Station Prices Soar : FM Radio: Real Sound Investment

At first blush, Orvon Gene Autry’s office looks more like the showroom of a second-hand spurs-and-lariat emporium than the headquarters of a $150-million radio empire.

Strewn with cowpuncher paintings, a couple of gaudy silver saddles and even a dour-looking wooden Indian, Autry’s surroundings reveal little of the kind of resources that have made the owner of the California Angels baseball team one of the major players in the high-stakes radio game of 1985.

“You can’t always tell with a radio station, whether it’s going to make a profit or not, just by looking at it,” Autry mused recently. Usually, Autry has been able to tell. He owns half a dozen radio stations, and they all make money.

Lately, radio stations--particularly FM stations--have been selling the way Cabbage Patch dolls do the day before Christmas. The sudden glamour of radio as an investment opportunity has been something of a puzzle to some, but not to Autry.

Bland as Boiler Room

Unlike television stations--with their high-tech sound stages and backlots that would rival MGM during its heyday--most radio stations occupy studios that are as bland as a boiler room. They are often operated by disheveled deejays and underpaid executives.

But low-rent appearances can be deceiving, drawls the 77-year-old Autry, casting a knowing glance at the wooden Indian seated to his right. Low rent, low wages and low expenses, he observes dryly, can mean fat profits for a station owner.

Autry bought himself a gold mine 33 years ago, for instance, when he picked up his first big AM radio bargain.

KMPC, the 50,000-watt powerhouse Autry and a partner bought in 1952 for $800,000, is worth at least 50 times that today. It took a lot of work: The studios are now state-of-the-art and employees from deejays to ad salesmen are well paid. Over the years, the station’s consistent positive cash flow paid for such Autry investment triumphs as the 1964 $12-million purchase of television station KTLA Channel 5 (which he sold three years ago for $245 million) and the creation in 1960 of Autry’s California Angels baseball team.

‘Couldn’t Miss’

“You couldn’t miss if you just stuck with it,” he said. “AM radio went everywhere with you.”

But America’s original singing cowboy also thought he knew a turkey when he saw one. In the early 1950s, FM radio could have been served with cranberry sauce and stuffing and nobody would have known the difference. More than once, Autry scorned the chance to pick up an FM radio station for a few thousand dollars.

In 1949, for example, he sold an FM frequency for $45,000. Today that frequency is the home of KIQQ at 100.3 megahertz on the FM dial. Station brokers estimate its worth at close to $20 million.

“It simply makes me sick,” Autry said.

Last fall, he paid $15 million for KUTE-FM. He moved the station into KMPC’s Sunset Boulevard headquarters this month.

“And $15 million was a steal,” said Bill Ward, executive vice president of Autry’s Golden West Broadcasters company.

A lot has changed since the days when for $45,000 you could pick up an FM frequency that couldn’t be heard in the next valley. “They figured it (the FM signal) couldn’t be heard over hills then,” Autry grumbled. “Everybody said FM would never be worth anything.”

There were only about 400 FM stations operating in the United States in the mid-1960s. As of this month the Federal Communications Commission had 3,839 FM stations licensed to operate and another 700 in the process of being licensed. There are 4,799 AM stations operating.

In recent years, prices of radio stations in general--and FM stations in particular--have skyrocketed. The bull market is explained partly by the fact that there are only about 8,400 AM and FM licenses available in the United States. The competition for major-market licenses in such cities as Los Angeles and New York has always been fierce, but recently even stations in smaller markets, like Fresno and Lompoc, have sold for more than $1 million. KTYD-FM in Santa Barbara, for example, changed owners last month for $3.5 million. Within the last month, Iowa-based Stoner Broadcasting paid $7 million cash for a New Orleans FM station.

Overdue Recognition

After years of playing second fiddle to the more glamorous and lucrative medium of television, big business has finally recognized radio as the high-profit, low-overhead industry that it always has been.

“It’s the only business I know where people come up to you and ask you to take their money,” said Harry Spitzer, vice president and sales director of the Southern California Broadcasters Assn.

