Evergreen Media Corp. and Chancellor Broadcasting Co. on Tuesday announced plans to merge and acquire the radio division of Viacom Inc., a deal valued at nearly $2.7 billion that would create the nation's second-largest radio group.
The resulting company would be known as Chancellor Media Corp. and, if approved by shareholders and federal regulators, will operate 103 radio stations generating more than $700 million in revenue. The combined company would own five FM stations in Los Angeles: KKBT, KYSR, KIBB, KLAC and KZLA.
Over the last year, the radio industry has been reshaped by a frenzy of deal making that has consolidated many of the most profitable radio stations across the country into the hands of a few large groups. Westinghouse Electric Corp. struck the largest deal last spring when it bought Infinity Broadcasting for $3.9 billion, creating the top-ranked group with $1.1 billion in revenue last year.
The acquisition frenzy was set off by telecommunications reforms a year ago allowing single owners to control as many as eight stations in a market.
Tuesday's deal makes two clear leaders in the radio business, with the third-largest group, Jacor Communications, only half the size of the Chancellor/Evergreen combination. The consolidation is forcing owners of mid-sized radio groups--like Viacom and Disney--to either sell out or grow larger to compete.
Some analysts predicted that Chancellor would seek further radio acquisitions to become the largest group.
Chancellor and Evergreen, both based in the Dallas area, had been bidding against each other and Jacor for Viacom's radio group until late last week. When it became clear that Jacor might win the bid, Evergreen and Chancellor accelerated merger discussions and joined forces to improve their chance of winning the auction.
The two radio groups will merge in a stock swap valued at nearly $700 million, with debt assumption bringing the total value to $1.6 billion. Their cash bid of about $1.1 billion for Viacom's 10 radio stations beat out Jacor's bid by only $25 million, one source said.
After the merger, the companies said, Scott Ginsburg, who co-founded Evergreen nine years ago with six stations, will become chief executive of the resulting company. Thomas Hicks--head of Hicks, Muse, Tate & Furst, the investment firm that owned nearly half of Chancellor--becomes chairman of the resulting company.
For Viacom, the transaction completes a plan initiated two years ago under which the company vowed to shed non-core assets to trim debt undertaken in its acquisition of Paramount Pictures and Blockbuster Entertainment.
After being beaten down on Wall Street for much of the last year for its lingering debt problems, Viacom shares jumped $1.625 to close at $35 on the American Stock Exchange.
Wall Street lauded the premium the company attracted for the radio group, after high-priced sales of Madison Square Garden and its cable systems. After taxes, the estimated $700 million in proceeds from the radio sale will bring debt below $9 billion, according to analysts.
Evergreen shares dropped $1.25 to $31.50; Chancellor shares lost 6.25 cents to finish at $28. Both trade on Nasdaq.
Though Viacom failed to get its $1.4-billion asking price, analysts viewed the deal as rich--roughly 19 times last year's cash flow. That's a slightly smaller multiple than Infinity Broadcasting fetched from Westinghouse.
Analysts said the price signals an end to a brief lull in radio consolidation. The acquisition frenzy tapered last summer after the Justice Department began antitrust reviews of several transactions, including the Westinghouse-Infinity deal, and required modifications of some smaller agreements.
Large owners like Westinghouse and Chancellor are betting that controlling groups of stations in single markets can help the industry take advertising dollars away from newspapers and local television stations. In major markets, Chancellor hopes to offer advertisers a reach nearly as broad as the local newspaper at roughly a third the price, analysts say.
In most of the top 10 markets, Chancellor will control up to 25% of local radio advertising spending, contrasted with an average 14% held before the merger announcement by Evergreen, the third-largest radio group, said Frank Bodenchak, a media analyst at Morgan Stanley. Its size could make it more attractive to larger national advertisers that previously viewed radio as too narrow to bother with.
While some analysts are skeptical of the high multiples being paid for radio groups, the radio industry says these acquisitions will enable them to increase their share of the total advertising pie beyond the current 7%.
The continued consolidation is putting pressure on other radio group owners like Disney, with fewer stations in top markets. In fact, industry sources had expected Disney to buy Viacom, Chancellor or Evergreen.
Sources say Disney was prepared to buy Viacom late last year for a much lower price, but the deal fell apart when its champion, former Disney President Michael Ovitz, announced his resignation.