RADIO ONE INC. Harvard Business School Case 201-025 Case Software 201-706 (4th edition) Copyright © 2000 by the President and Fellows of Harvard College This case was prepared as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Exhibit 2
Radio One's Acquisition Strategy
Market
W ashington D.C. Baltimore, MD Philadelphia, PA Detroit, MIa Atlanta, GA Cleveland, OH St. Louis. MO Richmond, VA Boston, MA
Number of Stations FM 2
2 1 2 2 1 1 7 1
TOTAL 19 Source: Adapted from numerous SEC 10-K Filings. a One station is located in Kingsley, MI.
AM 2
2 2 1
7
Year(s) of Acquisition
1980, 1987, 1995, 1998 1992, 1993 1997 1998 1999 1999 1999 1999 1999
Exhibit 3
African-American Demographic Information Faster Population Growth 1995-2010
) 25 % ( h t 20 w o r 15 G f 10 o e t 5 a R 0
21.2 13.3
Ge ner al P op ul at ion
A fri ca n-A mer ic ans
Population
Key Demographic Statistics
60% faster Population Growth Largest Minority Group in the United States Population projected to reach 40MM by 2010 150% faster Income Growth than General Population Source: Adapted from Company Reports.
Faster Income Growth 1980-1995 ) %12 ( 10 h t w 8 o r 6 G f 4 o e 2 t a R 0
10.7
4.3
G en era l P op ul at io n
A fr ic an- Am eri ca ns
Population
) 25 ( R G f h % t a 20 e w o r 15 10 5 0
Faster Population 1995-2010 Growth General13.3 Population Population African-Americans 21.2
) ( R G f h % t a 12 e w o r 10 8 6 4 2 0
10.7 General4.3 Populat ion Population meric ans Faster 1980-1995 Income GrowthA fric an-A
Exhibit 4
Rising Urban Format Power Ratios 1991 – 2002
a
0.90 0.85 0.80
o i t 0 . 7 5 a R r 0 . 7 0 e w 0 . 6 5 o P
0.71
0.73
0.74
0.76
0.77
0.78
0.80
0.81
0.82
0.84
0.85
0.70
0.60 0.55 0.50
9 1 9 1
2 9 9 1
3 9 9 1
9 4 9 1
5 9 9 1
6 9 9 1
7 9 9 1 Year
Source: Adapted from Company Reports. a
Years 2000– 2002 Estimated
8 9 9 1
9 0 2 9 0 0 1 0 0 9 0 0 1 2 2 2
Exhibit 5
Radio One's Turnaround Record
Washington DC Baltimore Philadelphia Atlanta
Cost(mm) $46.20
96BCF $6.30
Multiple 7.3x
99BCF $14.90
Multiple 3.1x
$13.70 $20.00 $13.50
$3.30 $0.20 $1.20
4.2x 100x 11.2x
$11.80 $1.70 $6.90
1.2x 11.8x 2.0x
Source: Adapted from Company Reports.
Exhibit 6
Radio One, Inc. and Subsidiaries—Consolidated Statements of Operations 1997
1998
Revenue
Broadcast revenue, including barter revenue of $1,010,000, $644,000 and $1,821,000, respectively Less: Agency commissions Net broadcast revenue Operating Expenses Program and technical
Selling, general and administrative Corporate expenses Stock-based compensation Depreciation and amortization Total operating expenses Operating income Interest expense, including amortization of deferred financing costs Other income, net (Loss) income before (benefit) provision for income taxes and extraordinary item (Benefit) Provision for income taxes (Loss) income before extraordinary item Extraordinary item Loss on early retirement of debt Net (loss) income Net loss applicable to common shareholders Basic and diluted loss per common share Loss before extraordinary item Net loss Weighted average shares outstanding Basic and diluted Other Data: Broadcast cash flow
EBITDA (before non-cash compensation) After-tax cash flow Capital expenditures
Source: Company Reports
$ 36,955,000 4,588,000 $ 32,367,000
$ 52,696,000 6,587,000 $ 46,109,000
$
$
5,934,000 12,914,000 2,155,000 -5,828,000 $ 26,831,000 $ 5,536,000
8,015,000 16,486,000 2,800,000 -8,445,000 $ 35,746,000 $ 10,363,000
8,910,000 415,000
11,455,000 358,000
$ (2,959,000)
$
--
(734,000) (1,575,000)
$ (2,959,000)
$
841,000
1,985,000 $ (4,944,000) $ (6,981,000)
-$ 841,000 $ (2,875,000)
($0.53) ($0.74)
($0.31) ($0.31)
9,392,000
9,392,000
$ 13,519,000 $ 11,364,000 $ 2,869,000 $ 2,035,000
$ 21,608,000 $ 18,808,000 $ 7,248,000 $ 2,236,000
1999
$ 93,260,000 11,557,000 $ 81,703,000
