The "pouncers"

[TheBigA]

Tom Taylor wrote in his daily email:

“There really are people – wealthy people – who believe radio’s got a future.”
That’s from a former group head who’s been circling the herd with the backing of some of those very wealthy people – waiting for the right opening to swoop in and start buying. I’ve called these folks the “Pouncers”, because they’re ready to strike when they spot prices they think are viable in today’s market – maybe 8 times cash flow. Or better, 6 or 7 times. A high-profile 6-times sale of a solid property would get a lot of people intrigued on the buying side, and might finally lead to some “capitulation selling.”

I've been reading that story in many less credible places for a long time. Even after the collapse in stock price and the placing of hundreds of quality properties on the block, no one has actually stepped forward.

My view on that story is that if they're looking to buy at "fire sale prices," they need to remember that the actual sale price doesn't reflect the amount of money necessary to operate the radio station. If you buy something at a fire sale price, that usually means the actual product is a shell. Which, some may feel, describes radio. But as anyone who has ever bought a burnt out shell can tell you, the purchase price is only the beginning.

Even if they get a radio station at 6 times cash flow (which is still lower than the average price in the pre-TCA years), they will still have to invest a lot more money in infrastructure, modernization, marketing, and personnel. And even after all that money, they will have to deal with a weak advertising market, and a perception problem about radio that is not of their making. Let's face it: There is a very large audience that isn't going to change their habits with radio no matter who owns it and how they run it.

So my point is that these may be some very wealthy people, but their wealth and patience will be severely tested if they believe they can reverse the current trend.

 

[jdweaver]

I do know of a couple of 'pouncers' - one in particular who got out during in early 2000 with a boatload of cash. He in turn came back into the business, buying a decent signal in a great Western market. In a simple understatement he said "...it's been harder than I thought it would be..."

It can be argued ALL business is harder than it used to be...but radio is a very mature business that offers opportunity to the investor with gonads, new ideas and patience. The majority still spin off some nice cash, just not as much as they used to. The successful models may look like Jerry Lee at WBEB. Local owner/operator of a cluster with deep community roots. That could be very attractive to the right kind of buyer.

 

[TomT]

Some of these properties have no cash flow--back to purchasing at multiples of gross sales.

However, that does not mean that the properties have no value---but will require TLC from local purchasers who understand the market. They will also have to reduce overhead, and re-energize, re-focus (or replace) the sales staff.

 

[Stewy]

Well stated.

 

[SirRoxalot]

The reality is that the only way some of these properties will be viable in today's market is if the current owner sells at a loss. Some properties are so highly leveraged that they can't make money. The current owner will have to decide if they want to take one big write-down, or bleed to death slowly.

Clear Channel did just that with some of their small market stations. They sold some smaller markets for the equivalent of pocket lint just to be rid of them.

 

[davideduardo]

Clear Channel did just that with some of their small market stations. They sold some smaller markets for the equivalent of pocket lint just to be rid of them.

I believe the proceeds of the roughly 400 stations they sold was just slightly in excess of what they paid; the reason for selling was principally to be rid of small properties that did not have the operating margins of the larger markets. Obviously, downsizing made them less subject to regulatory disapproval of the private equity buy-out, too.

 

[TomT]

A bigger challenge is financing. Our information is the banks that are still lending will want to see either substantial assets--read real estate, or at least a 20% cash inflow by the buyer. Most properties have very little real estate (besides a hill-top or corn-field transmitter site). Most operators --looking to expand-- have access to that amount of cash.

 

[TheBigA]

Buying the radio station is the cheapest and easiest part. That cost is constant. Even if you get the station for free, you have the cost of operations, rent, electric, phones, personnel, legal, engineering, government regulations, and anything else. Those are the real costs in running a radio station. Most people can barely meet their own rent or mortgage. Who can pay all the costs involved in running a radio station?

 

[Goat Rodeo Cowboy]

Buying the radio station is the cheapest and easiest part. That cost is constant. Even if you get the station for free, you have the cost of operations, rent, electric, phones, personnel, legal, engineering, government regulations, and anything else. Those are the real costs in running a radio station. Most people can barely meet their own rent or mortgage. Who can pay all the costs involved in running a radio station?

