The radio industry is in the grips of a buying frenzy.
KJOI, a leading FM station in Los Angeles, sold for $79 million in June after changing hands for $44 million in 1986 and $18.5 million in 1983. Station WDTX-FM in Detroit sold for $11.8 million earlier this year, after going for $5 million in 1985. And station WRFX in Charlotte, N.C., sold for $15.4 million three months ago after being acquired for $5.75 million in early 1986.
The big dollars being paid for radio stations and the high volume of transactions--nearly 1,000 of the nation’s 9,000 commercial FM and AM radio stations have changed hands so far this year--suggest that radio has been “rediscovered” by investors after being overshadowed by television for three decades or more. The aggregate sales price of this year’s transactions to date is $3 billion, up 50% from last year’s dollar volume.
“There is a huge churn in the marketplace, and there is no sign of it abating,” said Pat Clawson, the Washington-based financial editor at Radio & Records, an industry trade magazine.
All this buying and selling over the past two years has been spurred by Reagan-era deregulation, Wall Street’s new-found interest in “pure” radio investment plays and the decisions by several multimedia conglomerates--including National Broadcasting Co., RKO, Metromedia and Harte-Hanks Communications--to sell some of their stations or get out of the business altogether. In many cases, the conglomerates are selling properties that they have owned for decades. And some may be selling to cash in on current high prices, fearing that the bubble could burst.
The buyers of the stations are often members of a relatively new species of independent media chain that specializes in radio only. They include Noble Broadcast Group of San Diego, which has grown to 18 stations from two in three years; Legacy Broadcasting of Los Angeles, which owns 10 stations three years after starting business, and Infinity Broadcasting of New York, owner of 15 stations, up from seven in 1986.
Both Noble and Legacy have been in the news lately. In April, Noble agreed to buy Houston’s top-rated KMJQ-FM for $65 million, then a record price for a single station. Two months later, that record was eclipsed when Legacy sold its KJOI-FM in Los Angeles for $79 million to Command Communications.
“There really is a transition going on in the industry,” said Noble Broadcast President John Lynch. “You have all the old-line multimedia companies for whom radio was an afterthought being replaced by a whole new generation for whom radio is their primary business.”
Ample funds are available from Wall Street to finance the bigger and bigger deals, Lynch said. Wall Street’s enthusiasm for pure radio dates to the 1986 initial public stock offering of Infinity Broadcasting. The research that many investment firms did on the company then was the first ever done strictly on radio, Infinity President Mel Karmazin said.
In the past, radio stations were likely to be family-run or operated by “broadcasters who had come up through the ranks but who were lousy managers,” said Radio & Records’ Clawson. “It was mom-and-pop up to five years ago.” Now, however, the new chains are often run by sophisticated businessmen with strong financial backgrounds who rely heavily on market research to develop their programming strategies.
Why are the conglomerates selling? Because running a successful radio station in increasingly competitive markets often does not justify the media giants’ time and energy.
“All of CBS’ radio stations are worth maybe $600 million, or about the same as one of their TV stations. Naturally they just aren’t going to put the same amount of emphasis, care and concern into the radio,” Lynch said.
In fact, there have been persistent rumors in the industry that CBS is considering the sale of its 18 radio stations. But company spokesman George Schweitzer says CBS “is not now in discussions to sell its radio properties and has no intent to sell.”
As much as any other factor, investor interest in radio has been stirred by federal deregulation. Under the Reagan Administration, the Federal Communications Commission in 1985 increased the maximum number of radio stations that can be held by a single owner to 24--12 FM and 12 AM stations--from the previous limit of 14.
The higher limit has made the concept of radio-only chains more attractive to entrepreneurs, investment bankers and lenders because risk can now be spread over more stations, said Drew Marcus, a media analyst with Kidder, Peabody & Co. in New York. With a large number of stations, a ratings disaster at one or two won’t sink the company.
Ad Revenues Up
In addition to deregulation, improving market fundamentals are driving investor interest in radio. Industry advertising revenues, which hit $4 billion last year, should grow another 7.5% this year, according to George Riven of Miller, Kaplan & Arase, a North Hollywood accounting firm that tracks the nation’s top radio markets.
Year-to-date radio ad revenues in Los Angeles, the leading U.S. radio market, are running 16% ahead of last year and should exceed $350 million in 1988, Riven said.
The worse traffic gets in Los Angeles, the better it is for the radio ad market--because people spend more time in their cars listening to the radio, Legacy Broadcasting President Carl Hirsch said.
“In an advertising sense, people in L.A. have more ears than eyes,” Hirsch said. “The number of autos, the level of traffic and the amount of time people spend in a car is inordinate, compared to the national average. That leaves less time for TV viewing.” Or, for that matter, for reading newspapers and magazines.
Revenue growth has a direct bearing on station prices, of course, because the stations are valued according to cash flow rather than assets. As the advertising pie gets larger in a given market, so do the slices. And since all of the available radio frequencies in many major markets have long been taken, having to cut the pie into more and more slices is not a serious concern to most chains.
The current buying frenzy is part of a rush by some chains to reach the FCC limit of 24 stations, partly because of the financial clout that goes with bigness but, perhaps even more importantly, to beat a “reregulation” of the communications industry that many believe could occur in coming years. Noble Broadcasting, in fact, expects to expand from its current 18 stations to the maximum 24 by the end of next year, Lynch said.
The government’s repeal six years ago of anti-trafficking laws--which, under most circumstances, required station owners to hold properties for a minimum of three years before they could resell them--brought new liquidity to the radio ownership.
