Radio Buys: Cumulus Acquired By Private Equity

by Erik Sass, Jul 24, 2007, 9:15 AM

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Private-equity's appetite for media companies appears to be insatiable. Cumulus Media is the latest company to get gobbled up in a $1.3 billion sale to an investor group led by an affiliate of Merrill Lynch Global Private Equity. The Cumulus deal follows several other multibillion dollar private-equity deals, including the $20 billion sale of Clear Channel Communications to Bain Capital Partners and Thomas H. Lee Partners, and the $1.6 billion sale of Reader's Digest Association to Ripplewood holdings.

The investing group, which includes Cumulus CEO, president and chairman Lew Dickey and members of his family, is paying $11.75 per share--a 40.4% premium over the closing price of the stock last Friday. Per the terms of the deal, Dickey will continue to serve in his leadership roles at the company after the acquisition is complete in early 2008.

One of the nation's largest radio-station networks, Cumulus owns more than 344 stations in 67 mid-sized markets, mostly located east of the Mississippi.

First-quarter results (the most recent available) show Cumulus subject to the same structural downturn that is affecting the rest of the radio industry, with net revenue slipping 3.8% to $72.4 million and earnings down 6.5% to $16.4 million, compared to the first quarter of 2006. Nonetheless, Dickey remarked: "We strongly believe in this industry and in the long-term opportunities to grow the business."

Cumulus has purposefully built a portfolio of stations in mid-size markets, believing they represent a better long-term value proposition than stations in larger markets. Among the factors cited by Cumulus are proportionally greater use of radio advertising in mid-size markets versus large ones and the continuing expansion of national retailers in these markets.

Generally speaking, the high prices fetched by both Cumulus and Clear Channel stock in these private-equity deals suggest that radio, while weathering a structural downturn, is still an attractive business to own. (After several rejected bids, Clear Channel's stock finally sold for $39.20--an approximately 20% premium over the stock's median price last year.)

Indeed, while revenues may be slipping, radio stations maintain a high overall cash flow and margin of profitability. In fall 2006, Credit Suisse analyst John Klim praised radio's fundamentals: "We view radio as a superb business, particularly as it relates to the businesses' strong free cash flow characteristics." He added that radio is a good business because "there's not a lot of capital investment you have to make to run a radio station," and it provides a steady stream of income.

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