The stations I have looked at in recent years fit the category you are describing. I DON'T have significant capital so I have looked at stuff "at the bottom of the pond" but even most of those generate enough sales to meet the basic day-to-day costs. What they don't do is at their current down-trodden level produce cash flow to put in new equipment, to make the facility look tidy, and make it possible to improve some pretty hokey programming. I have looked at very, very small markets.... market where even if you run a whiz-bang operation there is pretty much a brick-wall maximum to the amount of revenue you can generate no matter how good you are. These ARE NOT the stations that were acquired by the big corporate owners.

The stations that the big conglomerates may be ready to spin off, the kind of stations that "the pouncers" would gobble up CAN pay their operating expenses. They are currently sending funds to the corporate office to pay for all the management services they receive from corporate as well as paying their local expenses. And to pay their share of those corporate salaries. They would be for sale because they do not generate the level of cash flow big corporations demand.

This scenario is no different than companies that own a chain of motels, a chain of nursing homes, a chain of fast food stores, or a chain of pet-food stores. Or a chain of automobile dealerships. They can make reasonable money by putting their money in reasonable passive investments. When they take on the headaches of running a chain of enterprises, they expect much higher levels of cash flow from their investment. What might be a handsome income and return to me or you is "chicken feed" to the big corporate operators.

Now if indeed local ownership, local operation, local programming actually have any value, then we can assume that under new ownership the volume of business will increase in the reasonably short term. The main issue is to not PAY TOO MUCH to start with because even the well financed pouncers will expect a cash flow starting reasonably soon to amortize the amount they pay to acquire the station.

 

[TomT]

In the large markets we will likely see "like kind" exchanges, as the major groups consolidate or improve their position in various markets as best they can in a weak economy with reluctant bankers. As an example, the Cumulus-Clear Channel recent trade between Green Bay and Cincinnati. Cumulus had just two FM's in Cincy--acquired when they bought Susquehanna. CC had to divest two FM's as a condition of going private. Hence, to avoid tax consequences and keep their respective bankers happy, Cumulus traded their equivalent value Green Bay cluster for the two CC Cincinnati stations.

(If you have a "like kind" exchange, where you swap one property for another property of equal value in the same business, you can avoid paying capital gains).

As the banks loosen up, we will see the large group owners either getting out of markets (as CBS did in Columbus and Denver) or adding to their clusters. I suspect we will also see some marginal properties (those Class A and rimshot signals) shed in order to pick up better properties--or simply to improve the bottom line.

More activity will occur in small to middling rated markets, where prices will become more reasonable. These can be good markets as long as you don't rely too much on national spot buys. Clear Channel is still in a large number of these markets, but they will want to sell clusters, not individual stations. Watch for some innovative deals to be made by other local operators in these markets who are smart enough to know when to cooperate, and when to compete all-out.

 

[kd8hho]

it would be nice to see some of these station get into the hands of local owners. who could maybe bring some local sound back to the radio.

 

[davideduardo]

it would be nice to see some of these station get into the hands of local owners. who could maybe bring some local sound back to the radio.

What is intrinsically better about "local" radio vs. syndicated or network radio? I see so much pursuit of "localism" as if it were the Holy Grail of radio, yet fail to see how just being local for local's sake is of any value to the average listener.

Is Pandora local? Is American Idol local? (I know, not the zenith of culture, but 30 million people view it) Is Fox News or Lastfm? Does you city have a "city magazine?" What's its circulation vs. the combined numbers of all magazines sold or delivered in the market, from Field & Stream to Forbes and People?

Would someone, seriously, please explain why pure localism is such a wonderful quality?

 

[LowPayDJ]

How about providing jobs for 1000's of out of work DJ's?

 

[TheBigA]

You can't provide jobs if you don't have any money. The small local owners I worked for never had any. They paid minimum wage and no retirement plan. All the idealists who wish for the small owners to come back forgot the bad old days. I once had an owner hand me a paycheck, and ask me not to cash it, because there was no money in the account.

