Commentary: Terrestrial radio biz won't fade out despite all that static from Wall Street

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Radio stocks might be dead in the water, but the industry isn't.

Terrestrial radio still reaches 90% of Americans weekly, Stanford analysts noted recently. That number has remained steady despite the introduction of satellite radio, iPods and other competitors. And a recent report from SNL Kagan predicts that, as as happened on several occasions, radio will meet its challenges and emerge as a stronger medium.

Those challenges, though, are not trivial: Radio companies have taken on too much debt at exactly the wrong time, given the credit crunch and a U.S. recession. Plus, Wall Street seems to think radio never will recover from the advertising slump that has hurt all media.

But given the horrendous performance of pure-play radio stocks last year, with the best being cut in half and the worst down to mere pennies, Wall Street might be too pessimistic.

That might last another 12-18 months, SNL Kagan says, but by then radio will "again attract private-equity and debt players ready to take advantage of the industry's ability to throw off copious amounts of free cash flow."

SNL Kagan says investors have pushed down the average radio stock to only eight times 2008 cash flow, from multiples of about 23 a decade ago.

In 2008, Sirius XM took the biggest hit, falling from $3.03 a share to less than 6 cents as investors worried about debt of $175 million coming due Tuesday and an additional $750 million due later this year. But Charles Ergen of EchoStar and Dish Network has been acquiring Sirius XM debt, sending its shares into convulsions as investors determine whether Ergen's endgame will be good for shareholders or if a bankruptcy might take the stock to zero.

But all publicly traded radio companies have heavy debt loads, and SNL Kagan acknowledges that they "will need to negotiate more flexibility with lenders." It adds, though, that most will succeed.

That's an opinion not shared universally, however. Stanford analysts wrote that "pressured cash flow and heavy debt burdens could render the equity value of many radio stocks worthless."

Hence Wall Street's mistreatment of radio stocks, with Regent Communications sinking 94% to 9 cents last year and Citadel dropping 92% to 16 cents. The rest of the carnage looks like this: Emmis Communications down 91%, Entercom off 90%, Salem Communications down 89%, Radio One off 81%, Cumulus Media down 79%, Saga Communications down 72%, Beasley Broadcast Group off 64% and Cox Radio down 51%.

Regent is showing the most significant progress this year, rising from 9 cents a share to 16 cents, improving its loss to a still astronomical 90% during the past 13 months.

"Marginal radio stations, which survive easier times, may see staffs reduced and their programming limited to simulcasting stronger stations until the ad-revenue environment can produce more viable stations," the SNL Kagan report said.

Such maneuvering already is taking place, with Citadel cutting 7% of its work force and Emmis 10%. Meanwhile, local talent is being dropped in favor of cheaper nationally syndicated shows starring the likes of Ryan Seacrest and Sean Hannity.

Radio also has a few technological improvements on its side, including the rollout of HD, which will get a boost as more carmakers make it a factory-installed option, as Ford will do this year.

The bigger opportunity is the Internet. Last year, SNL Kagan estimated that online advertising on radio station Web sites amounted to only 2.2% of radio ad revenue, but the research firm sees that growing to 4.5% and more than $1 billion by 2012.

"Unlike traditional ad-revenue sources, online revenues have increased each year since 2003," it said.

To ensure that online advertising brings in new money and doesn't simply amount to cannibalization, more and more companies are not allowing mixed buys.

SNL Kagan sums up its relatively bullish analysis this way: "Although some press recently has called for the eventual extinction of broadcast radio as old media, the industry still reaches more than 235 million listeners and will likely remain a viable business in the long term."
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