M&A Deals of the Year
Introduction   Apple and partners-Nortel   Google and Motorola Mobility   Access Industries -Warner Music   Cumulus Media-Citadel   Comcast-NBC Universal   H&R Block-TaxAct   Caterpillar-Bucyrus   Ares and CPPIB-99 Cents Only Stores   Grupo Bimbo-Sara Lee baking assets   BHP Billiton-Petrohawk   Peabody Energy-Macarthur Coal   Selling off Bank of America   Dish Network-Blockbuster   Amgen-BioVex   KKR et al.-Samson Investment   Pearson-Connections Education   Alleghany-Transatlantic   Breaking up Dexia

Seldom does an acquirer wind up with a stronger balance sheet after pulling off not one but two major acquisitions in a single quarter. But that's what Cumulus Media Inc. managed to do in the third quarter of 2011 by snagging Citadel Broadcasting Corp. and bringing in the 75% of Cumulus Media Partners LLC it didn't already own. What's more, as an examination of pro formas reveals, the three-way tie-up simultaneously lowered Cumulus' debt-to-Ebitda ratio to a manageable 4.2 from a wobbly 5.8.

The key ingredient to this Deal of the Year was Citadel's emergence from bankruptcy in June 2010. The Las Vegas-based radio company owed much of its No. 3 ranking to its acquisition of ABC Radio in June 2007. But the purchase also saddled Citadel with an additional $1.4 billion in debt, taking its total to $2.1 billion just before the industry got "body-slammed," to quote a media banker, by the financial crisis.

Citadel succumbed in December 2009 to bankruptcy, where it shed $1.4 billion of debt before emerging a half-year later with just a term loan of $760 million. By the first quarter of 2011, according to its merger proxy, Citadel had further shrunk its long-term obligations to $746 million. This gave it a leverage ratio that was only 2.8 times management's Ebitda estimate for all of 2011.

The same proxy-derived ratios for Atlanta-based Cumulus and CMP were significantly higher -- with CMP's actually topping 7 -- as neither radio group reorganized during the worst advertising recession since the Depression. But it's not as if they were unscathed. The price of Cumulus stock, after soaring to more than $50 per share during radio's rapid-growth era in the 1990s, fell to 35 cents in 2008 before ending 2011 at $3.34.

For CMP, the story's more complicated but no less scary. Cumulus, the country's No. 2 radio broadcaster, partnered with three private equity firms in 2006 to acquire 33 radio stations from Susquehanna Pfaltzgraff Co. for $1.2 billion. While each financial sponsor put up cash for its 25% equity stake, Cumulus obtained its 25% by contributing radio assets in Houston and Kansas City, Mo. It also supplied management services to the combined operation, renamed CMP, for an annual fee of $4 million or, if greater, 4% of CMP's adjusted earnings.

To say Cumulus' partners got burned on their investments is an understatement. On Aug. 1, in exchange for complete ownership of CMP, Cumulus gave the PE trio a total of 9.9 million shares. This translated into $35 million at prevailing prices, or less than a sixth of what the trio put up in 2006. That said, however, Cumulus' former financial backers traded their stakes for 7% of a reconfigured company that, compared with the prefigured one, is more than 350% larger in terms of revenue and almost 30% lighter in terms of leverage.

R2 Investments LDC also deserves recognition here for making sure this deal never got away. Its loan-to-own practices, as with those other distressed-debt funds, drew it to a staggering, pre-bankrupt Citadel like a bee to honey. Then, once its prebankruptcy debt got turned into post-bankruptcy equity, R2 threatened to sue Citadel management not only for an alleged bait-and-switch scheme involving an equity-incentive program but also for putting up "roadblocks to a merger so that you can keep your jobs."

R2 ended its diatribe against Citadel -- filed in the U.S. Bankruptcy Court for the Southern District of New York, which previously oversaw the radio broadcaster's Chapter 11 protection -- with an unequivocal "Shame on you!" But this shame turned into acclaim as Citadel nudged Cumulus' initial cash-and-stock offer of $31 per share up to a deal-striking $37.