Will Wall Street Embrace Radio Stocks After Entercom CBS Deal?

There’s plenty of agreement on Wall Street that in order for investors to take a fresh look at radio, something needs to change. The sought-after catalyst may be the impending acquisition of CBS Radio stations by Entercom. The deal will not only create a big new purely radio company, but because of how the deal is structured it will also serve to introduce a number of investors to the radio industry. The way the complex three-stage separation agreement is designed, CBS shareholders will ultimately own 72% of Entercom, holding a combined 101,407,494 shares in the radio group.

“It’s not that people woke up one day and they are interested in radio—they’re interested because they’re going to own a share of a radio stock and they have no choice,” Wells Fargo Securities analyst Marci Ryvicker said. And because of that structure, Ryvicker has had a “hundred times” as much investor interest in radio than in the recent past. “If you are a CBS shareholder you need to understand what this is,” Ryvicker said. And that’s where the opportunity lies for the industry to expose a fresh new group of investors to the idea that radio is a mighty good buy.

If that effort has been dealt a setback at all, it’s with revelations during the past few months that CBS Radio stations haven’t been delivering as positive results as many had thought, leading some investors to become nervous about the deal. It’s pushed Entercom’s stock price down by about one-third year-to-date and raised questions about whether the deal will close. Entercom did not respond to a request for comment. But during a recent presentation to investors, executives told a crowd of CBS shareholders looking to bone up on the radio industry that both companies are contractually obligated to get the agreement done and there aren’t any so-called “outs” written into the deal.

“There’s nervousness that Entercom will not be able to turn it around,” Ryvicker said. “You have people who don’t pay attention to the industry who say, why is this guy buying an asset that has been in significant decline.” But she believes Entercom CEO David Field is better positioned that anyone else to make the pro-radio pitch. “If anyone can save radio’s reputation with Wall Street, it is David Field. I don’t think anybody else would be able to do it,” Ryvicker said. “He is trusted [because] he never burned anyone and he’s never done anything stupid. The fact that he didn’t do other deals is helping him gain credibility on this deal.”

When the dust settles, Entercom will become radio’s second-largest company in terms of revenue with 244 stations across 47 markets including all but two of the top 25 metros. The rollup is projected to cut as much as $25 million in expenses, including payroll, but analysts think that number could be higher.

“They can stand out from the radio industry and bring more [investor] interest, but it’s probably going to take a little bit more time than we thought initially,” Wells Fargo analyst Davis Hebert said on a recent podcast. At the same time he said if they’re able to “stabilize” the CBS stations to perform on par with the rest of the industry then the cash the company generates should be “quite profound.” It’s a fact he thinks some investors are discounting. “CBS Radio bonds continue to trade quite well. The bond world thinks this is a pretty safe investment and it’s a pretty safe acquisition,” he said. “The equity is telling you something otherwise so it will be interesting to see who is right.”

A Radio Ripple Effect?

S&P Global senior media analyst Justin Nielson also believes an influx of CBS investors could have ripple effects across the wider radio sector, and he agrees it will depend largely on how successful Entercom is at finding synergies and producing good cash flows. Both will be critical, Nielson says, because it won’t get much of a tailwind. “We’re seeing 1%-2% growth for the industry and a lot of that is on the digital side, so it’s going to be imperative to keep costs down and keep margins up,” he said.

It’s not just analysts and Wall Street types who hope an improving revenue trend as well as a higher-profile pureplay will have an impact for all of the industry’s publicly traded companies. Some radio leaders can be counted among them. “If as an industry we can show consistent topline revenue growth, which I think we can, that will help all of us,” Emmis CEO Jeff Smulyan said. “I think the CBS-Entercom deal, with David banging the drum as a pureplay radio company, will help. But I think the big issue will still be showing significant topline growth for the entire industry.”

Ryvicker cautions that there may be some “volatility” as Entercom’s stock gets its sea legs after the deal closes later this year and new investors await an answer to the question of whether radio can again show growth. “We’re hoping that David answers that but it’s not going to be the day the transaction closes, it’s going to be over time,” she said. Ryvicker also doesn’t believe just the combination of two big groups will be enough on its own. It will also take the completion of iHeartMedia and Cumulus Media’s debt restructuring. “There’s no interest in radio if there’s only one stock to buy,” she added.

-Post SOURCE - National Association of Broadcasters and Inside Radio