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CBS Portland Sale Sets The Bar

E

Element9

Radio-Info reports late Saturday, August 8, that CBS Radio has sold four Portland, OR properties, three FM and one AM valued at $40M to Larry Wilson, former President-CEO of Citadel Communications. Having kept his powder dry after spinning Citadel off to Forstmann-Little, Wilson and his Alpha Broadcasting appear to be embarking on a course of wisely re-investing in radio, primarily in the Northwest.

Compare Portland, OR to Buffalo, NY. According to Arbitron market ranking, Portland, OR, market #23 is twice that of Buffalo, NY at #52. More importantly, the economy of Portland, OR is arguably far better than Buffalo and Western New York.

Based on the sale price of $40M for three FM signals and one AM in Market #23, one might deduce that Regent grossly overpaid CBS when it purchased the Buffalo cluster $125M for four Class B FMs and a kilowatt AM. On the heels of the NY Times' sale of WQXR, the sale price of the CBS Portland, OR cluster creates serious problems for companies such as Cumulus and Citadel which, within the past five years, purchased properties at highly inflated prices.

The impact on Wall Street may not be immediate. But in time, investment banks and lenders may view the CBS spin-offs as setting the policy for pricing, especially if there are more to come. Is this the first crack in the dam? Will the floodgates open?
 
If "Mom & Pop" had any money or the banks would be willing to listen (unlikely), they could probably put together a realistic priced combo or two and leave it at that.

Just like real estate, is it wise to sell if you can, or wait and see if the market comes back a little bit?
 
Element9 said:
The impact on Wall Street may not be immediate. But in time, investment banks and lenders may view the CBS spin-offs as setting the policy for pricing, especially if there are more to come. Is this the first crack in the dam? Will the floodgates open?
Click to expand...

If the floodgates open, that will cause the prices to go up. That's what everyone is hoping for. The reason the prices are so low is the ad market is down, so value of the stations is much lower, and only a handful of companies have any money to spend because of the credit crisis. If lots of people start buying, that will increase prices based simply on demand.

The question the employees of the former CBS cluster would love to ask the former CBS employees in Buffalo (those who are left) is: "Are you better off now, or before?" I think we know the answer. We could ask the same question of the former CBSers in Denver.

I think one of the Buffalo employees in fact moved to Portland a couple years ago, no?

I just think it's interesting that Larry Wilson now owns 6 stations in the market, which gives him about a quarter of the sticks in town. He was one of the first to play the big money acquisition game after de-regulation. And yet now, because he got out before the roof fell in, he's looked upon as one of the good guys. Some viewed him as one of the "real broadcasters" who could come back, buy stations at fire sale prices, and return radio to its former glory. Wait til you see how he plays the game in the new economy.
 
What's the cash flow on the Portland stations? Is this a 5x cash flow sale, or a 10x cash flow sale? Even in a depressed ad market, I'm guessing that it's closer to a 5x multiple, which is about where the market's been since the recession hit.

TheBigA said:
The question the employees of the former CBS cluster would love to ask the former CBS employees in Buffalo (those who are left) is: "Are you better off now, or before?" I think we know the answer. We could ask the same question of the former CBSers in Denver.
Click to expand...

The former CBS employees in Buffalo have taken cuts along with the rest of the industry, but the Regent cluster here is in better shape than former market revenue leader Citadel. The better question is "Who's in better shape - the employees of a cluster that sold for a 15x multiple a few years ago and has a ton of debt to service, or the employees of a cluster that just got purchased for a 5x multiple in depressed market."

CBS was a pretty good company to work for. Larry Wilson has a reputation as a pretty good guy to work for. Either seems preferable to the Farid & Judy show, the Mays family, the Dickey Birds, or several others out there.
 
SirRoxalot said:
The better question is "Who's in better shape - the employees of a cluster that sold for a 15x multiple a few years ago and has a ton of debt to service, or the employees of a cluster that just got purchased for a 5x multiple in depressed market."
Click to expand...

Keep in mind that Larry isn't drawing on his personal savings to buy these stations. He's using a Portland based investment firm. Which means he's doing what a lot of these companies are doing: playing with someone else's money. Debt is debt, no matter the amount. If the market continues without improvement, and radio doesn't improve its numbers, 5 times cash flow will seem like a lot.
 
TheBigA said:
Debt is debt, no matter the amount.
Click to expand...

Really? Then why are all these "financial geniuses" doing their damndest to refinance their current debt?

If you just borrowed $300,000 to buy a house, you've got a MUCH better chance of paying it back if your salary is $100K per year, and the house is worth $400,000.

Right now, you've got groups like Citadel that borrowed $2.1-Billion to buy a group that's worth less than that now, and has taken a significant revenue cut. That's like buying a house that you can barely afford, taking a significant pay cut, and finding out that the house isn't worth what you paid for it.

The interest on a large debt is certainly much greater than the interest on a small debt, and the amount you'll pay back over time is MUCH greater. When you're paying nothing but interest - and not even all of that - you'll never get the debt monkey off your back.
 
SirRoxalot said:
Right now, you've got groups like Citadel that borrowed $2.1-Billion to buy a group that's worth less than that now, and has taken a significant revenue cut.
Click to expand...

The thing you continue to ignore is that Citadel has its own built-in bank known as Forstmann Little. They approved every dollar that was spent, and every purchase that was made. This is not to say Citadel doesn't owe a lot to outside banks and investment companies. But before anyone files for bankruptcy, they'll first make a call to a man with one of the biggest checkbooks around.
 
It's a buyer's market now, for a number of reasons. If I'm reading the tea leaves correctly (not that I'm Jim Cramer or Charles Munger) it will continue to be a buyer's market even if the floodgates open. There won't be a feeding frenzy driving up multiples because there very likely will be factors as noted that will keep sale prices in check.

The days of 10-12 times cash flow are very likely over. It's doubtful the prices will be bid up in a feeding frenzy --- "gotta have this cluster in this market NOW" --- because buyers won't play that game; 5 to 7 times multiples will be the norm for quite some time.

As to Larry Wilson, nobody's said he's a saint. His deals may be financed as most are, but he has more liquidity than most operators to secure the financing and protect the properties. Regarding Citadel's private bank named Forstmann Little, even if they're flush, smart banks don't throw good money after bad.
 
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