Chancellor to Purchase Capstar for $4.1 Billion

Chancellor Media Corp. agreed to buy Capstar Broadcasting Corp. for $4.1 billion in stock and assumed debt, joining two companies controlled by Hicks, Muse, Tate & Furst to create the largest U.S. radio broadcaster.

The move by Dallas-based investment firm Hicks Muse gives Irving, Texas-based Chancellor 463 radio stations in 105 markets, more than double that of No. 2 Clear Channel Communications Inc. It also extends a bet by Hicks Muse Chairman Thomas Hicks that a company with interests in radio, TV and billboards, spanning cities as large as New York and as small as Farmington, N.M., can have an appeal to advertisers that’s unmatched by most of its rivals.

“The combined entity will be dynamite,” said Larry Haverty, portfolio manager at State Street Research & Management.

Hicks Muse has taken advantage of recent regulatory changes that make it easier for companies to own more stations in any one market. The latest transaction would marry Capstar’s focus on stations in small and medium markets with Chancellor’s focus on larger markets.

“It has been a long-term professional and personal goal of mine to create the nation’s largest radio and broadcasting entity by all measures,” said Hicks, who would be chairman of the new company.

Hicks Muse, which owns about 15% of Chancellor and 59% of Capstar, is expected to own about 25% of the new company, which would carry the Chancellor name.

Chancellor shareholders would own 66%, and Capstar shareholders would own 9%. The transaction, which the companies hope to complete in the second quarter, is expected to increase after-tax cash flow, they said.

Shares of Chancellor fell $2 to close at $42.75 on Nasdaq. Capstar, based in Austin, Texas, fell $2.19 to close at $19.31 on the New York Stock Exchange.

The new company would have radio stations in 11 of the 23 markets in which it owns billboards and four of the eight markets in which it owns TV stations. Chancellor currently has 108 stations in 22 markets.

The benefits of these overlaps are simple. Chancellor can blanket any one advertising market with billboards, radio stations and a TV station, giving it an edge by offering advertisers a package of media outlets at attractive ad rates. The overlaps also allow Chancellor to cross-promote its own properties.

“You become more attractive to advertisers by giving them one-stop shopping,” Haverty said.

In Texas, for instance, Chancellor would own stations in both small and big markets and may be able to sell an “all-Texas” advertising package.

“We will be able to appeal to advertisers in ways that no one else can,” said Jeffrey Marcus, Chancellor’s chief executive and president.