Radio One Inc.

An analysis of the proposed acquisitio

ns
TEAM 3
Boyega Ajayi
Ines Chen
Damon Delorenzis
Jessica Jusuf
Doreen Marcher

Case Introduction

Opportunity for Radio One as a result of divestu

res by Clear Channel Communications.

Potential acquisitions of 21 stations

What is the right price?

Background

The consolidation trend in the radio station ind

ustry.

Reduced expenses

Increased prices for radio stations

Divestiture by Clear Channel

Objective of Analysis

Evaluate the Broadcast Cash Flows (BCF) of the t

argeted radio stations

Determine and evaluate appropriate multiples t

hat can be used to evaluate the potential acquis
itions

Determine an appropriate offer price for the tar

geted radio stations

Decision Criteria

Multiples
Broadcast Cash Flow (BCF)
Earnings before Income Tax
Depreciation and Amortization (EBITDA)
After Tax Cash Flows

Methodology

Discount Rate Unlevered Cost of Equity

Discounted cash flow

Corporate Valuation
Forecast period
Horizon Value

Multiple Analyses

Discount Rate - Unlevered Cost of Equity

rsu=rRF+(RPM)(u)

Hamada Equation

PRM
rRF
u
Average asset
i
Rs

7.2%
6.28%
0.61
0.75
10.71%

Amortization Expense

Depreciation of property and equipment

Straight line depreciation for 15 years

Capital Expense
= 21 new operating Units X $100,000 each
= $2.1M

NWC Adjustment
Net Broadcast Revenue
BFC
Total Current Assets
Total Current Liabilities
NWC
Change in NWC

1997
32,367,000
13,519,000
17,537,000
3,287,000
14,250,000

Actual
1998
1999
46,109,000 81,703,000
21,608,000 37,444,000
17,641,000 284,463,000
5,041,000 10,136,000
12,600,000 274,327,000
-1,650,000 261,727,000

NWC % of Revenue
NWC % of BFC

44.0%
105.4%

27.3%
58.3%

335.8%
732.6%

Adjusted
NWC % of Revenue
NWC % of BFC

44.0%
105.4%

27.3%
58.3%

22.0%
47.9%

Incremental Corporate Expense Adjustm

ent
Total
BCF(1000s)

101,548, 116,079 136,034, 158,249, 180,786 205,920

Total Corporate
Expense(1000s)

6,000

6,000

6,900

BCF - Potential
New Markets

59,014

65,041

76,436

89,711 101,966 115,277

BFC-NewMarkets
/ TotalBCF

58.1%

56.0%

56.2%

56.7%

Corp Expense for

Potential New
Markets (1000s)

3,487 3,362 3,877

7,935

9,125

56.4%

10,494

56.0%

4,498 5,147 5,875

Net Working Capital (NWC) % of

BCF

Steady State
Growth

47.90%

Revenue to Growth
Gross Revenue
Direct Expenses
Net Revenue

WACC

10.71%

Tax Rate

34.00%
Year 6/Steady
Year 5
State
2004
2005
9.89%
4.00%
$200,676
$208,703
24,857
$175,820

$120,486
15,094
$105,392

Year 1
2000
8.22%
$130,384
16,243
$114,143

Year 2
2001
12.35%
$146,488
18,176
$128,313

Year 3
2002
12.56%
$164,891
20,432
$144,460

Year 4
2003
10.75%
$182,609
22,624
$159,985

Operating Expenses
BCF
Corporate Expenses
EBITDA
Depreciation and Amortization
Depreciation Capital Expenditure
EBIT
Taxes
NOPAT

$46,376
59,014
$3,487
$55,527
$0
$0
$55,527
$18,879
$36,648

$49,102
65,041
$3,362
$61,679
$0
$0
$61,679
$20,971
$40,708

$51,877
76,436
$3,877
$72,559
$90,000
$420
-$17,861
-$6,073
-$11,788

$54,750
89,711
$4,498
$85,213
$90,000
$840
-$5,627
-$1,913
-$3,714

$58,020
101,966
$5,147
$96,819
$90,000
$1,260
$5,559
$1,890
$3,669

$60,543
115,277
$5,875
$109,402
$90,000
$1,680
$17,722
$6,026
$11,697

Add: Depreciation
Less: Capital Expenditure
Less: Increase in NWC
FCF

$0
$0

$36,648

$0
$0
$40,708

$90,000
$2,100
$3,662
$72,450

$90,000
$2,100
$636
$83,550

$90,000
$2,100
$587
$90,982

$90,000
$2,100
$638
$98,959

$0
$36,648

$0
$40,708

$0
$72,450

$0
$83,550

$0
$90,982

$710,399
$809,358

Terminal Value
FCF+Terminal Value

Year 0
1999

4.00%

Enterprise Value

$669,705

$119,888

$270,000
$2,100

$11,229

$90,000
$3,516
$51,904
$45,809

Net Working Capital (NWC) % of

BCF

Steady State
Growth

47.90%

Revenue to Growth
Gross Revenue
Direct Expenses
Net Revenue

WACC

10.71%

Tax Rate

34.00%

$120,486
15,094
$105,392

Year 1
2000
8.22%
$130,384
16,243
$114,143

Year 2
2001
12.35%
$146,488
18,176
$128,313

Year 3
2002
12.56%
$164,891
20,432
$144,460

Year 4
2003
10.75%
$182,609
22,624
$159,985

Year 5
2004
9.89%
$200,676
24,857
$175,820

Operating Expenses
BCF
Corporate Expenses
EBITDA
Depreciation and Amortization
Depreciation Capital Expenditure
EBIT
Taxes
NOPAT

