Under Pressure

BY KIMBERLY M. RANDOLPH & SAMUEL CALVERT

Despite high hopes in early 2020, radio has been on a downward

rollercoaster ride. When will it start to move up? This is the first in a series of stories on the performance of various industry sectors that will run over the next five issues.

THERE WAS SOME LEVEL OF OPTImism regarding how the radio industry would fare in 2020 as last year drew to a close. After all, there was a relatively healthy economy, a strong core advertising market and expectations of record political spending. This was reflected in the market performance of the radio industry in general. It closely mirrored the S&P 500 Index (S&P) through the first two months of 2020 and hit an index high of 4.9% on Jan. 22.

The index was bolstered in large part by Beasley Broadcast Group Inc. (BBGI), which cited a 28.5% year-over-year increase in digital revenue. While BBGI supported the index, its trend reflected a recovery of the stock rather than a market outperformance. BBGI’s share price had steadily decreased in the prior three years.

That optimism for the radio industry turned sour quickly in the last part of the first quarter, when the World Health Organization declared COVID-19 a pandemic. The radio industry’s equity performance was much more significantly impacted by the crisis than the overall S&P. By June 30, radio stocks were down 23.5% from their value on March 11. In comparison the S&P was down 13.1% in the same period.

Radio’s equity performance indicates shareholder skepticism regarding the sector’s ability to maintain market share. There are some positive aspects to the business, such as its local presence and ties to individual communities. However, its audience may have shifted to other media choices as a huge segment of the population began working at home rather than commuting to work. In addition, lack of live sports and other local-event-driven activities also have had a negative impact on listener levels.

A heavy debt load has increased the pressure, further hampering stocks. Over the past three years, several companies in the radio broadcast industry have made significant strides to de-lever their balance sheets. But the industry remains just under 3.0x more levered than the S&P.

Prior to the pandemic, radio stocks averaged a net debt/EBITDA (earnings before interest, taxes, depreciation and amortization) of 5.4x, which is below the five-year historical average of 6.3x. With further weakness expected in the radio advertising market, these multiples are set to increase, bringing them back in line with the historical average.

TRANSACTION ACTIVITY

As the public market slumped, transaction activity did as well, both in terms of the dollar value of transactions and the number of stations sold. The total dollar value for transactions announced through May was $49.1 million (223 stations) – well below results for the last 10 years, comparing the same five-month period. That’s according to data reported by Kagan, a media research

700

600

500

400

300

200

100

0

393

FY ’10 602

FY ’11 377

FY ’12

Radio Station Transactions Year to Date Through May

Number of Stations Dollar Value (in millions)

299 457

273 427

426

291 405

223

$3,500.0

$3,000.0

$2,500.0

$2,000.0

$1,500.0

$1,000.0

$500.0

FY ’13 FY ’14 FY ’15 FY ’16 FY ’17 FY ’18 FY ’19 YTD ’20

SOURCES: Industry Data, Kagan Estimates

$0.0

11.00x

10.00x

9.00x

8.00x

7.00x

6.00x

5.00x

6/30/17 1/8/18

group within the TMT offering of S&P Global Market Intelligence.

By comparison, the next lowest year-to-date comparison was May 2016 at $101.5 million, more than double the dollar volume. Given that the radio industry does not have a solid growth story or recent history of financial health (mostly hampered by a few industry players), it is unlikely that a rise in transaction volume will occur anytime soon.

Even prior to the pandemic, transaction trends in the radio industry were not increasing. Multiples, both in the public market and private market, trended downward over the past three years, finishing 2019 at around 6.5x, which was relatively consistent between broadcast cash flow (BCF) and EBITDA.

Private-market transactions trended down from around 7.0x to 6.5x BCF over the last three years. But the situation was much more dramatic for public market stocks, which trade on an enterprise value and EBITDA basis. Three years ago they traded close to 9.5x EBITDA and were trading closer to 6.0x in late June 2020.

While results have varied, the 100-day moving average of the multiple captures the downward trend that has defined the radio industry for the past three years. This trend is set to continue as the decline grew steeper heading into the third quarter, ending with a 100-day moving average of 6.2x.

LOOKING AHEAD

The timing and velocity of an economic rebound is still heavily debated. Will it recover quickly, or will the lag continue into 2021? While the overall health of the economy

more directly impacts local and national core advertising dollars, the big unknown for all media is political.

Certainly, 2020 is expected to be a record political year due to the increased polarization between Democrats and Republicans (and even within the parties themselves). And there may be new opportunities from issue-oriented ads due to the rise of social justice movements, like Black Lives Matter and defunding the police.

Given the volume of political dollars expected, the radio industry could stand to benefit from the “spill-over” dollars that traditionally go to local TV sources.

This could provide a solid finish to the year for radio. However, a longer-term growth strategy needs to be more clearly defined. Radio still plays a significant role in the media ecosystem. But as alternative forms of media become more prevalent and more easily accessible, radio needs to continue to re-invent its position in the market.

This could drive topline growth and help it maintain market share. Accentuating its ties to local communities – and appeal to a wider audience base than just commuters – could help it during the upcoming election. And that could, in turn, help radio compete with stocks that have done well during the COVID crisis and attract investor attention.

Enterprise Value / EBITDA

COVID-19 INDEX: CMLS, ETM, SGA, BBGI, SALM, UONE.K, EMMS, IHRT, TSQ, EVC — EV/EBITDA 100 Day Moving Average

6/1/18 1/1/19 6/3/19 1/1/20 6/26/20

SOURCE: Capital IQ

A longer-term growth strategy needs to be more clearly defined. Radio still plays a significant role in the media ecosystem.

Kimberly M. Randolph is a managing director and Samuel Calvert is an analyst at the valuation advisory Stout. They can be reached at krandolph@stout.com or (646) 810-4305 and scalvert@stout.com or (646) 810-4403.