The long-dormant radio industry stands to be reawakened and reassessed this year through a series of M&A maneuvers not unlike the positioning technique of triangulation. Instigating the anticipated return to industry consolidation and revaluation is Cumulus Media Inc., the country's No. 2 radio broadcaster. The Atlanta-based company handily secured first-mover status late last year by going public with designs on Citadel Broadcasting Corp., the country's No. 3 radio broadcaster.
That Citadel is averse to Cumulus' advances borders on understatement. Within hours of Cumulus' public confirmation of having made not one, but two overtures to buy Citadel, the target spurned them as "neither credible nor at an appropriate valuation." Las Vegas-based Citadel also criticized a pro-Cumulus letter that a major shareholder sent to the company's directors, denouncing it as "full of baseless claims" and belittling it as "nothing more than a heavy-handed ploy." But no one who knows this shareholder, R2 Investments LDC, expects it to go away.
Although run by the exceedingly private Geoffrey Raynor, distressed-debt fund R2 (as in R-squared) has never been shy about public confrontation. In a countersuit, fittingly, no less than Carl Icahn accused Raynor of being a "serial suer" -- an epithet based on the 45-plus legal complaints that the Fort Worth resident has filed in the past five years on behalf of his investment entities, a number of them aimed at Icahn. In fact, R2 has already sued Citadel. And in its letter to Citadel's board, the distressed-debt fund expressed its willingness to relitigate should the directors fail to give Cumulus' merger proposals their due: "We will once again seek every legal means to address what is, in our view, a breach of your fiduciary duty to equity holders in favor of your self-interest in preserving your jobs."
R2's letter obviously resonates with Cumulus, which aspires to be an aggregator, as it and others in the industry used to be. "The radio industry is now almost 100 years old," says Cumulus chief financial officer J.P. Hannan. "Any other industry of that maturity is a lot more consolidated, but we still have 25 to 50 major players carving up the space." That radio remains so fragmented, Hannan adds, has made it extremely difficult for broadcasters to exercise any sort of pricing power.
Yet R2's letter seems likely to resonate with Citadel's other shareholders, too. This is because the broadcaster, which only last June emerged from Chapter 11 bankruptcy, finds itself owned by two kinds of investors: banks, whose Citadel debt is now Citadel equity; and distressed-debt funds such as R2, whose loan-to-own practices drew them to a wobbly though still prebankrupt Citadel like bees to honey. Banks don't like to own equity; distressed-debt funds do, provided it's the kind issued as companies emerge from bankruptcy. Both, however, will eagerly sell such holdings to anyone offering terms reasonably construed as opportunistic.
Were it not for R2, Cumulus and Citadel might play this cat-and-mouse game for years. But now their relationship must also accommodate the metaphorical equivalent of a junkyard dog. By rallying Citadel's equity-owning banks and other distressed-debt funds, R2 is lowering the likelihood of a sustained standoff between Cumulus and Citadel. All it needs is a bidder to step up with an acceptable offer.
This dynamic, according to an increasing number of observers and dealmakers, already qualifies as a tripartite radio play: Cumulus in the role of wannabe aggregator, Citadel in the role of reluctant suitor. Added to the mix is R2 in the role of catalyst. And while the interactions of these three are impossible to predict, they promise to reshape and revalue an industry long paralyzed by a scarcity of capital and a lack of consensus on what constitutes an appropriate valuation. Besides, the combination of Cumulus and Citadel is a really good idea.
Lew Dickey Jr., Cumulus' chairman, president and CEO, has a history of overreaching. He did so after co-founding Cumulus in 1997, when he racked up small-market radio deals at the preposterous rate of nearly one a week. But the faulty integration of these acquisitions, compounded by accounting irregularities, almost cost Dickey his company in 2000. Cumulus stock, issued at $14 per share in 1998 to finance the rapid-fire expansion, fell from a high of $53 per share in the fourth quarter of 1999 to $3.19 in the fourth quarter of 2000. What's more, with additional equity offerings out of reach and a debt-to-Ebitda ratio over 14, Cumulus had to scramble to cover pending deals with Connoisseur Communications Partners LP and industry leader Clear Channel Communications Inc.
That's when Dickey, who as Cumulus' chief dealmaker held the title of executive vice chairman, installed himself as CEO. He got Connoisseur to extend the closing date on its 35 radio stations and Clear Channel to restructure its deal for 11 stations. Terms of the latter were basically reversed: Cumulus wound up trading 99 of its stations for 14 from Clear Channel, plus $220 million in cash. As Dickey admitted in this publication a decade ago, "That deal saved our bacon."