$46,376
59,014
$3,487
$55,527
$0
$0
$55,527
$18,879
$36,648

$49,102
65,041
$3,362
$61,679
$0
$0
$61,679
$20,971
$40,708

$51,877
76,436
$3,877
$72,559
$90,000
$420
-$17,861
-$6,073
-$11,788

$54,750
89,711
$4,498
$85,213
$90,000
$840
-$5,627
-$1,913
-$3,714

$58,020
101,966
$5,147
$96,819
$90,000
$1,260
$5,559
$1,890
$3,669

$60,543
115,277
$5,875
$109,402
$90,000
$1,680
$17,722
$6,026
$11,697

Add: Depreciation
Less: Capital Expenditure
Less: Increase in NWC
FCF

$0
$0

$36,648

$0
$0
$40,708

$90,000
$2,100
$3,662
$72,450

$90,000
$2,100
$636
$83,550

$90,000
$2,100
$587
$90,982

$90,000
$2,100
$638
$98,959

$0
$36,648

$0
$40,708

$0
$72,450

$0
$83,550

$0
$90,982

$962,025
$1,060,984

Terminal Value
FCF+Terminal Value

Year 0
1999

6.00%

Enterprise Value

$806,391

Year 6/Steady
State
2005
6.00%
$212,717

$122,194

$270,000
$2,100

$10,995

$90,000
$5,274
$53,009
$42,712

Net Working Capital (NWC) % of

BCF

Steady State
Growth

47.90%

Revenue to Growth
Gross Revenue
Direct Expenses
Net Revenue

WACC

10.71%

Tax Rate

34.00%

$120,486
15,094
$105,392

Year 1
2000
8.22%
$130,384
16,243
$114,143

Year 2
2001
12.35%
$146,488
18,176
$128,313

Year 3
2002
12.56%
$164,891
20,432
$144,460

Year 4
2003
10.75%
$182,609
22,624
$159,985

Year 5
2004
9.89%
$200,676
24,857
$175,820

Operating Expenses
BCF
Corporate Expenses
EBITDA
Depreciation and Amortization
Depreciation Capital Expenditure
EBIT
Taxes
NOPAT

$46,376
59,014
$3,487
$55,527
$0
$0
$55,527
$18,879
$36,648

$49,102
65,041
$3,362
$61,679
$0
$0
$61,679
$20,971
$40,708

$51,877
76,436
$3,877
$72,559
$90,000
$420
-$17,861
-$6,073
-$11,788

$54,750
89,711
$4,498
$85,213
$90,000
$840
-$5,627
-$1,913
-$3,714

$58,020
101,966
$5,147
$96,819
$90,000
$1,260
$5,559
$1,890
$3,669

$60,543
115,277
$5,875
$109,402
$90,000
$1,680
$17,722
$6,026
$11,697

Add: Depreciation
Less: Capital Expenditure
Less: Increase in NWC
FCF

$0
$0

$36,648

$0
$0
$40,708

$90,000
$2,100
$3,662
$72,450

$90,000
$2,100
$636
$83,550

$90,000
$2,100
$587
$90,982

$90,000
$2,100
$638
$98,959

$0
$36,648

$0
$40,708

$0
$72,450

$0
$83,550

$0
$90,982

$1,580,995
$1,679,954

Terminal Value
FCF+Terminal Value

Year 0
1999

8.00%

Enterprise Value

$1,142,621

Year 6/Steady
State
2005
8.00%
$216,730

$124,499

$270,000
$2,100

$10,761

$90,000
$7,032
$54,113
$39,616

Enterprise value
Steady Growth
Rate

Enterprise Value
(000s)

Scenario 1

4%

669,705

Scenario 2

6%

806,391

Scenario 3

8%

1,142,621

Multiple Analysis
Enterprise
Value
Multiple of
BCF

Enterprise
Value
Multiple of
EBITDA

Enterprise
Value
Multiple of
After-Tax CF

Scenario 1

11.3

12.1

18.3

Scenario 2

13.7

14.5

22.0

Scenario 3

19.4

20.6

31.2

CASE Q1:
Liggins and Royster had to decide if Radio
One should purchase the stations and how
much to offer
CASE Q2:
What purchase price range that
would make sense ?

Multiples Analysis of BCF

Growth Depreciation

Enterprise
Value
($ 1000s)

BCF
Enterprise Value
($ 1000s) Multiple of BCF

4%

15 year

669,705

59,014

11.3

6%

15 year

806,391

59,014

13.7

8%

15 year

1,142,621

59,014

19.4

Strengths and Weaknesses

Too many factors make it very difficult to assess

an Acquisition proposal accurately

The Cost of Capital for the targeted stations is an

assumption that could be changed

Expenses such as corporate expense and net wo

rking capital are based on assumptions that the t
argeted radio stations will have ratios similar to
Radio One

Conclusion & Recommandation

As revealed by the risk analysis, some of the sta

tions may be overvalued

Radio One should acquire all 21 stations and we

recommend an offer not greater than 21 x BCF

The management should capitalize on their hig

h stock price when structuring the acquisition o
f the 21 targeted radio stations


Thanks