 

[gr8oldies]

It's important to realize that in the hallowed radio days of yore, that there were many more job slots, however very few that paid anything close to a middle class wage. If you didn't make it big, you were off to a job at the bank, the factory, or to college for another career. Now, if I hear everyone correctly, all we need is for the gummint to come in, yank all of CC, Cumulus's, etc's stations away from them, hand them all to "local" owners, and these local owners would have enough financing that they would have a blank check to fill their stations with warm bodies. 24/7 live-local DJs. 20-person newsrooms! It would be 1972 all over again!
Of course we'd have all these stations that moved from bedroom communities sent back to those bedroom communities, necause as we all know people who live in Broownsburg, Indiana or Englewood, Ohio, never, EVER venture into the big bad city or surrounding suburbs to work, shop or play. It's all school board meetings, all the time!
Unfortunately, in the real world, assuming you even could buy any of these stations, guess what? The bank, venture capital firm, or whoever is financing the deal is very familiar with hard drives and satellites, and yes, they want to see a return on their investment. They won't be writing blank checks and saying "Here, Mr. Owner. Spend all you want!".

 

[SirRoxalot]

Moving Forward

Let's hope that the next round of owners aren't STUPID enough to pay 15X cash flow, and that the banks aren't STUPID enough to lend them money on a deal like that.

The primary reason that radio is in trouble is that most of the big companies have so much debt that an exhorbitant amount of their income is going to debt service instead of being used to produce better product.

Before consolidation, there were wide variances in pay scales - even at the same station. I know of small stations that paid a few key people very well - with full benefits and retirement. A lot of morning guys were in that position. Other dayparts paid a lot less, with a lot fewer benefits, because they were staffed by people on the way up, or on the way down. It was unlikely that somebody would last more than a year or two at that position.

At bigger stations, success bred better compensation. It really was a team effort, and those at the top of the heap made a pretty good living. Yes, even at those stations there were lower paying positions with fewer benefits. Once again, people either on the way up or on the way down occupied those positions until they either got something better, or got out.

The simple fact is that the consolidators overpaid badly for the properties they acquired, and the savings that they promised from centralized management never came about. Syndication and voice-tracking were an attempt to reduce programming costs. Unfortunately, it also appears to be reducing revenue a lot more than costs. It's becoming painfully obvious that their next move is likely to be additional centralized programming, distributed via syndication, in an attempt to cut costs and make up for their error in overpaying in the first place.

Several consolidators have already written down the value of their radio stations significantly. Maybe, if some of these guys are forced into bankruptcy, station values will get back to a reasonable number, and radio can stop paying money to bankers, and start paying money to the people that produce their profit.

 

[oaktree]

The people that "produce their profit" is not the DJs as you think. The people that "produce their profit" are the merchants, businesses, car dealers and "advertisers" -- local, regional and national.

Right now, no matter how good the talent ... advertisers aren't buying. Revenues are down. That's where the profit comes from. The more the revenue, the more the profit.

Talent, I hate to say this, but please understand ... is an expense ... no matter how you slice it. High priced talent is good ... if high priced rates lend the ability to sell out a daypart, thus making the "expense" worth it. If the revenue isn't there ... then it's a combination of management, sales, on-air and audience that makes or breaks the success of a station.

In today's over radioed, fragmented audience makeup ... in any size market ... radio is facing some tough, tough times ... with more to come.

Please try to look at it in another way than just "talent." It's about "stations" ... availability of audience and, most of all, advertisers spending money ... and lots of it.

 

[Goat Rodeo Cowboy]

What is intrinsically better about "local" radio vs. syndicated or network radio? I see so much pursuit of "localism" as if it were the Holy Grail of radio, yet fail to see how just being local for local's sake is of any value to the average listener.

//*** s n i p ***//​

Would someone, seriously, please explain why pure localism is such a wonderful quality?

David has asked the "industry saving" question.... and others have challenged this topic... and at our peril we ignore the question. In fact, there seems to be quite an effort to simply shout down the question in hopes of simply winning a debate by default.

People in any industry.... any line of work... get all wrapped up in the mechanics of how we do things. We cling to tradition. Some us cling to Live and Local. Live and Local can be a catalyst that allows the as-of-yet unidentified critical ingredient to blossom.

There is some element necessary if you are going to compound a mixture of what we refer to as "program content" and often we grab the most convenient terminology: LIVE AND LOCAL!!! But that is NOT the correct and workable definition. Live and local programming at one time often contained whatever the mysterious element is that puts the MAGIC in an audio stream intended to gather an audience.

MUSIC is not the 'holy grail' either, David. Music is a 'Pretender to the Throne' and since the rightful heir to the throne has not been identified, we assume that music should occupy the throne. Those who live in the sphere of large metro markets can easily assume that music is the mysterious magic ingredient. And as long as no one is smart enough to isolate, identify and name the ingredient that should be on the throne, music looks like the rightful king. There is no element contending to displace music.