$ 13,576,000 30,683,000 4,155,000 225,000 17,073,000 $ 65,712,000 $ 15,991,000 15,279,000 2,149,000 $
2,861,000 2,728,000
$
133,000
-$ 133,000 $ (1,343,000) ($0.08) ($0.08) 16,137,000
$ 37,444,000 $ 33,289,000 $ 16,303,000 $ 3,252,000
15.94%
12.96%
11.10%
Exhibit 7
Radio One, Inc. and Subsidiaries—Consolidated Balance Sheets
1997 Assets Current assets: Cash and equivalents Investments, available for sale Trade accounts receivable, net of allowance for doubtful accounts of $1,243,000 and $2,429,000, respectively Prepaid expenses and other Deferred income taxes Total current assets Property and equipment, net Intangible assets, net Other assets Total assets Liabilities and Stockholder Equity Current liabilities: Accounts payable Accrued expenses Income taxes payable Total current liabilities Long-term debt and deferred interest, net of current portion Deferred income tax liability Total liabilities Commitments and contingencies Senior cumulative redeemable preferred stock:
Series A, $.01 par value, 140,000 shares authorized, 84,843 shares issued and outstanding
$
$
$
$
$ $ $
$
8,500,000 $
1998
1999
4,455,000 $ 6,221,000 -256,390,000
8,722,000 12,026,000 19,833,000 315,000 334,000 1,035,000 -826,000 984,000 17,537,000 $ 17,641,000 $ 284,463,000 4,432,000 6,717,000 15,512,000 54,942,000 127,639,000 218,460,000 2,314,000 1,859,000 9,101,000 79,225,000 $ 153,856,000 $ 527,536,000
258,000 $ 3,029,000 -3,287,000 $
1,190,000 $ 3,708,000 143,000 5,041,000 $
1,663,000 6,941,000 1,532,000 10,136,000
74,954,000 131,739,000 82,626,000 -15,251,000 14,518,000 78,241,000 $ 152,031,000 $ 107,280,000
9,310,000
10,816,000
--
Series B, $.01 par value, 150,000 shares authorized, 124,467 shares issued and outstanding 13,658,000 15,868,000 -Stockholders’ equity: Common stock—Class A, $.001 par value, 30,000,000 shares authorized, 0 and 17,221,000 shares issued and outstanding --17,000 Common stock—Class B, $.001 par value, 30,000,000 shares authorized, 1,572,000 and 2,867,000 shares issued and outstanding -2,000 3,000 Common stock—Class C, $.001 par value, 30,000,000 shares authorized, 3,146,000 and 3,184,000 shares issued and outstanding -3,000 3,000 Accumulated comprehensive income adjustments --40,000 Additional paid-in capital --446,400,000 Accumulated deficit (21,984,000) (24,864,000) (26,207,000) Total stockholders’ (deficit) equity $ (984,000) $ (1,825,000) $ 420,256,000 Total liabilities and stockholders’ equity $ 79,225,000 $ 153,856,000 $ 527,536,000
Source: Company Reports
0.156626278
Current Assets $ 17,222,000 #######
#######
Current Liability $ 3,287,000 Work. Cap $ 13,935,000 103.08% 43.05%
####### #######
####### #######
53.61% 25.12%
46.60% 21.36%
23.24%
Exhibit 8
Ticker
Radio Industry Trading Multiples as of March, 2000 based on 2 001E forecasts
Company
BCF
a
a
EBITDA
After-Tax Cash
13.7 15.8 15.4 15.7 17.9 18.7 19.2 12 17.7 44.5 19.4 24.2 11.4 25.3 19.4
Flow 15.4 22.3 14.4 21.7 20.1 24.2 37.2 13.2 21.1 59.7 26.9 36.5 14.5 38.6 26.1
b
BBGI CBS AFM CITC CCU CXR CMLS EMMS ETM HBCCA INF ROIA SGA WOM
Beasley Broadcasting Group CBS AMFM Inc Citadel Communcations Clear Channel Communic. Cox Radio Cumulus Media Emmis Broadcasting Entercom Communications Hispanic Broadcasting Infinity Broadcasting Radio One Saga Communications Westwood One AVERAGE
11.8 15.1 14.7 14.6 17.2 17.4 17.7 11 16.6 42.1 18.8 22.1 9.9 24.4 18.1
Source: Credit Suisse First Boston, Radio One, Inc. Equity Research Report, March 9, 2000 and casewriter estimates. a
BCF & EBITDA: Adjusted Market Value Multiple to 2001
b
After-Tax Cash Flow: Current Price as a Multiple of 2001
c
Asset betas are equity betas adjusted for leverage by multiplying the equity beta by the equity-to-value ratio and adding (assumed to equal 0.25) times the debt-to-value ratio.
