The CC Debate

[TheBigA]

Yep, home mortgages are very costly, but would you pay $200,000 for a rental house that rents for $1,000 a month in today's market?

Some people do. Let me turn it around: Would you pay a thousand dollars a month to rent a house that's only worth $70,000? Considering the neighborhood you'd find a $70K house, I think the answer is no.

The point I think you and I are both making is the big boys paid way too much for the stations that didn't have the track record to support the price paid.

That's the point you're making. The point I'm making is you're making this judgement in hindsight.

Now, in today's market, stations billing $16 million are worth $8 million. Is that better? You now work in an industry built around properties where the land is worth more than the facilities. You can buy homes in the ghetto for half of what they're worth. But most people don't. Because they don't want to live in the ghetto.

Buying stations at the top of the market didn't cause the current situation. It may have made it harder for owners who paid top dollar. But that isn't why the value of those stations fell. They fell because circumstances in the economy and the media marketplace changed. There was nothing the owners could have done that could have prevented the current situation, and no way they could have anticipated it. Regardless of whether an owner like CC or Citadel is in debt, or an owner like Saul Levine who has his stations paid off and no debt, the reality is that radio revenues are down, the projections are down, and those stations are worth less now than they were ten years ago.

 

[bturner]

It is not hindsight. My boss, a former banker and CPA, and I spoke many times about the enormous prices paid back in the late 1990s for stations. He claimed the numbers were way out of the normal range. We looked at advertising revenue spent in the market versus the prices paid for the stations and both of us were scratching our heads.

If you will go back and review station sale prices in the last half of the 1990s, you will see there was a massive uptick. Investigate station sale prices or call a broker and ask about the late 1990s.

I make no reference to the current economic situation and anything that has happened since, say 1999. The facts clearly show the prices paid for stations became very high, especially in major markets. Most of these stations were not the ones that were struggling or could be upgraded but stations at or very close to the top of their game.

I guess you could relate it to the prices paid for homes and the mortgage industry approving loans that were way too much for the buyer. I know I was told by my real estate agent that I could qualify for a $170,000 home. He said at that price level values were always going up. Luckily (likely dumb luck) I picked a $90,000 home and struggled anyway.

Yes, the economy took corrective action and in all segments, the debt has a stranglehold with the doors pretty much shut to restructuring the debt to a level some could sustain.

Yes, the medium of radio is depressed. I'm sure it involved practices of the big boys and the newer forms of communication that have become commonplace in the past decade. In fact I wonder if radio is content to continue to ride the sled down the hill. I keep hoping for radio to reinvent itself.

In hindsight, in today's world I would say even those who bought almost anything at a price reflecting normal sale price ratios several years ago is having a tough time, even if the debt was mostly paid down.

You are correct that we never imagined what was on the economic horizon. Who would have guessed that radio would be losing ground or that a worldwide economic downturn or semi-collapse would occur. Who knows if it will totally collapse. Everybody got caught with their pants down.

The point was made about paying cash. That's the best advice. While paying totally in cash might not be possible, say for a home, waiting to save even more cash is certainly the wisest. I carry no debt higher than the cash I have. I've been lucky enough to tuck away a few months of living expenses because I know life has its good times and bad times.

 

[TheBigA]

If you will go back and review station sale prices in the last half of the 1990s, you will see there was a massive uptick. Investigate station sale prices or call a broker and ask about the late 1990s.

I've done a detailed invstigation on the entire period, and it wasn't limited to the late 1990s. It was a pattern of price increases that began in the mid 1980s. I don't have the data with me now, but I'll post it later. In the late 80s, it wasn't uncommon to see multiples of 8 times cash flow. That increased to 10, but 8 times was already unrealistic, given what we know now.

Yes, the medium of radio is depressed. I'm sure it involved practices of the big boys and the newer forms of communication that have become commonplace in the past decade. In fact I wonder if radio is content to continue to ride the sled down the hill. I keep hoping for radio to reinvent itself.

