Radio One Inc. Case Study And Analysis Help With Solution

Radio One (Nasdaq: ROIA, ROIAK), the largest radio group targeting African-Americans in the country, had achieved tremendous success by purchasing underperforming radio stations, changing them to urban formats, and using its programming, marketing, and operating skills to cut unnecessary costs. Under the leadership of Alfred Liggins III, chief executive officer and president, the company posted consistent, above-average, same-station broadcast revenue and cash flow growth, and grew from 7 stations in 1995 to 28 in 1999.

In October 1999, two of the nation’s largest owners of radio stations—Clear Channel Communications Inc. (NYSE: CCU) and AMFM Inc (NYSE: AFM)—announced plans to merge. Scott Royster (HBS ’92), chief financial officer and executive vice president of Radio One, knew that the Federal Communications Commission (FCC) would require Clear Channel to divest some of its radio assets after the proposed merger. The divestitures were an opportunity for Radio One to acquire 12 established urban stations in the top 50 markets. Acquiring those stations would more than double the size of Radio One and help build its national platform.

Liggins and Royster had to decide if Radio One should purchase the stations and how much to offer.

RADIO ONE

Please use the template included in the folder to work on your Radio One case. You are asked to value the stations Radio One is considering purchasing.

• Perform the valuation from Radio One’s point of view

• Pay attention to the strategic benefits of the acquisitions, but try to quantify them to include in the FCF calculations

o Purchase power
o SG&A

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• Please assume purchase is financed through 100% equity, as the focus in this case is cash flow calculation issues. As such, in two places, you are asked to “normalize” cash flows. What is asked of you is to remove a distorting factor present in those cash flows

• Identify the potential risks, not only from the financial point of view, but also from the “management and integration” point of view

• Provide the price you are willing to pay and the incremental value for Radio One

Additional questions:

Why has Radio One been so successful in the last few years? Name one reason and leave other to your classmates. (at least, at the beginning of this thread)

Why have we seen such a consolidation boom in the last decade? According to the evolution of M&A multiples in the industry, could we say there was a bubble?

What implies from a business point of view paying 20x BCF for a company? Is this reasonable? How could this be?

In general, which are the most relevant factors or pre-conditions between 2 companies for synergies to exist in a merger/acquisition?

Can you think of any failed merger in your sector or industry? Which do you think were the reasons behind synergies not been materialized as initially planned?

Taking into account previous questions, can you think of the main risks that RO is facing when acquiring the different radio stations?

Product Code :Case66

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