Asset Beta
NA 1.06 0.96 0.68 0.65 0.27 0.83 0.55 0.3 1.23 0.82 0.82 0.26 1.29 0.75
the debt beta
c
Exhibit 9
Radio One, Inc. Actual and Projected Financial Performance of Existing Markets and Potenti ----Pro Forma---1999
Gross Revenue – Existing Markets Washington Baltimore Philadelphia (WPHI) Philadelphia (WPLY) Detroit Atlanta Cleveland St. Louis Richmond Boston Existing Gross Revenue
2000
----------------------Projected-------2001 2002 2003
32,221 25,162 6,239 8,978 8,309 15,811 2,415 -10,713 -109,848
34,812 26,952 7,277 9,500 11,075 17,584 5,488 1,028 13,226 3,401 130,343
37,597 29,108 8,151 10,450 12,736 19,782 6,311 2,056 15,210 4,081 145,482
41,357 32,019 8,966 11,495 14,010 21,760 6,942 2,467 17,492 4,693 161,201
45,492 35,221 9,863 12,645 15,130 23,936 7,497 2,837 19,241 5,162 177,024
1,002 2,708 5,173 38,626 1,501 13,370 36,618 4,756 4,614 12,118 120,486
1,250 2,750 5,814 41,117 1,634 13,750 39,547 6,120 4,864 13,538 130,384
2,250 3,200 6,600 45,221 1,634 15,000 43,502 8,500 5,418 15,163 146,488
3,250 3,400 8,200 49,517 2,043 16,500 47,852 11,700 5,750 16,679 164,891
4,250 3,600 9,500 54,221 2,553 17,750 52,638 13,500 6,250 18,347 182,609
(4,098)
(5,080)
(5,486)
(5,790)
(6,369)
(3,232)
(4,018)
(4,339)
(4,483)
(4,931)
Philadelphia (WPHI)
(800)
(1,078)
(1,207)
(1,255)
(1,381)
Philadelphia (WPLY)
(921)
(1,078)
(1,207)
(1,379)
(1,517)
Detroit
(818)
(1,483)
(1,705)
(1,961)
(2,118)
Atlanta
(2,080)
(2,436)
(2,741)
(3,046)
(3,351)
(166)
(632)
(727)
(972)
(1,050)
--
(163)
(326)
(345)
(397)
(1,607)
(1,982)
(2,279)
(2,449)
(2,694)
--
(484)
(581)
(657)
(723)
(13,722)
(18,434)
(20,598)
(22,337)
(24,531)
(150)
(189)
(313)
(435)
(549)
Augusta
(406)
(357)
(379)
(402)
(426)
Indianapolis
(519)
(607)
(702)
(882)
(1,078)
Los Angeles
(5,155)
(5,496)
(6,045)
(6,619)
(7,248)
--
--
--
--
--
Cleveland
(1,707)
(1,650)
(1,800)
(1,980)
(2,130)
Houston
(4,479)
(4,746)
(5,220)
(5,742)
(6,317)
Gross Revenue – Potential New Markets Charlotte Augusta Indianapolis Los Angeles Miami Cleveland Houston Dallas Greenville Raleigh New Markets Gross Revenue Direct Expenses – Existing Markets Washington
a
Baltimore
Cleveland St. Louis Richmond Boston Existing Gross Expenses Direct Expenses – Potential New Markets Charlotte
Miami
a
Dallas
(547)
(825)
(1,063)
(1,463)
(1,688)
Greenville
(566)
(603)
(672)
(729)
(791)
(1,565)
(1,770)
(1,982)
(2,180)
(2,398)
ROI Direct Expenses Net Revenue – Existing Markets Washington Baltimore Philadelphia (WPHI) Philadelphia (WPLY) Detroit Atlanta Cleveland St. Louis Richmond Boston Existing Net Revenue a Net Revenue – Potential New Markets Charlotte Augusta
(15,094)
(16,243)
(18,176)
(20,432)
(22,624)
28,123 21,930 5,439 8,057 7,491 13,731 2,249 -9,106 -96,126
29,732 22,934 6,199 8,422 9,592 15,148 4,856 865 11,244 2,917 111,909
32,111 24,769 6,944 9,243 11,031 17,041 5,584 1,730 12,931 3,500 124,884
35,567 27,536 7,711 10,116 12,048 18,714 5,970 2,122 15,043 4,036 138,863
39,123 30,290 8,482 11,127 13,012 20,585 6,448 2,440 16,547 4,440 152,494
852 2,302
1,061 2,393
1,937 2,821
2,815 2,998
3,701 3,174