His personal life at the time was similarly erratic. Kimberley Kennedy, a former fiancée of Dickey's, recounts this period in "Left at the Altar: My Story of Hope and Healing for Every Woman Who Has Felt the Heartbreak of Rejection." The book, published in 2009, revisits the author's horror 12 years earlier on being ditched by Dickey the day before they were to marry. It happened at the wedding rehearsal, when Dickey's sister summoned the bride-not-to-be into the priest's office. There, Dickey told her, "I just can't do it." So he didn't.
But that didn't stop his family from trying to secure the wedding band "for a gathering at his home for his out-of-town guests," writes Kennedy, a prominent Atlanta newscaster throughout her courtship with Dickey. Then, when her life was beginning to feel "pretty normal again," the jilted bride discovered in 2000 that People magazine had designated her ex-beau one of the year's most eligible bachelors. "Did he not think it would be more respectful, more considerate to someone he had professed to love to decline the offer," she continues, "... even though it was a very cool thing for him to do?"
Dickey, now 49, seems to have steadied himself over the years. As one of his fans in private equity says of the Stanford University alum who went on to earn a Harvard M.B.A.: "He's the all-American boy packaged into a radio CEO. And his influence on the industry is substantial."
It's also substantial on private equity, with which Cumulus partnered in 2006 to acquire 33 radio stations from Susquehanna Pfaltzgraff Co. for $1.2 billion.
The acquisition vehicle in that transaction, Cumulus Media Partners LLC, consisted of publicly traded Cumulus and three PE firms: Bain Capital LLC, Blackstone Group LP and Thomas H. Lee Partners LP. The three financial sponsors put up cash for 25% equity stakes. Cumulus' contribution consisted of radio operations in Houston and Kansas City, Mo. The broadcaster also provided management services to CMP for an annual fee of $4 million or, if greater, 4% of CMP's adjusted earnings.
At one point, the overarching idea was for CMP to absorb Cumulus, too. But this take-private plan was scrapped, as was a later plan in which an investor group headed by Dickey and an affiliate of Merrill Lynch Global Private Equity proposed to take out Cumulus' public stock for $11.75 per share. The second group terminated its proposal in May 2008, with Cumulus shares listing between $4 and $5, on grounds its members could no longer agree on terms. The shares still trade in that range.
CMP's other owners haven't fared well, either. Last week, Cumulus signed a definitive agreement to buy them out for $80 million -- about a third of what they put up in 2006. The all-stock deal, slated to close in the second quarter, isn't expected to affect Cumulus' designs on Citadel.
Despite the losses on CMP, private equity remains favorably disposed toward Dickey. Last April, for instance, Cumulus announced a partnership with Crestview Partners LP that virtually replicates the CMP template. Crestview, a media-focused private equity firm in New York, even pledged to back the new joint venture, Cumulus Radio Investors LP, with up to $500 million in equity. And, as with its previous JV, Cumulus signed on to manage all assets acquired by CRI for fees and incentive compensation. "Together with debt financing expected to be available through the capital markets," Cumulus noted on announcing the partnership, "CRI could target acquisitions totaling in excess of $1 billion."
Because the announcement came out a week before the annual convention of the National Association of Broadcasters, which advocates for the country's 14,000-plus radio stations, some in the industry dismissed it as grandstanding. "At first I thought it was just Lew being Lew, trying to get some press to raise his profile and maybe his company's valuation," says one radio veteran. But he changed his mind when the same $1 billion figure recently resurfaced when Cumulus confirmed its offer of $31 per share for Citadel.
The actual reference, which appeared in a statement issued by Dickey's company, also noted that the $1 billion in cash would represent "about 71% of the consideration to Citadel shareholders." Still, with Citadel stock having climbed from $22.50 per share to top $30 since the company emerged from bankruptcy, it's not altogether certain Cumulus can pull a winning bid from its Crestview-backed war chest. It may not matter, in other words, that its latest proposal places an enterprise value on Citadel of $2.1 billion. The premium is de minimus for a company in recovery, and the take-out multiple barely tops 9 at a time Citadel's Ebitda is galloping ahead at a quarterly rate greater than 25%.
Many expect a higher premium to be forthcoming. But if it wants its pro-merger argument to be truly compelling, Cumulus must also sell Citadel shareholders on the implications of consolidated financial statements -- not just its own with Citadel's, but also with CMP's. After all, Cumulus' original JV continues to totter financially, with its debt of $639 million nearly 9 times greater than its trailing Ebitda. Cumulus is up there, too, with debt of $594 million coming in at 7.6 times Ebitda.
