Marking the largest radio acquisition in history and the continued consolidation of the industry, Clear Channel Communications Inc., the nation's third-largest radio operator, agreed Monday to buy the leader, AMFM Inc., in a stock deal valued at $15.9 billion.
The transaction, which had been widely anticipated since January, would transform Dallas-based Clear Channel into one of the nation's largest outlets for advertisers, with 830 radio stations, 425,000 billboards, 19 television stations and Katz Media, a firm that represents electronic media.
The combined companies would take in more than $5 billion in advertising--about the same amount as News Corp. and Walt Disney Co., but half as much as Viacom Corp. after its proposed acquisition of CBS Corp. is completed.
If the deal is approved by regulators and shareholders, Clear Channel will be catapulted to the top of the radio industry, generating twice as much cash from its stations as the next-largest company, CBS' Infinity Broadcasting.
The deal underscores a trend among media companies toward offering advertisers packages of commercial space in multiple outlets. Infinity, for instance, is drawing in new advertisers and securing higher rates through a plan that offers advertisers a combination of radio, billboard, Internet and TV time.
Parent CBS intends to add cable channels and additional television stations to the mix through the Viacom merger.
"CBS and Viacom are trying to use MTV and the CBS network to leverage the national advertiser," said James Marsh, a broadcast analyst at Prudential Securities. "Clear Channel's strength is their strong local franchises."
Following a three-year acquisition spree, Clear Channel, which completed its purchase of third-ranked Jacor Communications in April, will have a significant presence in California.
Lowry Mays, the chairman and chief executive of the company, said that when the AMFM purchase closes in mid- to late 2000, Clear Channel will own about 10% of the stations in the state and 13 in Los Angeles, including KBIG-FM (104.3) and KIIS-FM (102.7).
Clear Channel already controls Eller Media, the largest outdoor advertising firm in Los Angeles. Though it owns no television stations here, in other markets it surrounds them with radio and billboard holdings to create local advertising juggernauts.
"We're throwing the net across a larger audience, giving advertisers a more efficient way of reaching audiences and making us a true alternative to newspapers," said Mays, who is lauded on Wall Street as one of the best operators in the business.
Analysts said Clear Channel is riding the boom in "out-of-home" advertising as Americans have become increasingly captive to billboards and radio listening because of rising car travel and as advertisers have sought to break free of the clutter of "in-home" messages from a proliferation of cable channels, broadcast networks and local TV stations.
A consolidation among out-of-home advertising outlets, spurred by federal deregulation, also helped drive growth of the segment. Congress relaxed radio ownership limits in 1996 to breathe new life into the industry, which was struggling to compete for local advertising dollars against newspaper monopolies and a rising number of television stations and national networks.
The deregulation set off a consolidation frenzy, with companies such as Infinity and Clear Channel amassing radio and billboard outlets in their markets to give them reach comparable to that of newspapers. Three years ago, no radio group controlled more than 30 stations, while the top five operators today each own more than 100 stations--and several in one market.
Analysts said buying AMFM will also enable Clear Channel to tap into the growth of Internet advertising. While Clear Channel's radio stations are mostly in mid-sized markets, AMFM's are predominantly in the top 10 cities, where dot-com advertising is mushrooming.
Marsh estimates that radio advertising will outpace its historic growth rate of about 5% this year, expanding by as much as 9%, largely as a result of new spending by Internet companies.
He estimates that 50% of the projected $800 million in Net advertising during the first half of the year flowed to radio broadcasters and an additional 30% went to billboard operators. TV stations made up the rest, but could shrink because of their demand for cash upfront to protect against rising delinquencies.
Some analysts were surprised at the drop in Clear Channel stock on Monday, when shares fell $3.88, to $76.50. Marsh said Mays bought AMFM at a discount because of Wall Street's lack of faith in its management, its debt overhang, and the potential conflicts of interest arising from its ownership by a money management firm, Hicks, Muse, Tate & Furst Inc.
AMFM has been trading at a multiple of 18 times earnings, compared with Clear Channel's and Infinity's trading multiples of 30. Although Wall Street punished Clear Channel for paying a rich 26 times earnings, Marsh said the deal should remove the uncertainties and restore the company's value.
"If you don't believe in Tom Hicks as a manager, you will be happy that Clear Channel is taking control," said Marsh, referring to the principal of Hicks Muse and chairman and chief executive of AMFM, Thomas O. Hicks, who just a year ago envisioned building Chancellor Media, since renamed AMFM, into a media giant with television, billboard, radio and Internet holdings.
That dream was short-lived, as management turmoil and an unworkable cost structure forced Hicks to put the company up for sale in January. Industry sources said Hicks Muse bid up prices in the industry to gain a foothold, overpaying for properties in part because of its ability to charge investors in its funds management fees.
After a flirtation from Clear Channel in January, AMFM was pulled off the auction block as its financial performance--and stock price--sank. A recently installed management team was ousted, and the company was restructured, divesting outdoor assets and scuttling a TV acquisition.
Under Monday's deal, AMFM shareholders would receive 0.94 share of Clear Channel for each of their shares, valuing their stock at $71.91 based on Monday's closing price of Clear Channel stock. AMFM closed at a 52-week high, up $1.31 on Nasdaq, at $65.19 a share.
Hicks will become vice chairman of the family-controlled company, which will be 37% owned by current AMFM shareholders and 63% by Clear Channel shareholders.
Clear Channel would assume $6.1 billion in AMFM debt.
The company said it will divest about 125 stations, worth more than $4 billion, to comply with federal ownership caps that limit owners to eight stations in the nation's largest markets, such as Los Angeles, and no more than five FM or five AM stations. Clear Channel expects to sell off four of its FM stations and one of its AM stations in Los Angeles to meet those requirements.