In a deal that would make it the nation's largest owner of radio stations, Dallas-based investment firm Hicks, Muse, Tate & Furst Inc. agreed Monday to buy SFX Broadcasting Inc. in a transaction valued at $2.1 billion.
The sale of SFX is one of the last major transactions expected in the rapid consolidation of the radio industry. Since federal rules on radio ownership were eased last year, more than 2,100 stations have changed hands in deals valued at more than $15 billion, with the top five radio groups now controlling more than 25% of the nation's radio advertising sales, up from less than 5% in 1992.
For Hicks Muse, the purchase is the culmination of a four-year acquisition spree in radio that would put the investment firm in control of two radio groups with more than 400 stations and combined annual revenue of $1.4 billion once pending deals are completed. The current industry leader, Westinghouse Electric Corp.'s CBS Radio, has revenue of about $1 billion from 74 stations.
"The radio industry was so artificially fragmented for so long," said Thomas Hicks, chairman and chief executive of Hicks Muse, who said he seized on telecommunications reforms to take part in the radio industry's equivalent to the Oklahoma land rush.
Like other radio buyers, Hicks Muse is counting on economies of scale and efficiencies from clustering stations in the same market to offer advertisers broader reach. Together, the top two radio groups would control between 50% and 60% of the radio advertising in each of the top 10 markets.
Hicks Muse began investing in radio in 1993, when it formed Chancellor Broadcasting Corp. Chancellor would become the nation's second-largest radio group next month upon completing the purchase of Evergreen Media Corp. Hicks Muse would be the single largest shareholder of the combined company, which would have $808 million in revenue, and would hold a 13% stake, with Hicks serving as chairman.
Whereas Chancellor concentrates on stations in large markets, Capstar Broadcasting Corp. was formed by Hicks Muse last year to focus on mid-size and smaller markets. SFX's 71 mid-size stations would be combined with Capstar's 243 stations to become the nation's third-largest group, with $566 million in revenue.
Under Monday's transaction, which must be approved by federal regulators and SFX shareholders, Hicks Muse would pay $1.2 billion in cash and assume $920 million in debt for SFX. It would pay $75 apiece for public shares of SFX, which closed Monday on Nasdaq at $74.13, up $6.25. The stock traded below $25 in December.
SFX founder Robert Sillerman, who stands to make $100 million in the transaction, would preside over a new public company, SFX Entertainment, which would run the live music business that would be spun off from the radio group before Hicks Muse's purchase. SFX operates 20 concert halls through long-term lease agreements.
The SFX-Capstar radio combination, which would be privately held, would be managed by Steven Hicks, a longtime radio executive who is Thomas Hicks' brother. Steven Hicks founded SFX with Sillerman and took the company public in 1993 before leaving to form Capstar.
"We have two world-class management groups," said Thomas Hicks. "One specializes in large markets and the other in small markets."
The investment firm has a similar strategy in television. Earlier this month, it agreed to pay $1.7 billion for Lin Television Corp., an operator of several large stations. Last year, Hicks Muse invested in four stations in small markets. While industrial investments are still its mainstay, Hicks Muse now has about 30% of its money in broadcasting.
"We have now completed putting together our platforms for ownership in small and large markets in television and radio," Thomas Hicks said.
Investment bankers estimated that Hicks Muse is paying a full price for SFX--a multiple of about 17 times this year's earnings. By comparison, CBS paid a multiple of 17 for Infinity Broadcasting. Hicks said his two radio groups are realizing yearly cash flow increases of more than 25% from consolidation and clustering benefits of past deals.
Analysts said the bidding war for SFX would probably prompt a deal between two of the losers. They expect third-ranked Jacor Communications Inc. to buy fifth-ranked American Radio Systems in a deal that could exceed $2 billion and supplant Chancellor as the second-largest group.
One investment banker said American dropped out of the SFX bidding in early rounds when the price escalated and put itself on the market hoping to draw Jacor, its yearlong suitor, back to the negotiating table.
"You don't want to be the last girl at the dance when the music stops," said Herb McCord, a radio consultant based in Red Bank, N.J.
Although CBS bid for SFX, investment bankers said the company dropped out, reluctant to take on debt at a time when its parent, Westinghouse, is preparing to split the media group from the industrial assets in a public offering.
Analysts say these latest deals will put pressure on other top 10 radio groups, such as Clear Channel Communications and ABC Radio, to find partners to survive.