Little left for private-equity firms

Analysts say radio groups are likely to remain publicly traded

With radio giant Clear Channel Communications set to go private, Wall Street is discussing the likelihood for more radio station groups taking the route of a private-equity-sponsored buyout.

While transactions to go private have been a staple of the broader media and entertainment space in recent years, sector watchers caution investors not to hold their breath for a quick slew of more deals.

Bear Stearns analyst Victor Miller recently downgraded his broadcasting sector view from "overweight" to "market weight," arguing that this year's share gains will be "hard to replicate" for many players given a weaker fundamental advertising outlook and recent upward momentum from buyout chatter that might not become a reality.

"Emmis tried to take itself private, and many are convinced Cox Radio will go private at some point," Miller said. "(Won't there be) fewer companies for sale in 2007?"

Cox Radio has been expected to go private since related cable operator Cox Communications left the stock market.

But overall, "private-equity guys usually look for a big acquisition that is worth their while and that gets them a good payout," said media industry expert and Vogel Capital Management president Hal Vogel. "I doubt many radio companies will be taken over (and private) this way. ? Clear Channel is the 800-pound gorilla (in radio). The big PE guys won't have much appetite for buying small companies with 25 stations."

Others suggest that the Clear Channel deal at least may pave the way for smaller private-equity deals. "Moving from being a public media company to a private one has become a serious option as competitive conditions change," Mark Fratrik, vp at financial and strategic advisory firm BIA Financial Network, said in a note about the Clear Channel deal. "During the years after the passage of the Telecommunications Act of 1996, the advantages of having public stock to acquire additional properties was quite important. That is no longer the case as the public marketplace has registered its lack of confidence in the growth prospects of traditional media."

By going private, companies "believe that they can grow in value over the long term without being concerned about investors' quarterly targets," Fratrik said.

Still, Goldman Sachs analyst Mark Wienkes sides with Vogel, warning that "additional buyouts across the group remain unlikely owing to a combination of either minority-held supervoting shares, high leverage and/or still-challenging fundamentals." He said "the uncertain revenue outlook will keep smaller dollar deals at bay."

Investors might hope that the buyout buzz will continue and help lift radio stocks further, but Street observers believe not everyone will follow the example of the sector's largest company, whose shares had long traded at a discount to peers, some said.

In the case of Clear Channel, the first mention of management's consideration for a move to private company status ignited the stock.

"For more than a year, management attempted to address Clear Channel's lagging stock price beginning with financial moves including dividends and stock buybacks plus the more dramatic partial initial public offering of outdoor operations and spinoff of live entertainment," Barrington Research analyst James Goss wrote this month. "The market has reacted very favorably to the announced plans to consider strategic options of a potentially dramatic nature."

But Wienkes warned that buyout buzz might not push all stocks much higher. "Though group multiples are nearing media peer levels, weak fundamentals, optimistic estimates and asset sales imply further downside remains more likely than not," he said.

The Goldman analyst also mentioned in his report that he has spoken with various private-equity firms with some interest in midsize radio operators.

"In general, the conclusion is that absent a stable revenue outlook, the variability around the terminal multiple is too great," he said. "There are other relatively more attractive sectors without deteriorating revenue trends that are higher on the short list for (leveraged buyout) attention."
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