Tuesday, June 6, 2006

CBS Selling Smaller Market Radio Stations:
Harbinger of More Things to Come?

The announcement by CBS Radio of their intention to sell 39 stations in 10 markets is another indication of readjustments in the radio industry.

In the ten years since the passage of the 1996 Telecommunications Act, which dramatically altered local and national radio ownership regulations, there has been dramatic and rapid acquisition of radio stations resulting in radio companies owning more stations than anyone would have predicted.

Now, CBS Radio's divestiture of stations, along with ABC Radio selling most of their radio stations, and Citadel, Radio One and others announcing that they, too, are looking to sell certain stations proves that radio groups are reassessing their core assets and determining where there is the greatest potential for growth and financial reward.

So, who or what groups will pick up these divested radio stations? Potential buyers most likely will not be in the markets where the stations are being sold. Existing competitors are, for the most part, precluded from buying additional stations under the radio ownership rules as modified in June, 2003. However, there appears to be several mid-sized and new radio groups that may have an interest to enter these markets and have access to an ample supply of equity and debt financing. This will be discussed further in a moment, but it is worth first examining the stations that are up for sale.

CBS Radio Stations To Be Sold: Not All in Small Markets

While most of the stations CBS Radio is choosing to divest are in smaller markets, the ten selected are not in their ten smallest markets. The map below shows where CBS is selling stations and the number of stations it owns in each market.

CBS Radio strategically retained stations in certain smaller markets because of their long term potential to increase in value. In each of these markets, one of the following situations probably offered an attractive ROI to the company: stations in markets that are being managed by CBS Radio clusters in larger neighboring markets (e.g., Victor Valley), or stations in markets in which CBS owns television stations (e.g., West Palm Beach), or, stations in markets that are expected to grow substantially in the next few years (e.g., Las Vegas).

CBS Radio's smaller markets include Palm Springs (Market Rank 144), Victor Valley (127), Hartford-New Britain-Middletown, CT (50), West Palm Beach (46), Orlando (37), Charlotte (35), and Las Vegas (32).

Now, in reference to the stations that CBS Radio has placed on the market, they generate noticeable revenues in most of those markets, and, often, are the first or second group in terms of revenue market share. Collectively, BIAfn estimates they generated $172.6 million in revenues in 2005. The table below provides information on these stations grouped by markets.

Potential Buyers for the CBS Stations

As shown in the map above, there is a wide geographic dispersion of these radio properties throughout the country. For that reason alone, it is fascinating to consider who the potential buyers could be. A company could make a big splash and acquire all of the stations. Any such deal could be supported by a number of the larger private equity players that are showing increased interest in radio M&A. More likely, the most probable buyers will be other radio groups that focus on these particular regions of the country as their strategic focus.

In all but one of these markets - (San Antonio, TX) - the total number of CBS Radio stations is three or more, which would make it difficult for existing in-market radio operators to acquire the CBS stations. There are some notable exceptions, however. For example, in the Memphis, TN radio market, Entercom only owns 1 AM and 2 FM stations, and under the local radio ownership rules, it could purchase the 1 AM and 2 FM stations that CBS is putting up for sale.

Similarly, in the San Antonio, TX market, both Border Media Partners and Clear Channel Communications could purchase the CBS AM and FM stations in that market while still satisfying the local radio ownership regulations. Additionally, several groups with radio stations in the Greensboro-Winston Salem-High Point, NC radio market - Clear Channel Communications, Curtis Media Group, Dick Broadcasting, and GHB Broadcasting - could acquire the three CBS AM stations that are being sold.

Alternatively, there are several radio groups interested in entering these markets. For example, Regent Broadcasting owns radio stations in several other New York radio markets and would be ideally suited to acquire the Buffalo and Rochester CBS radio clusters.

Cox Radio, who owns stations in the Dayton, OH market, could have some interest in either or both the Cincinnati and Columbus markets. Jacor and Clear Channel radio executive, Randy Michaels, could even enter into the picture given his historic interest in Ohio radio properties. Finally, the Fresno, CA CBS stations may be somewhat attractive to groups that own stations in neighboring markets (e.g., Monterey, Visalia, etc.) such as Entravision or Mapleton Communications.