Commentary: Radio broadcasters fear merger of Sirius and XM

Objections illustrate worries over singular celestial competitor

From the way the National Association of Broadcasters objected to the merger of satellite radio companies Sirius and XM, it's obvious they feared that the strength of a singular celestial competitor would weaken their terrestrial businesses.

But as far as Wall Street is concerned, it doesn't matter where your radio signals are coming from or how many people are tuned in -- it's all just bad. And it's not the fault of those pesky Republican FCC commissioners who approved the merger of Sirius and XM, nor can you blame Mel Karmazin, Howard Stern, faulty satellite radio receivers that caused interference or any other red herring.

Radio is in the toilet simply because it hasn't figured out how to effectively compete in the digital age, and advertisers have noticed.

No wonder then that radio stocks have fallen off a cliff.

Here's the damage this year among the purest of them: Radio One is down 30%, Cumulus Media is off 45%, Regent Communications is down 43%, Westwood One has fallen 63%, Entercom Communications is down 53%, Citadel Broadcasting is off 56% and Salem Communications has fallen 72%.

And the scary one that was supposed to benefit so much from a merger, Sirius XM Radio, is down 56% on the year.

The only one to have escaped the carnage so far is Cox Radio, down only 10%. That could change, though, according to Stanford Group analyst Frederick Moran, who downgraded the stock to "sell" last month and reduced his target to $7, suggesting that it will fall about 36% during the next 12 months.

In July, radio industry revenue in the U.S. declined 6%, according to the Radio Advertising Bureau. That's actually an improvement compared to the 9% drop in June but, still, the trend is no friend.

Another problem with radio, says Northlake Capital's Steve Birenberg, is that the industry went on an acquisitions binge in the 1990s before most people had even heard of the Internet, so their balance sheets today are saddled with debt. Then, of course, came online radio, Napster and the iTunes-iPod juggernaut that is rapidly making its way into automobiles, formerly a radio safe haven.

"As advertising declines, margins get crushed, cash flow dwindles, free cash flow goes away, and debt cannot be paid down," Birenberg warned.

According to Moran, radio revenue in the current quarter might decline 11% compared with last year. Pretty sad considering all the presidential election ads that are running nowadays. He's predicting a full-year decline of 7%.

And advertisers aren't only shunning music radio but also news, talk and sports. Take Westwood One, for example, which provides such content as "The Dennis Miller Show," weather and traffic reports and much more to 5,000 radio stations nationwide. The company went public in 1990 and the stock soared tenfold in 10 years to more than $35 a share. But it has plunged 98% in the past four years and on Tuesday it traded for just 74 cents.

Then there's Salem, which has fallen 94% in four years. Of the company's 95 radio stations, only 12 of them are music formats, with the bulk of the rest focused on Christian and conservative talk. But even its well-traveled Townhall.com Web site hasn't helped to stop the bleeding.

Moran says that overall advertising in the company's most recent quarter fell 19% and music underperformed only slightly. Christian talk, he said, was "unable to withstand overall weakening market fundamentals."

As for Sirius XM, the jury is still out. But Birenberg figures the company has too much debt and that the market for subscription radio is smaller than previously expected. Others, like Miller Tabak analyst David Joyce, think the stock has sunk so low that it is now a screaming buy. He estimates it will more than double in the next year or so.

In fact, even a radio bear like Birenberg acknowledges that all these stocks have been so beaten down that investors craving risk might want to scoop up a basket of several different companies and hope one or two make a recovery.

"The thing is," he said, "the upside could be enormous. Four or five times your money."
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