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Partnerships Tune In Radio Stations

After lying dormant for the past 18 months, the market for radio stations appears to be showing some signs of life.

Earlier this month, leveraged-buyout king Kohlberg Kravis Roberts & Co. announced that it was forming a $50 million partnership that will buy stations.

Just last week, veteran radio operator Osborn Communications said it too was forming a limited partnership to acquire stations.

Why the renewed interest?

“This is a case of smart equity recognizing that this is another area where there are depressed and over-leveraged assets which could be bought at favorable prices,” says longtime radio station broker Gary Stevens, Gary Stevens & Co.

That interest is a welcome sign to potential sellers who have watched their stations sit in what has been a virtually dead market for the last year and a half.

A record 1,168 stations (worth nearly $3.1 billion) changed hands in 1986, according to Paul Kagan Associates. But the flurry of speculative buying could not sustain itself. A worsening advertising climate, coupled with a number of failed deals, slowed radio station trading; 865 station deals (worth $2.2 billion) were transacted in 1989.

The prevailing credit crunch and skittishness on the part of bank lenders stifled what was left of the trading market and prices plummeted; in 1990,794 stations traded hands for only $982 million.

While a major market FM station could fetch multiples as high as 11 times its annual cashflow (earnings before interest, taxes, depreciation and amortization) in the late 1980s, experts say today that same station would most likely sell at 8 to 8 1/2 times its cashflow.

Both KKR and Osborn appear ready to take advantage of what they consider to be discount prices for stations, albeit in a prevailing weak advertising climate.

Brokers concede some sellers may overreact to the new partnerships: “Station owners see this and say, ‘Great, the market’s back,’ and they’re ready to serve them up some full price retail deals,” Stevens says. But he expects the partnerships will be very choosy. KKR’s partnership, Granum Communications LP, will draw 90% of capital from KKR and the remaining 10% from Granite Capital Group, a small New York investment bank.

But, unlike financial buyers who bought in at the top of the market in the mid-1980s and then realized they didn’t really know how to run radio stations, KKR has aligned itself with a seasoned radio operator. Longtime radio exec and Granite partner Herbert McCord will serve as chief exec of Granum.

McCord says the LP is looking at both turnaround and profitable radio stations in the nation’s 25 largest markets. According to sources close to the deal, Granum intends to supplement its own cash with borrowed money, increasing its buying power to about $150 million to $200 million.

Osborn’s plans are somewhat less clear cut. The radio operator formed its limited partnership with VS& A Communications Partners LP, an investment fund affiliated with investment bank Veronis Suhler & Associates.

Osborn, which will manage the newly formed partnership, has agreed to contribute stations in Syracuse, NY. and its radio stations and entertainment properties in Wheeling, W. Va. As a result of the transaction, Osborn will receive cash, which, with its interest in the partnership, totals $27.2 million.

VS& A will initially invest $3.5 million in the partnership and will acquire certain rights to convert its partnership interest into Osborn common stock at future dates.

Because of the terms of the deal, some industry experts question if the Osborn LP is really just a corporate restructuring on Osborn’s part.

But the company refutes such a view and emphasizes its desire to buy stations. “This transaction permits us to take a lot of cash out of these properties and still retain a majority interest in them,” says Ellen Fader, senior v.p. of administration at Osborn. “We can use that cash to do two things: reduce our debt substantially and acquire radio properties in an environment where people are having considerable trouble raising capital.”

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