Commentary: Radio Stocks Can't Play This Tune Forever

The craze to consolidate rampaging throughout the nation's radio-station industry has made lots of people rich. Just ask any shareholder in SFX Broadcasting, which recently agreed to a $1.2 billion takeover offer from the Dallas-based buyout firm Hicks, Muse, Tate & Furst. Word of the deal swiftly sent SFX shares as high as 75--three times what the stock might have fetched less than a year ago. Are there more triples like that awaiting investors in radio?

While many in the industry are confident more mergers are ahead, some observers think the easy money has already been made (table). In other words, if you don't now own shares in radio companies, this is probably not the time to ring up your broker and place an order. "Radio stocks have topped out," says Robert Price, chief executive of Price Communications, a cellular-telephone concern that exited broadcasting last year. "It's the greater fool theory."

PRICEY. The excitement has pushed the prices of such industry leaders as Clear Channel Communications to more than 18 times estimates of next year's cash flow--double the multiple granted many such stocks over the past 12 months. Even some of the tamer radio stocks, such as Emmis Broadcasting, have gotten a bit pricey, says Michael Kupinski, an analyst at A.G. Edwards & Sons who has followed broadcasting for 14 years. Speculation is running high that Emmis--which hasn't put itself up for sale--is takeover bait because it's one of the few remaining independent broadcasters with radio stations in key urban markets, including Los Angeles, New York, and Chicago. Despite recently downgrading Emmis to "accumulate" from "buy," Kupinski watched it jump nearly $5 a share the next day. "It's outrageous," he says.

Today's lofty valuations give Kupinski the creeps, as he recalls how radio stocks, crippled by the conclusion of an earlier stretch of mergers, plunged by 85% or more from 1989 to 1991. Jacor Communications, for one, fell to less than 1, from 8, in that period. Beyond that chilling history, though, is an underlying sense that the current merger wave's power may be waning. "Because of the consolidations," notes Value Line analyst Todd Schwartzman, "you're not going to see as many deals done" as fewer public companies are left to be gobbled up. The deals that do go through are more likely to involve privately held broadcasters.

Future mergers also promise slimmer possibilities for cutting operating costs and boosting cash flow. By buying several stations with varying formats in a single local market--rock, country, and classical, for example--operators have been able to spread back-office costs across more revenues. Kupinski thinks, though, that future mergers will create collections of stations that are more broadly--but thinly--spread across the map, making back-office efficiencies tougher to come by.

"BIG JUMP." There's also a question about whether radio companies, which in the past five years have experienced a boom in advertising revenues, can keep grabbing a larger share of Madison Avenue's budgets. In the postwar period, radio advertising steadily ran at about 6% of total ad sales, Price observes. Recently, that share has swelled to 7.5% or more. "That's a big jump, without any real reason," Price says. "There aren't any more radios being sold." In an economic downturn, ad spending is one of the first budget items many companies cut--something Price Communications witnessed in the last recession, which savaged radio operators.

What worries Price the most is that knowledgeable industry insiders are selling, including SFX Chairman Robert Sillerman and Steven Dodge, chief executive of American Radio Systems. The latter recently hired investment bankers, a move widely seen as American Radio putting itself on the block. "When people like that want to sell, you shouldn't buy," warns Price, a former partner at Lazard Freres. "They are not fools, and I don't want to stack my intelligence against theirs."

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