According to the New York-based Radio Advertising Bureau, the industry will collect $6.5 billion in advertising revenues this year--12% more than last year. Television will collect more than $21 billion, but its production costs, payroll and capital expenditures are often 10 times that of radio.

“Your hard assets in a radio station you can put in a bag and throw in the ocean,” said Roy Rowan of the broadcast brokerage firm of Blackburn & Co. “You won’t miss them.”

Low overhead and net profit potential has been a radio truism for years, however. By itself, it doesn’t explain the sudden explosion in station prices which, for most of the 1960s and ‘70s, were undervalued, according to analysts and industry veterans like Autry.

“I’ve been following this industry for 20 years, and the way it’s accelerated the last year or two seems slightly reminiscent of California real estate,” said Fred Anschel, a media stock analyst with Dean Witter. “Radio has had its ups and downs, but it’s basically been a good investment. I do think some people may be overpaying right now.”

Last month, Regency Broadcasting Co. bought KJOI-FM in Los Angeles from Noble Broadcasting for a record $44 million--the most ever paid for a single FM station. Just a year ago, Noble bought KJOI from Beatrice Foods for what was then a record price of $18.5 million. How did it appreciate in value by $25.5 million in a year’s time?

“I don’t know,” said Loyd Sigmond, Autry’s former partner in the original purchase of KMPC. “I cannot put a pencil to these things and make them come out. If you pay that much for a station, I don’t know how you’re going to make your money back.”

In 1950, Sigmond briefly owned the KJOI license, but heeded the same advice as Autry and got rid of the “turkey” for $60,000.

“Everybody said at the time that it was crazy to get into FM,” said Sigmond--the man who went on to immortality as the father of the Sigalert during his days as KMPC’s general manager in the 1950s and ‘60s. “You couldn’t sell them for more than a few thousand. Now they’re paying millions.”

65% Tune to FM

Recent Arbitron listener rating breakdowns show that about 65% of America listens to the smoother stereo sound of FM these days, while only about 35% tune in to the harsh tone of AM--a gap that widens with each passing year.

Nationally, only those AM stations with all-talk or Big Band music formats (like perennially Top 10-rated KMPC) attract sizable audiences. Listeners who like pop music tend to tune to FM, helping to explain the phenomenal rise in FM station values.

Experts like Anschel blame the Federal Communications Commission partly for the ballooning price of radio stations. Until now, a single company could own no more than seven AM, seven FM and seven TV stations. The commission liberalized group ownership rules in 1984, allowing a single company to own as many as 12 AM, 12 FM and 12 television stations, as long as they did not own both radio and TV licenses in the same broadcast market.

Another reason for the current station prize frenzy stems from the $3.5-billion merger of American Broadcasting Companies and Capital Cities Communications. The merger, which becomes effective Jan. 3, forced both ABC and Cap Cities to sell off several radio stations in key markets like Los Angeles, spurring bidding wars that have driven up station prices, according to several experts.

Two months ago, ABC and Cap Cities sold a Houston FM station for $32 million.

A pair of Cap Cities-owned Los Angeles stations--KZLA and KLAC--sold for $43 million in August.

At least 15 companies bid for KTKS-FM in Dallas three months ago. The station that ABC bought two years ago for $9 million was finally sold to Gannett Broadcasting (owner of KIIS-FM and AM in Los Angeles) for a reported $16 million.

“I take a little different view of all this,” said Jerry Del Colliano, editor and publisher of Inside Radio, an influential industry newsletter. “The ABC-Cap Cities merger opened the floodgates. They set the precedent. People began looking and saying, ‘Maybe this is an excellent area to make an investment.’

“The state of the (Federal Communications) commission is the other thing. Under deregulation, they have said in essence that they don’t want to be involved in much of anything. That sends a signal to investors that what might have been a red-tape nightmare before--a real mess--is now going to be easy. They can buy and sell licenses with a minimum of FCC interference.”

According to Anschel, old standards of radio station pricing no longer apply. “The old rule of thumb was, ‘Never pay more than 10 times operating cash flow,’ ” he said. “That is obviously out the window.”

Low Cash Flow

In Los Angeles, even highly rated radio stations have a cash flow of only a few million dollars a year. Yet estimates on the worth of a Top 10 station in the Los Angeles market by today’s standards put their worth in the KJOI range ($44 million).

