 0.6314 70,238 Say growing at 6% 2005 122,194 4,277 - 117,917 0.5628 66,364 2006 129,525 4,533 - 124,992 0.5017 62,708 2007 137,297 4,805 - 132,491 0.4472 59,250 2008 145,535 5,094 - 140,441 0.3986 55,980 2009 154,267 5,399 - 148,867 0.3535 52,625 2010 163,523 5,723 - 157,799 0.3167 49,975 2011 173,334 6,067 - 167,267 0.2824 47,236 2012 183,734 6,431 - 177,303 0.2517 44,627 2013 194,758 6,817 - 187,942 0.2244 42,174 2014 206,444 7,226 - 199,218 0.2 39,844 2015 218,830 7,659 - 211,171 0.1783 37,652 2016 231,960 8,119 - 223,841 0.1589 35,568 2017 245,878 8,606 - 237,272 0.1417 33,621 2018 260,630 9,122 - 251,508 0.1263 31,765 2019 276,268 9,669 - 266,599 0.1126 30,019 2020 292,844 10,250 - 282,595 0.1003 28,344 2021 310,415 10,865 - 299,550 0.0894 26,780 2022 329,040 11,516 - 317,523 0.0797 25,307 2023 348,782 12,207 - 336,575 0.0711 23,930 2024 369,709 12,940 - 356,769 0.0634 22,619 2025 391,891 13,716 - 378,175 0.0566 21,405 2026 415,405 14,539 - 400,866 0.0503 20,164 2027 440,329 15,412 - 424,918 0.0448 19,036 2028 466,749 16,336 - 450,413 0.0399 17,971 2029 494,754 17,316 - 477,438 0.0356 16,997 2030 524,439 18,355 - 506,084 0.0318 16,093 NPV AT 12.2% 1,178,171 So the NPV = $1178m But this is only up to 2030. But is gives us an illustration of value. Perpetuity DCF Terminal values At 4% Growth $1,036m At 6% Growth $1,316m At 8% Growth $1,862m
Trading Multiples BCF 76,436 18.1 1,383,492 22.1 1,689,236 42.1 3,217,956 EBTIDA 72,572 19.4 1,407,897 24.2 1,756,242 44.5 3,229,454 After Tax Cash Flow 74,681 26.1 1,949,174 36.5 2,725,857 59.7 4,458,456 Added Value that Radio One can create. The fact that Radio One targets a specific audience/ product, they are able to gain premium rates from advertisers. This is a real benefit and would enable them to greatly enhance the value. What about economies of scale We must assume that these are included in the figures. However, clearly there would be considerable savings. The company doubles in size but would not need twice the admin or sales staff.
DCF v Multiples Is it fair and reasonable to take the last year and apply a multiple? Would this work when it is expected that there will be substantial income growth? Surely DCF would be better! Consider P/E and Earnings Multiples If the companies P/E is 30. See page 5. You purchase for 20 times BCF. So long as cash flow is not distant from earnings then you are gaining a multiple of 10! Cultural Issues Clearly a niche market. Government encouragement especially towards female controlled businesses.
So what value? The DCF for next 30 years gives a value of $1.1b The perpetuity DCF of $1.3b. The BCF of $1.38b to $1.69b.
Market Value of Radio One Value per share = $97 Number of shares = 16,137,000 = $15,653m How would the finance work Say that a value of $1.5b was the final figure. Compare this to the market value of Radio One $15,653m At $97 per share that would represent 1,546b shares. ( an increase of about 10% in the capital) Possible deal! Radio One has Investments available for sale of $256m. Currently has debt of $82m Equity Market Value of $15,653m However note debt coverage. Interest was $15.3m compared with Earnings of $16m. Barely coverage! The acquired stations would take earnings up to $21.6m in 2001. Leveraging the deal Clearly limited funds could come from leverage. Current debt requires $15m. If income $21.6m then debt could increase by 44% retaining the same coverage. This is not exactly attractive for the equity holders as it again leaves no reserves. 44% extra debt would represent $36m. Lets look at WACC Kd = Interest paid of $15.3m over Market Price = $82.6m = 18.53% Ke = CAPM = 6.28 + Beta of .82*7.7 ( Used the BBB Corp Bond Rate) =12.44
WACC Debt 18.53% 82/1573 Equity 12.44% 1553/1573 = Results Equity is clearly cheaper at present. Why? Because the company is really not profitable. Accumulated losses of $26m. Debt capital is expensive. Equity holders are looking for 100% capital gain as there are no dividends. Return to the deal! If equity can be used then it should be. One could question the debt and why the investments have not been used to repay the debt! Leverage is clearly expensive. If a share price of $97 could be used to buy the stations then it should be used. Even paying 100% in equity would mean issuing 1,546m shares.
Other Bidders Consider that you can get real info on them. From accounts you can see who and what capacity they can deal. What their WACC is. A well done deal often involves a bit of real evaluation of the competition. Sometimes it can get dirty. What deal would you propose? Do we agree that there is a range of the total value for the 21 stations of $1.3-1.4b That we should use some if not all our cash to sweeten the deal as only paper is not that attractive. Use cash to partly fund purchases and repay debt. Could use $86m to extinguish debt. Balance as part of purchase price. This would mean that they could offer Cash of $170m and shares of $1,330m. But remember the real cost of equity.
The real issue! Negotiate the deals! Remember it is only when both parties agree that a deal is done. Each have strengths and weaknesses. It is a real advantage to investigate the other sides position so as to be able to manipulate the deal to meet those issues. The End But wait What did happen!!!!! News Flash - Washington Today Radio 1 announced that it acquired 21 new stations from IBL, Shirk & Davis for a total of $1.35b in cash and in shares.