At the other extreme is Citadel, having shed $1.4 billion of a more-than $2 billion debt load after filing for bankruptcy in December 2009. Granted, $1.35 billion of Citadel's prebankruptcy debt represented obligations incurred with the purchase of ABC Radio in June 2007. But after Citadel got "body-slammed like all radio broadcasters in 2008," to quote a media banker, ABC Radio became a burden. Citadel's operating cash flow actually fell below premerger levels in 2008, sending the company's leverage ratio above 15.
The purge provided by bankruptcy couldn't have been more restorative: Citadel's debt of $778 million now represents only 3.4 times trailing Ebitda. So, thanks to Citadel's deleveraging, the pro forma debt-to-Ebitda ratio on consolidating the three radio companies would be a very manageable 5.2. And that's before consideration of the synergies obtainable by merging Citadel's 225 stations in more than 50 markets with Cumulus' 345 stations in 67 domestic markets and CMP's 32 stations in nine markets.
Surprisingly, in light of the scale of such an undertaking, the consolidation would produce overlaps in just five markets and legally require only a couple of stations to be spun from the three-way tie-up. The agglomeration would pass regulatory muster, too, given that the resulting platform would have only three-quarters the number of stations as industry leader Clear Channel. "A merger like this could solve a lot of issues for a lot of people," the media banker says. Yet the merger might also create issues for the one person best positioned to block it.
Farid Suleman, Citadel's 59-year-old president and CEO, is recognized as radio's chief financial engineer. It's a reputation he earned mostly as a CFO while working 16 years alongside CEO Mel Karmazin, who's often regarded as radio's best operator. Their means to industry acclaim was Infinity Broadcasting Corp. -- the precursor to CBS Radio Inc. -- which the duo wound up taking public three times. "They had a ruthless focus on costs, and Farid was very good serving as the lead henchman," says a radio veteran close to both of them. "He was the perfect yin to Mel's yang."
A native of Tanzania who was educated in England, Suleman was the first to leave radio's ideal partnership. After trying to buy assets for Infinity from Citadel in 2001, he had the tables turned on him by its new owner, Forstmann Little & Co. The private equity firm not only pursued Suleman but won him over in February 2002 after a sweetened offer made him a special limited partner at Forstmann Little as well as Citadel's new CEO. (Karmazin, currently CEO of Sirius XM Radio Inc., wouldn't resign from CBS-acquirer Viacom Inc. until 2004, after months of bickering with boss Sumner Redstone.)
Suleman took Citadel public again in 2003, but soon demonstrated that a strong suit in financial engineering doesn't necessarily guarantee shrewd dealmaking. One station trader recalls being surprised to learn that Citadel paid $100 million for four Memphis radio stations in 2004, calling the price "profoundly high at a time when nobody was paying high." He also considers Suleman a feckless seller. "If the market was at 9 times [Ebitda], he'd insist on 10," the trader says. "If it was at 8, then he'd demand 9."
Whatever shortcomings Suleman has as a dealmaker, the undoing of his company had more to do with timing. In February 2006, with a market value at $1.4 billion, Citadel agreed to pay $2.7 billion for ABC Radio. But the complicated transaction, structured as a reverse Morris Trust to lighten the seller's tax burden, took more than a year and several revisions to close. Meanwhile, a financial crisis, an advertising depression and such secular challenges as satellite broadcasting, smartphones and the iPod eradicated all notions that radio's local-market prominence could render the industry recession-resistant.
For broadcasters laden with debt, revenue shortfalls made restructuring just a matter of time. To wit: The sales dip for a pro forma Citadel and ABC Radio was 3.5% in 2007, followed by a 9.4% decline in 2008 and a 16.2% decrease in 2009. Not surprisingly, as the company drifted toward bankruptcy, its stock price hemorrhaged more than its revenue. Regulatory filings show that, over the five years ended in 2009, a $100 investment in Citadel shares lost 99.9% of its value.
Such performances don't usually command exceptional pay packages. But here, too, Suleman distinguished himself. According to Citadel's most recent proxy, his total compensation amounted to $6.1 million in 2008, $11.2 million in 2007 and $17.9 million in 2006. These figures compare with same-year pay packages of $3.2 million, $3.3 million and $2.8 million that Entercom Communications Corp. awarded its president and CEO, David Field, whom many consider the best operator in terrestrial radio today. "Farid can talk the talk," says a radio veteran when asked to explain the pay discrepancy. "He knows how to win the confidence of Wall Street types."