My view is that had Clear Channel or CBS not bought these stations, we would have seen the current crash in radio values much earlier. Their actions merely delayed the inevitable. The foundations for this crash were set in the actions of the FCC and others in the early 80s. It continued as long-time radio operators got out of the business. There was no increase in mom & pop ownership in the late 80s and early 90s. The fact that small companies sold out left a financial vacuum that was only filled by bigger, publicly traded companies. But having larger companies but these stations didn't cause the crash. It was going to come regardless of what they did.

 

[Goat Rodeo Cowboy]

I don't remember other lines of business making so much public information about cash-flow-multiples as was true in radio. I may highly naive but if people were negotiating to buy a nursing home or a farm or a small aluminum window manufacturing plant, I always thought the multiplier was down in the 2x to 6x range. But 10x, 15x, 18X? Only in radio?

When you are negotiating with a corporate owner and you are a corporate buyer, we are both using standard accounting procedures and probably at least one part in the transaction is a publicly traded company where the rules are really spelled out!

What I found mind boggling was mom and pop type stations wanting 12X when the accounting to support Cash Flow was a laugh. Some of these potential sellers obviously never took even high school bookkeeping... much less understanding accounting. Fortunately for some of them, the buyers were equally naive on the finer points of Cash Flow.

 

[gr8oldies]

The argument always comes down to saying that if the 96 act never happened, and there was never a Clear Channel, there would be no automation or voice tracking, and live DJs would be hitting the post 24/7 with mom and pop and insurance company ownership. With the increase in signals, that you could make 30 signals viable enough for large staffs when once there were 6.

 

[bturner]

The Big A has it right. Those radio station prices had been rising for years. The multiples were over the top from the mid-80s forward.

I agree the crash would have come much earlier without the big boys. They had the ability to 'buy some time' and I would even venture to say they came up with innovative ways to try to work their way out of their problems, buying a little more time.

I noted the comment that if the big boys never got so big, we'd all be jocking our stations versus voice tracking and automation. I think we are past the point of live and local everywhere on the dial. I do think the big boys made voice tracking and such possible much earlier than it would have come about if radio was limited to Mom and Pop owners. The big boys were able to produce the cash flow for the little company that had a voice track program, so they could eliminate any issues and really jump ahead. Look at what Clear Channel did in Ogalalla, Nebraska.

In some respects the big boys made it easier for the Mom and Pops to automate and voice track because the big boys adopted the technology quickly, lowering the price for stations that needed it most.

Although I said the public traded radio companies were a bad idea, contending they could not serve two masters (community and stockholder), I believe they have brought forward many good and useful ideas that have helped radio. Still, did the many negatives negate the good?

 

[gr8oldies]

The ability for Mom and Pop to automate with a satellite network came about in the early 80s with Night Time America, Transtar and Satellite Music Network. I worked for a mom and pop that had a jock doing voice work by ISDN in 1995. Whether it would have been delayed on a large scale under old ownership rules is questionable. I don't believe radio would have stayed in a time warp.

 

[bturner]

I recall the sales piece hitting my desk in 1981 pushing satellite delivered radio formats. No jocks calling in sick or playing just their favorites and breaking format. For the cost of a fulltime employee you can get major market air talent and your audience's favorite music. As I recall, it was $800 a month plus 2 minutes an hour. Hook up the triple decker cart machines to fire off at the tones and that giant 40 minute cart you fill up with 13 three minute breaks to fill those required breaks on the hourly clock. Just clear all the commercials, send the affidavits to them with that monthly check, cover 9 minutes or was that 12 an hour with your own stuff and you're part of the new radio revolution. So many small town stations jumped in, fired the staff and the husband and wife ran the whole place on half the income, making more profit.

 

[Talk_Dude]

I recall the sales piece hitting my desk in 1981 pushing satellite delivered radio formats. No jocks calling in sick or playing just their favorites and breaking format. For the cost of a fulltime employee you can get major market air talent and your audience's favorite music. As I recall, it was $800 a month plus 2 minutes an hour. Hook up the triple decker cart machines to fire off at the tones and that giant 40 minute cart you fill up with 13 three minute breaks to fill those required breaks on the hourly clock. Just clear all the commercials, send the affidavits to them with that monthly check, cover 9 minutes or was that 12 an hour with your own stuff and you're part of the new radio revolution. So many small town stations jumped in, fired the staff and the husband and wife ran the whole place on half the income, making more profit.

