Street divided on radio buyouts
Some say several groups will go private, others see too many hurdlesWill 2007 indeed become the year of the radio buyout?
While some on Wall Street have recently argued that several radio station groups could end up being taken private this year, others believe there are hurdles that could leave many sector players as publicly traded companies.
Many of the doubters believe that there are fundamental reasons that could prevent radio groups from going private for now. For example, one argument is that radio stocks will remain under pressure and could fall even lower, making buyouts less likely at current valuations.
Said one such Street observer, who has his doubts about the privatization wave predicted by some, "Patient suitors could wait for (radio) stocks to really hit bottom," which he argues is far from clear and visible yet.
Currently, most radio investors have their eyes and ears focused on Clear Channel Communications, the sector's largest firm, whose shareholders are set to vote May 8 on a sweetened $39 per-share takeout bid by private-equity groups.
However, with large institutional shareholders Fidelity and Highfields Capital Management, which hold about a 15% voting stake, opposed to the bid based on what they argue is still a low price tag and others expected to abstain from the vote, it remains unclear if even the giant Clear Channel can win the two-thirds approval needed for the going-private deal.
A couple of smaller radio station owners also have been in the possible buyout spotlight of late. Shares of Cox Radio Inc. recently rose 8.3% in one day as two analysts upgraded the stock and suggested parent company Cox Enterprises may be more likely to take the radio group private given recent weakness in its stock plus some very company-specific factors.
Credit Suisse analyst John Klim upgraded his rating on the stock from "sell" to "underperform," citing valuation. He has a $14 price target on Cox Radio, arguing a recent share decline "has brought Cox Radio's valuation in line with the radio group."
Specifically, Cox Enterprises' balance sheet "is about to become much healthier with a large cash payment on the way" based on a recent agreement by Cox to sell its 25% stake in Discovery Communications for $1.28 billion in cash, the Travel Channel and Antenna Audio, he said.
That could make the parent more likely to buy the 36% stake in Cox Radio that it doesn't yet own, he said.
Bear Stearns analyst Victor Miller made similar arguments in a recent report, suggesting that 2007 could well turn out to be "the year of the buyout" for radio stocks thanks to a combination of factors.
Among others, he cited a poor stock performance since 2005, which has left the average sector stock down 35%, declining implied take-out multiples and a reduced share count for many companies because of stock buybacks of recent years.
Miller upgraded Cox Radio shares, in his case to "outperform" with a $16 target price and a possible $18.75 takeout value.
Of course, neither Cox company has commented on the Street chatter so far as companies usually stay away from such talk.
While the chatter initially boosted the stock, Goldman Sachs analyst Mark Wienkes recently warned that Cox Radio shares might already have run up enough.
"We think the recent rebound in Cox Radio is unsubstantiated," he said, maintaining his $12.50 price target "based on our belief the premium in the stock owing to a buy-in remains overstated."
Among the other objects of recent radio buyout talk remains Emmis Communications. Emmis president, chairman and CEO Jeff Smulyan — the firm's controlling shareholder — tried a going-private deal last year only to fail to get approval from a special committee of the board.
Some on Wall Street believe he could launch another buyout offer in the coming weeks or months given a sluggish stock and the possibility of Clear Channel going private.
Either way, for now, the radio privatization talk looks like it is here to stay.