Or so he did until Citadel entered into bankruptcy. Yet, even there, Suleman acted the good general willing to soldier through a difficult process. He initially agreed to an equity-incentive program for the company's post-bankruptcy management -- a program intended to spread stock options, with designated strike prices, that vested ratably over three years. Those options, once vested, were to account for 7.5% to 10% of the company's new common stock. Then he testified, under oath at a bankruptcy confirmation hearing, that he grasped pertinent details of the equity-incentive plan. "I have tried to get stock," Suleman said, "and each time I was told I am getting options at market value." He also acknowledged that the compensation plan called for options to "vest one-third each year on the anniversary from the time I got those options."
However, after Citadel emerged from bankruptcy, an entirely different incentive program was put in place. The replacement sought to incentivize not through restricted options but through restricted stock. And it was to vest in two years instead of three. Moreover, of the 3.8 million shares the revised plan proposed to reward management, Suleman alone was to receive more than 1.9 million. That would mean his Citadel holdings would already be worth $58 million, and all he had to do to cash out half is stay aboard until June.
The switch to stock from options set up another potential perversity as well. The at-market and out-of-the-money options featured in the original plan would not have rewarded management should the price of Citadel's shares decline. In contrast, the stock in the replacement plan would still deliver $55 million to management if it oversaw a 50% decline in the company's post-bankruptcy equity value.
The changes so incensed one Citadel investor that it called the replacement incentives approved by the board, which in its revisions also granted each of its members over $1.35 million worth of shares, "a blueprint for all other management teams to emulate in order to loot company coffers." The blueprint warranted its own tagline, the investor continued: "Attention all CEOs -- Not happy with your pay package? File your company for bankruptcy, mislead the judge about your true intentions immediately after you emerge from Chapter 11, and then you can become the highest paid executive in your industry."
That investor was R2, of course, and its criticism of Citadel's bait and switch was contained in a complaint filed in U.S. Bankruptcy Court for the Southern District of New York, which oversaw the broadcaster's Chapter 11 protection. It had the desired effect, too. Last November, on withdrawing the complaint, R2 noted that Citadel had agreed to "rescind their awards of restricted stock" and revert to the options program detailed in the earlier plan. But the resulting truce lasted barely a month before the distressed-debt fund again took Citadel's board to task.
"We find it unconscionable that this board would flatly reject the second proposal from Cumulus, despite the fact that many of your significant shareholders urged Cumulus to submit a more attractive proposal after its initial rebuke," R2 wrote Citadel when Cumulus' takeover proposals became public. "First you tried to pull off one of the most egregious shams for a company coming out of bankruptcy and pay yourselves and the management team a bonus of $110 million," R2 complained. "Now, in a similarly self-interested maneuver, you've put up roadblocks to a merger so that you can keep your jobs. Shame on you!"
Mergers with as many moving parts as the one Cumulus, CMP and Citadel may eventually pull off often look better in theory than they turn out in reality. Take top management. Dickey and his brother John, who serves the company as co-COO and executive vice president, micromanage in a big way.
"They've even installed cameras at some of their stations," says a source who has worked with them, "so they can see who's in the office whenever and wherever they want." Suleman, by comparison, is so remote that he works out of Miami instead of the company's Las Vegas headquarters.
One could argue that a blend of these management styles might serve a merged company well, a kind of yin-yang similar to that attributed to the old Suleman-Karmazin team. But this would require putting egos aside, which sources contend will never happen -- especially since, as one says of Cumulus' public complaints about Citadel's unresponsiveness, "Lew effectively served Farid a real shit burger." And so the operative phrase for post-merger leadership of a collective full- and part-time staff of 7,000 would more likely be, another source predicts, "pick your poison."
However, for investors in Cumulus, CMP and Citadel, such concerns aren't sufficiently offputting to derail the idea of a single radio platform attainable through a three-company combine. It's an idea so powerful it's already spawning rumors that, if Citadel doesn't want to be taken over itself, then it should turn around and buy Cumulus. That Citadel's market capitalization of $1.5 billion dwarfs Cumulus' $190 million certainly gives this rumor sway. And at the right price, the 43.6% voting interest in Cumulus maintained by the Dickey family might even embrace change.
For the time being, though, R2 seems content to let the financial advisers to these broadcasters -- UBS Investment Bank for Cumulus, Lazard and J.P. Morgan Securities LLC for Citadel -- explore the terms and possibilities of an equitable trade. But a source familiar with the distressed-debt fund expects this complacency to be relatively short-lived. "There's a lot of price discovery going on right now," he says, "so bid-ask spreads should converge pretty soon." And when they do, look for R2 and other long-suffering investors in radio to step up demands that the industry return to consolidating its businesses in accordance with some very grand plans.