Corp Fin - Radio One Inc (2)

8/11/2019 Corp Fin - Radio One Inc (2)

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Radio One Inc.

By Professor Clive Vlieland-Boddy

EADA 2006


2/39

Group Discussion

What would you pay for the radio stations?


3/39

Key Issues

Who is to make the decision?

What is the decision to be made?

What is the company? What is the industry?


4/39

Proposed Acquisitions

12 stations from Clear Channel.

6 stations from Davis.

3 stations from IBL LLC.= Total of 21 new channels.


5/39

How would all this affect RadioOne?

Overtrading?

Market is clearly expecting substantialgrowth. Note 30 + P/E.

Dilution of existing shareholders.


6/39

Current Position

19 fm stations and 7 am stations.

Growing Market. See Exhibit 3.


7/39

What would you value RadioOne at?

Still making losses.

But the public give it a multiple of 30xearnings!

Why?


8/39

CCUs divestiture

Certainly an opportunity to acquire manystations in the 50.

Likely to be many bidders.

Offers Radio One the opportunity to double itssize!

Offers Radio One substantial scale economies.

Would create National coverage overnight.


9/39

So is this a real opportunity

Lets have a look et the Risks andRewards.


10/39

Any Risks?

So long as they are fairly priced.

So long as Radio One can enhance thevalue.

So long as the advertisers see the benefitsof a global market.


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What could be the rewards.

Economies of scale.

National service could attract premiumadvertisement rates.

Restrict competition.


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Evaluation the proposedacquisitions.

Discounted Cash Flows. DCF techniquesto evaluate the NPV and the IRR.

Trading Multiples.

Transaction Multiples.


13/39

DCF evaluation.

What discount factor to apply?

WACC after acquisition.


14/39

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%


15/39

Working Capital Required!

Accounts receivable represent +/- 27% ofsales.

Accounts payable represent +/- 2% ofsales.

Net is 25% of sales. Say $30m.

Will grow with business at say 3.5%


16/39

Radio One Year BCF New Working Total Disc Present

Markets Capital Cash Flow Factor 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 66,3642006 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 39,8442015 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 23,9302024 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


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So the NPV = $1178m

But this is only up to 2030. But is gives usan illustration of value.


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Perpetuity DCF

Terminal values

At 4% Growth $1,036m

At 6% Growth $1,316m At 8% Growth $1,862m


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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


20/39

Added Value that Radio Onecan create.

The fact that Radio One targets a specificaudience/ product, they are able to gainpremium rates from advertisers.

This is a real benefit and would enablethem to greatly enhance the value.


21/39

What about economies ofscale

We must assume that these are includedin the figures.

However, clearly there would beconsiderable savings. The companydoubles in size but would not need twicethe admin or sales staff.


22/39

DCF v Multiples

Is it fair and reasonable to take the lastyear and apply a multiple?

Would this work when it is expected thatthere will be substantial income growth?

Surely DCF would be better!


23/39

Consider P/E and EarningsMultiples

If the companies P/E is 30. See page 5.

You purchase for 20 times BCF.

So long as cash flow is not distant fromearnings then you are gaining a multiple of10!


24/39

Cultural Issues

Clearly a niche market.

Government encouragement especiallytowards female controlled businesses.


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So what value?

The DCF for next 30 years gives a valueof $1.1b

The perpetuity DCF of $1.3b.

The BCF of $1.38b to $1.69b.


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Market Value of Radio One

Value per share = $97

Number of shares = 16,137,000

= $15,653m


27/39

How would the finance work

Say that a value of $1.5b was the finalfigure.

Compare this to the market value of RadioOne $15,653m

At $97 per share that would represent1,546b shares. ( an increase of about 10%

in the capital)


28/39

Possible deal!

Radio One has Investments available forsale 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 earningsup to $21.6m in 2001.


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Leveraging the deal

Clearly limited funds could come fromleverage. Current debt requires $15m. Ifincome $21.6m then debt could increase

by 44% retaining the same coverage. Thisis not exactly attractive for the equityholders as it again leaves no reserves.

44% extra debt would represent $36m.


30/39

Lets look at WACC

Kd = Interest paid of $15.3m over MarketPrice = $82.6m

= 18.53%

Ke = CAPM = 6.28 + Beta of .82*7.7 (Used the BBB Corp Bond Rate)

=12.44


31/39

WACC

Debt 18.53% 82/1573

Equity 12.44% 1553/1573

=


32/39

Results

Equity is clearly cheaper at present. Why?

Because the company is really notprofitable. Accumulated losses of $26m.Debt capital is expensive.

Equity holders are looking for 100% capitalgain as there are no dividends.


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Return to the deal!

If equity can be used then it should be.

One could question the debt and why theinvestments have not been used to repaythe debt! Leverage is clearly expensive.

If a share price of $97 could be used tobuy the stations then it should be used.

Even paying 100% in equity would meanissuing 1,546m shares.


34/39

Other Bidders

Consider that you can get real info onthem. From accounts you can see whoand 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.


35/39

What deal would you propose?

Do we agree that there is a range of thetotal value for the 21 stations of $1.3-1.4b

That we should use some if not all ourcash to sweeten the deal as only paper isnot that attractive.


36/39

Use cash to partly fundpurchases and repay debt.

Could use $86m to extinguish debt.

Balance as part of purchase price.

This would mean that they could offerCash of $170m and shares of $1,330m.

But remember the real cost of equity.


37/39

The real issue!

Negotiate the deals!

Remember it is only when both partiesagree that a deal is done.

Each have strengths and weaknesses. Itis a real advantage to investigate the othersides position so as to be able to

manipulate the deal to meet those issues.


38/39

The End

But wait

What did happen!!!!!


39/39

News Flash - Washington

Today Radio 1 announced that it acquired21 new stations from IBL, Shirk & Davisfor a total of $1.35b in cash and in shares.

Corp Fin - Radio One Inc (2)

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