Brokers have appraised KABC-AM, the second-highest-rated station in Los Angeles, at about $70 million. KIIS-FM, the most-listened-to station in Los Angeles, may be worth as much as $90 million, according to some experts.

“What’s happened is that the Wall Street guys--the gurus--finally got around to blessing it,” said Radio Advertising Bureau Vice President Danny Flamberg. “For years and years and years, your strict investment types would only look at assets. They’d count up all the chairs before they’d buy.

“Somebody decided to start looking at cash flow. Maybe you wouldn’t keep a lot of money at the end, but a lot of cash passed through people’s hands.”

Anschel agrees, pointing out the obvious.

“What the buyers seem willing to do now is take a longer-term point of view as long as the cash flow is there,” he said. “It’s never happened quite like that before.”

Prices Doubling

The average price of a radio station in the United States last year was $1.19 million--almost double the average paid for a station in 1979. This year, the average price is expected to nearly double again.

The rush to buy stations has attracted a number of institutional investors, as well as smaller limited partnerships with little or no experience in broadcasting. They will be the ones who pay too much and learn too late that this year’s glamour investment requires more than an absentee landlord to make money.

Mark Blinoff, a former Golden West executive who left KMPC 10 years ago to buy his own FM station in Salem, Ore., offers this advice to fledgling radio entrepreneurs: “If you want to buy an exciting, proven business that will make you a community leader, require that you work seven days a week and give you a good return on your money, don’t buy a radio station. Buy a McDonald’s.”

A station’s premium price is usually tied to its listener ratings, measured quarterly by Arbitron Ratings Service. In today’s bull market, even low-rated stations are commanding record prices.

Many Losers

“Thirty percent of the radio stations in the United States are losing money,” said Blackburn & Co.’s Rowan. “That’s a fact.”

Nonetheless, he said, even those stations sell for two to three times their gross annual sales revenues.

“Although the age of radio acquisitions is indeed good news, it will have a profound effect on station operations,” outgoing ABC Radio President Ben Hoberman told a group of Oregon broadcasters last month. “What are you acquiring when you buy a radio property? Talent, staff, programming, a studio, a license to broadcast, transmitting facilities, real estate, good will. Few assets; your major resource is people.”

The other major acquisition is debt, and new owners are going to have to find ways--not all of them good--to pay off that debt.

“Most new owners will have to cut the fat and some of the bone” in order to pay the huge prices they’re now paying, Hoberman said. “In the next five years, you’ll see radio stations run with as few people as possible.”

One result of this debt-induced cost-cutting will be desperation programming, predicts Del Colliano. He advises audiences not to fall in love with their radio stations.

Value of Format

“The bad news is that if you get to love your station, in a couple years it won’t love you,” he said. “When ratings go down, you’ll hear the ‘New’ this or the ‘New’ that. One lesson that radio stations will not learn is that you have to find a good format and stick with it--not for the next two years, but a generation or more.”

KJOI is a case in point.

Though it has been through a series of owners, the station’s “beautiful music” format has never wavered in 15 years. As a result, KJOI has consistently been among the five most-listened-to stations in Los Angeles. Both its audience and its advertisers are loyal and its value as a salable commodity keeps going up.

Autry’s KMPC follows the same formula. The only time the station dipped disastrously in the ratings during the last 30 years was four years ago when it flirted for a year with an all-talk format. After restoring Big Band music two years ago, the station has once again crept into the Los Angeles Top 10.

Fickle Yuppies

“In all candor, the switch-around is going to hurt the stations more than the listeners,” Colliano said. “The generation of yuppies isn’t loyal anyway. They’re used to punching around the dial. They use media like toothpaste.

“In the old days, your radio station was like your girlfriend or boyfriend. You’d like each other, get married and stay loyal to each other. Now, you get married, divorced and there’s nothing to it. We’re a nation of users. We’re not loyal to anything.

“Radio gets rid of formats rather than trying to fix them. I know radio is a business, but it’s show business. Never forget that. Ten, 15 years ago, broadcasting was more show than business. Today, it’s more business than show.”