I have spent a lifetime railing against Detroit and the auto industry. I inherited the obsession from my father. The American automobile industry is poised for a possible implosion. The Detroit Automobile industry had all the answers. They knew what the holy grail was. But they didn't know after all. My work life took a detour and I found myself having to learn about Operations Research, Total Quality Management, and "What is the Toyota Secret?"

Radio content needs it's own "Toyota Secret". I am confident that it is not music, and I am confident that it is something beyond Live and Local.

 

[aunti-terrestrial]

it would be nice to see some of these station get into the hands of local owners. who could maybe bring some local sound back to the radio.

What is intrinsically better about "local" radio vs. syndicated or network radio? I see so much pursuit of "localism" as if it were the Holy Grail of radio, yet fail to see how just being local for local's sake is of any value to the average listener.

Is Pandora local? Is American Idol local? (I know, not the zenith of culture, but 30 million people view it) Is Fox News or Lastfm? Does you city have a "city magazine?" What's its circulation vs. the combined numbers of all magazines sold or delivered in the market, from Field & Stream to Forbes and People?

Would someone, seriously, please explain why pure localism is such a wonderful quality?

Dave, I think you've forgotten the very simple fact that people like t-shirts. American Idol isn't going to stop by their local Hooters and hand out promotional items. People can't call Ryan Seacrest on the drive home and hear their own voices wishing their wife a happy anniversary. Houston, for instance, is a city that offers its guests and residents an incredible variety of activity, and tourism boards across America are touting the exclusive benefits of their particular locale. In order to be a good Houstonite, I have to want great things to originate in Houston.

When Los Lonely Boys are playing your local concert series, the fans get all excited if they win a Grammy a few years down the line. "Hey, we saw them when they were local!" It's the thrill of being included, for fans, that produces that kind of loyalty. Local is the edge that's needed to establish that emotional connection to the radio station, the drive that makes them change what they were planning for that afternoon to attend your station's blood drive; the reason people give a business a try and then and return to patronize it after the station van drives away.

We won't even get into traffic, weather, emergency information, and saying street names properly from another city.

Without local radio, ZZ Top wouldn't exist. In one of the great shames in our city's musical history, Destiny's Child had to get airplay outside of Houston until they were picked up nationally and fed back to us in the form of a must-play on some format's national chart position.

I convinced a friend with a then-struggling business to advertise with my last CC station. Because he was a small-potatoes account, he wasn't given the time of day by the sales person once the contract was signed. I worked my behind off to promote his business and I increased his revenue and repeat business, but I did it without any t-shirts or bumper stickers to put on his display case, because the sales person was giving all his promotional items to the big-money, national clients and ad houses. I didn't let the client down; I washed two of my own station-logo shirts in good condition and gave them to him and his wife---but I swore I'd never ask another friend to be treated like that again. The local advertiser/business owner is not the priority and hasn't been for a long time. So much for all that "superserving" of local advertising that was promised when consolidation laws were relaxed and sales forces combined. Remember that? Clients would be superserved because they'd get five station buys and demos instead of one. Instead, they're not served at all.

When you add in the syndication factor and the first two minutes of any stopset being national, local spots won't air until at least two minutes into any stopset. How is that superserving the community of operation?

I can't understand people who profess to love this business, but can't understand the importance of localism. It's hard to imagine anybody keeping a straight face while typing the bait. Which *sigh* I realize, I took. DE strikes again. I made a resolution that I wasn't going to be sucked in this year.

Hey, if I mention Ryan Seacrest, will the Sound Design down the street from my house give me 10% off my car stereo purchase?

 

[TheBigA]

The local advertiser/business owner is not the priority and hasn't been for a long time. So much for all that "superserving" of local advertising that was promised when consolidation laws were relaxed and sales forces combined. Remember that? Clients would be superserved because they'd get five station buys and demos instead of one. Instead, they're not served at all.

I think a lot of things have changed in 8 years, don't you? Bringing up so called "promises" from 8 years ago is pretty silly when the entire advertising marketplace has changed. And not just on the radio side.

Right now, the game is staying in business. No one wants to be the next Circuit City. So you make decisions that you wouldn't have made 8 years ago. They don't have to be permanent. They just have to keep you in business long enough to get to the other side.