Final Exam - CorporateValuation

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Economics

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Feb 20, 2024

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1.) A potential benefit of the acquisition is that it would serve as a means for Radio One to achieve growth by accessing new markets. If this were to successfully occur, Radio One would have the largest share African American listeners of any radio station in the country. This chance of growth may not present itself again as the industry typically does not see these sorts of divestitures. Additionally, Radio One would likely see additional synergies in the form of cost reduction as vendor agreements and other production costs would see economies of scale with the newly acquired channels. The risks of the proposed acquisitions are the market price and capital commitments required. Rumors surrounding the acquisition have driven the stock price of Radio One to very high multiples. The price paid for these channels could have a drastic impact on Radio One stock and may force Radio One to overpay to avoid dilution. This purchase price along with the upfront capital required to bring up the acquired channels may make it difficult to achieve the financial returns expected. 2.) The metrics I focused on in evaluating these cash flows were 1. the growth rates in revenue and expenses and 2. The margins. I wanted to see revenue growth projections that weren’t too high, but still showed growth. Additionally, I expected to see an increase/decrease in the margins/expenses as this is an area that Radio One should see come up/down due to the cost savings that would be seen through the acquisition. Both criteria were satisfied, so I believe these cash flows are a reasonable projection for this acquisition.

3. Assumptions: No Debt involved in acquisition or WACC calculation. Equity Beta back solved via Asset Beta. 6.5% risk premium. 34% tax rate. Corporate expenses were allocated based on New Markets BCF/Total BCF.

We took yearly NWC as a % of Net Revenue from Radio One’s financials and applied that average rate to the projected net revenue for new markets. We removed “Investments, available for sale” as this skewed the average. This results in a value of just over $1.25Bil . 4. For comparable transactions we look to similar industry acquisitions. Per the case, Infinity Broadcasting paid 1.4Bil, or 21.5x BCF to acquire 18 stations from Clear Channel. Cox Radio paid $380Mil, or 18.4x BCF for stations as well. At 21.5x, we would value this acquisition at $1.398B . At 18.4x, we would value at $1.196Bil . Seeing how close this is to the Infinity Broadcasting acquisition would lend support that this is a fair acquisition price based on market trends. 5. Infinity paid $1.4b for 18 stations - $78Mil per station. Cox paid $380Mil for 7 stations - $54M per station. At these rates, Radio One can expect a reasonable range to be between $1.134Bil and $1.638Bil. As our valuation lies in the $1.25Bil to $1.398Bil range, Radio One should consider making an offer towards the lower bound ($1.134Bil). It would still be reasonable to expect to pay slightly higher than this lower bound, but Radio One should avoid overpaying if the price were to creep above $1.4M as it may not be worth it financially.

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