Indianapolis Los Angeles Miami Cleveland Houston Dallas Greenville Raleigh New Markets Net Revenue
4,654 33,471 1,501 11,663 32,139 4,209 4,048 10,553 105,392
5,207 35,621 1,634 12,100 34,802 5,295 4,261 11,769 114,143
5,898 39,176 1,634 13,200 38,282 7,438 4,746 13,181 128,313
7,318 42,898 2,043 14,520 42,110 10,238 5,021 14,499 144,460
8,422 46,973 2,553 15,620 46,321 11,813 5,459 15,949 159,985
Washington Baltimore
13,480 9,860
13,827 10,260
14,864 11,030
15,734 11,737
16,316 12,121
Philadelphia (WPHI) Philadelphia (WPLY) Detroit Atlanta Cleveland St. Louis Richmond Boston Existing Operating Expenses
3,779 5,815 6,421 6,799 1,774 -5,914 -53,842
3,957 3,622 6,578 7,503 3,791 1,440 7,648 2,243 60,869
4,254 3,743 7,071 8,066 4,075 1,548 8,222 2,411 65,284
4,618 3,791 7,495 8,393 4,234 1,912 9,627 2,783 70,324
4,926 3,853 7,776 8,716 4,451 2,199 10,319 2,998 73,675
665 1,361
1,023 1,584
1,249 1,669
1,461 1,758
1,659 1,851
2,954 14,448 510 4,862 10,129 4,012 1,919
3,206 15,621 584 4,600 10,592 4,195 1,928
3,463 16,176 584 4,700 11,046 4,938 2,071
3,848 16,584 862 4,958 11,469 5,238 1,945
4,255 17,581 1,224 5,101 11,850 5,500 1,922
Raleigh
Operating Expenses – Existing Markets
Operating Expenses – Potential New Markets
Charlotte Augusta Indianapolis Los Angeles Miami Cleveland Houston Dallas Greenville
a
Raleigh New Markets Operating Expenses
5,516 46,376
5,769 49,102
5,981 51,877
6,627 54,750
7,077 58,020
14,866 11,846 1,658
15,904 12,673 2,242
17,246 13,738 2,689
19,833 15,799 3,092
22,808 18,169 3,556
BCF – Existing Markets
Washington Baltimore Philadelphia (WPHI)
Philadelphia (WPLY) Detroit Atlanta Cleveland St. Louis Richmond Boston Existing BCF
2,500 1,069 6,933 470 -3,192 -42,534
4,800 3,013 7,645 1,066 -575 3,596 674 51,038
5,500 3,959 8,975 1,510 182 4,709 1,090 59,598
6,325 4,553 10,321 1,737 209 5,415 1,254 68,538
7,274 5,236 11,869 1,997 241 6,228 1,442 78,820
187 941 1,700 19,023 991 6,800 22,009 197 2,129 5,037 59,014
38 809 2,001 20,000 1,050 7,500 24,210 1,100 2,333 6,000 65,041
688 1,152 2,435 23,000 1,050 8,500 27,236 2,500 2,675 7,200 76,436
1,354 1,240 3,470 26,314 1,181 9,563 30,641 5,000 3,076 7,872 89,711
2,042 1,323 4,167 29,393 1,329 10,519 34,471 6,313 3,538 8,871 101,966
Total BCF
101,548
116,079
136,034
158,249
180,786
Corporate Expenses EBITDA Non-cash Compensation Depreciation and amortizationb
6,000 95,548 225 107,520
6,000 110,079 0 107,520
6,900 129,134 0 107,500
7,935 150,314 0 107,500
9,125 171,661 0 107,500
EBIT
(12,197)
2,559
21,634
42,814
64,161
a
BCF – Potential New Markets
Charlotte Augusta Indianapolis Los Angeles Miami Cleveland Houston Dallas Greenville Raleigh New Markets BCF
Source: Adapted from company reports a
Potential acquisitions in Charlotte and Augusta were from Davis Broadcasting; in Indianapolis from Shirk, IBL,LLC; and the remaining potential acquisitions were from Clear Channel Communications, Inc. b Includes about $90 million of tax deductible depreciation and amortization in each year beginning 2001 a 2015, as a result of the potential acquisitions.