“Doing away with the holding period made radio stations more of a commodity and easier to finance,” said Norman J. Pattiz, chairman of Westwood One, a Culver City-based media company that owns the NBC and Mutual radio networks, a station in New York and Radio & Records magazine.
The superheated market has also raised fears that radio’s bubble will burst. Many of the highly leveraged chains would be particularly vulnerable if a recession made it difficult to make payments on the big loans and high-interest “junk bonds” used to finance station purchases, Radio & Records’ Clawson said.
Noting that many of the recent deals were driven by a change in the federal tax laws that will make radio purchases more costly next year, Clawson said Congress may well tighten up further on the industry. Sen. Ernest F. Hollings (D-S.C.) has proposed charging a 2% to 4% surtax on station sales that would be put in a trust fund to fund public broadcasting.
TV’s Complexion Changing
Many radio executives like to portray radio’s success in terms of television’s problems. After years of double-digit ad revenue growth, TV is now going through a “fractionalization” of its markets caused by the growth of cable TV and independent, or non-network, TV stations, they say.
While network television commanded more than 90% of TV audiences in 1980, the networks now have only about 60%, said Gary Stevens, a New York investment banker who runs a small firm specializing in media properties.
“The criticism of radio from advertisers was always that there were too many stations and that it was too easy to change channels,” Infinity’s Karmazin said. “With cable and remote control, the same criticism is now true of TV.”
Thus, “there has been a tremendous amount of squeeze and it’s difficult to make profit levels in TV as they have in the past,” said Robert J. Coen, director of forecasting for the McCann-Erickson advertising agency in New York. “TV (ad revenues) are not soaring like a rocket anymore.”
As revenues level off, TV’s costs continue to surge. The result: TV stations are having to charge more for less audience, said Jeffrey H. Smulyan, president of Emmis Broadcasting, an independent, Indianapolis-based radio chain with 11 stations, including four purchased last month from NBC for $121.5 million.
“Every time the price of Cosby reruns are bid up, that sends TV stations’ costs through the roof,” Smulyan said. “Except for high-priced disc jockeys, you aren’t paying for a lot of expensive (programming) product in radio,” Smulyan said.
Radio industry observers also claim that TV is now going through the same shakeout that radio experienced in the 1950s, when stations stopped trying to be all things to all listeners and developed formats to target certain audiences. The segmentation of television has already become evident on cable TV, with its panoply of all-sports, news, shopping and music video shows.
New Stations on Way
Still, in some markets, radio also faces the prospect of further competition. The airwaves in smaller and newly developing markets could be filled with another 2,500 stations in coming years, a 25% increase. Construction permits for an additional 1,149 stations have already been granted by the FCC, and, under so-called Docket 8090, as many as 1,000 new FM station permits could be be issued in underserved areas.
And a planned expansion of the AM frequency band could add another 500 AM stations by the mid-1990s, said Mark Fratrik, director of financial and economic research at the National Assn. of Broadcasters, a Washington trade group.
Perhaps due to these concerns, the stock performance of the few publicly owned radio companies has been less than spectacular. Infinity Broadcasting of New York went private in August after management concluded that the stock market would never adequately value the company’s assets. Shareholders who stayed with the company did well, however: After going public in June, 1986, at $12.50 per share, Infinity management paid $30.25 per share to go private in August of this year.
Frustrated by its stock price, Malrite Communications Group of Cleveland, a media company that owns 11 radio stations and six TV stations, also has announced plans to go private.
Radio stocks “in the public market are typically selling at a discount to private market value because the expectation is that unless the company is bought out, you won’t realize full market value,” said Dennis McAlpine, vice president of Oppenheimer & Co. in New York.
McAlpine is cautious about radio’s future: “Revenue in general will continue to grow, but it’s going to become a much tougher market because all the moms and pops that were easy to knock over (in a given radio market) are pretty much gone.”
BIG RADIO DEALS OF 1988 Leveraged buyouts this year:
Infinity Broadcasting Corp. of New York, which owns 15 radio stations, went private in August in a $484-million, management-led leveraged buyout.
Management at publicly held Malrite Communications has made a $170-million tender offer for the company’s shares in a bid to take the company private. Malrite owns 11 radio stations and six TV stations.
Some station deals this year:
In September, Emmis Broadcasting Corp. bought five radio stations from NBC for $121.5 million.
Beasley Broadcasting has agreed to buy the KRTH AM and FM stations in Los Angeles from RKO for a reported $86.6 million; deal is due to close next month.
In July, Command Communications bought KJOI-FM in Los Angeles for $79 million, part of a three-station package, from Legacy Broadcasting, a record for a single FM station.
In April, Noble Broadcast Group bought KMJQ-FM in Houston from Keymarket Communications for $65 million.
In July, Command Communications bought KRLD-AM in Dallas from Metropolitan Broadcasting for $40 million, a record for an AM station.
In September, Westwood One bought WYNY-FM of New York for $39 million from Emmis Broadcasting Corp., which had bought the station from NBC.
On Oct. 11, Classical Acquisition Partnership bought the WGMS AM and FM stations in Bethesda, Md., and Washington from RKO for $34 million.
In August, Emmis Broadcasting announced plans to buy KKHT-FM in Houston from Malrite Communications for $24 million.
In August, Buckley Broadcasting agreed to buy WOR-AM in New York from RKO for $24 million.
Source: Radio & Records magazine