I recall listening to tape delivered automated programming back in 1968, when the ABC owned and operated stations carried the "Love" package with the entire 24 hour content of their broadcasting being played on reel-to-reel tape players. That was what I listened to on KQV-FM, just before it changed call letters to WDVE. I remember "Brother John" (Rydgren) being the only DJ voice on the station 24/7. So, even if getting the content delivered via satellite instead of via UPS might have started in the late 70's/early 80's, the idea of automated stations running canned programming 24/7 was around at least a decade earlier.

 

[bturner]

I know KRLD FM in Dallas went AOR with Jon Dillon in maybe late 1971 or early 1972. He recorded all the reels that played around the clock. This followed his successful run of Montage (sponsored by Coca Cola) on 50,000 watt KRLD AM 1080. If I recall, they were doing AOR on the AM all night after a while, but that didn't last too long.

 

[TheBigA]

I always thought the multiplier was down in the 2x to 6x range. But 10x, 15x, 18X? Only in radio?

Have you looked into the fast food business? You buy an established McDonalds or Burger King and you're talking 15x cash flow. Maybe more.

But here's the sad truth about radio: Right now station prices are the lowest they've been in 25 years, on average, with facilities that are modern and updated, and there are next to no buyers. It's like real estate: The issue never is price, but neighborhood. Right now, radio is a crime-ridden neighborhood where no one wants to live.

 

[bturner]

That is the truth!

A guy I know paid $300,000 for an FM combo in a nice town and was billing $25,000 a month on average. He had to invest a good deal...likely $150,000 as the ground system was gone, the building was falling apart and most equipment was 20 to 45 years old.

When he sold for $175,000, he was billing about $5,000. He blamed the economy.

What has amazed me are stations advertised by brokers at $750,000 that end up selling for $100,000 or so.

Bankers never seemed to understand radio all along (the President of my bank asked me about radio station values once) and it appears the other options for finance are dried up as well. The big sticking point for bankers is the license is technically not ownership, but something that in theory can be taken back by the FCC (I say theory because very few are ever revoked).

 

[Talk_Dude]

Bankers never seemed to understand radio all along (the President of my bank asked me about radio station values once) and it appears the other options for finance are dried up as well. The big sticking point for bankers is the license is technically not ownership, but something that in theory can be taken back by the FCC (I say theory because very few are ever revoked).

What else is new? Look around the country at relatively new shopping malls that are dead or dying, because the "big box" stores killed them. Look at how many people lost their shirts buying and renovating movie theatres when the multiplexes came along and killed the single-screen "movie palace". Look at how many video rental stores are either out of business or in big trouble. Look at how many Saturn, Pontiac, Hummer, and soon, Mercury dealers are out of business. Look at how many "Mom & Pop" grocery stores that were squeezed out of business in between convenient stores on one side and megamarts on the other.

That's business. Nothing lasts forever. Clear Channel thought they were getting into a good, profitable business. It cracks me up to read all the Monday Morning Quarterbacks using their perfect 20/20 hindsight to condemn Clear Channel's decisions. It cracks me up even more when some of the same people who condemn Clear Channel for not knowing in advance that times were going to change who'll turn around and recommend rolling the clock back to the 60's or 70's for a model of how to run a successful radio station, with DJ's, tight playlists, and insipid "imaging". I know, not everyone who points out Clear Channel's bad predicting skills is also a champion for old-school Top 40 style radio. But there are more than a few posting in Radio-Info, and reading them usually makes me laugh.

 

[TheBigA]

Bankers never seemed to understand radio all along (the President of my bank asked me about radio station values once) and it appears the other options for finance are dried up as well.

And yet when stations were, as you'd say, "over-priced," those same bankers were a bit more interested in making deals. Certainly the bigger bankers were sucked in. And now they own a few hundred radio stations.

Say all you want about stupid owners who over-paid. For every stupid owner, there's at least one or two stupid bankers who provided the money, who didn't do the homework, who didn't ask the right questions, and who overlooked the facts. We'll see if they do a better job.