Growth Rate BCF Corp Expenses
2001 2002 2003 2004 2005 15 15 15 15 14.090909 76,436 89,711 101,966 115,277 131,521 2025.554 2377.342 2702.099 3054.841 3485.2953
Depreciation PBT Tax PAT Capex NWC(gross) Delta NWC Depreciation FCFE CoA TV Final FCFE DCF value
90140 90280 90420 90560 90700 -15,730 -2,946 8,844 21,662 37,335 -5348.04836 -1001.76 3006.926 7365.134 12693.996 -10,382 -1,945 5,837 14,297 24,641 2100 2100 2100 2100 2100 17580.28 20633.53 23452.18 26513.71 30249.733 17580.28 90140 60,078 11.975 3416190.098 60,078 $1,463,005.09
3053.25 90280 83,182
2818.65 90420 91,338
83,182
91,338
3061.53 3736.0228 90560 90700 99,695 109,505
99,695
109,505
l New Markets ------------2004
50,042 38,743 10,849 13,909 16,341 26,330 8,097 3,064 20,780 5,575 193,730 4,700 3,800 11,000 59,372 3,191 19,000 57,743 15,188 6,500 20,182 200,676 (7,006) (5,424) (1,519) (1,669) (2,288) (3,686) (1,134) (429) (2,909) (781) (26,845) (607) (452) (1,257) (7,938) -(2,280) (6,929)
(1,898) (858) (2,638) (24,857)
43,036 33,319 9,330 12,240 14,053 22,644 6,964 2,635 17,871 4,795 166,887 4,093 3,348 9,743 51,436 3,191 16,720 50,814 13,289 5,642 17,544 175,820 16,807 12,425 5,240 3,875 8,032 8,994 4,667 2,358 10,709 3,137 76,244 1,781 1,949 4,639 18,642 1,313 5,149 12,035 5,900 1,574
0.909091
7,561 60,543 26,229 20,894 4,090
8,365 6,021 13,650 2,297 277 7,162 1,658 90,643 0.163375
4083.04 5803.95 1720.91 65,041 0.026459
2,312 1,399 5,104 32,794 1,878 11,571 38,780 7,389 4,068 9,982 115,277 0.143293 205,920 10,494 195,426 0 107,500
0.050723 0.050142 0.050474 0.050962 8% BCF old +X% BCF new =5%(BCFold+BCFnew)
87,926
Inc and d ending in 0.146784 0.909091
0.53
2006 2007 2008 2009 2010 2011 2012 2013 2014 13.181818 12.27273 11.36364 10.45455 9.545455 8.636364 7.727273 6.818182 5.909091 148,857 167,126 186,118 205,576 225,199 244,648 263,552 281,522 298,157 3944.7206 4428.845 4932.123 5447.754 5967.767 6483.165 6984.137 7460.328 7901.166
90840 90980 91120 91260 91400 91540 91680 91820 91960 54,073 71,717 90,066 108,868 127,831 146,625 164,888 182,241 198,296 18384.704 24383.91 30622.35 37015.08 43462.54 49852.36 56061.99 61962.11 67420.65 35,688 47,333 59,443 71,853 84,368 96,772 108,826 120,279 130,875 2100 2100 2100 2100 2100 2100 2100 2100 2100 34237.198 38439.04 42807.11 47282.4 51795.72 56268.98 60617.04 64750.02 68576.16 3987.4648 4201.838 4368.072 4475.289 90840 90980 91120 91260 120,440 132,012 144,095 156,538
120,440
132,012
144,095
156,538
4513.32 4473.266 4348.058 91400 91540 91680 169,155 181,739 194,058
4132.98 3826.138 91820 91960 205,866 216,909
169,155
205,866
181,739
194,058
216,909
2015 5 313,065 8296.224
92100 212,669 72307.41 140,361 2100 72004.97 3428.808 92100 226,933
3,643,123
