Вы находитесь на странице: 1из 39

Radio One Inc.

By Professor Clive Vlieland-Boddy


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.