– Viacom Inc. has agreed to sell its radio station group for $1.075 billion to Evergreen Media Corp, it said Monday, in a sign that the radio bubble hasn’t burst yet. Separately, Evergreen is merging with radio group Chancellor Broadcasting Co. in a $567 million stock deal.
The company that emerges from the merger and the Viacom purchase, to be known as Chancellor Media Corp., will be the biggest pure radio broadcaster in the country, although Westinghouse Electric Group’s CBS Inc. will continue to be the No.1 radio group in the country.
But CBS and Chancellor will be well ahead of their nearest competitors, putting renewed pressure on mid-sized operators like Jacor Communications and Walt Disney Co.’s ABC radio group to get bigger or get out, bankers said.
Viacom, which had come under similar pressure in the past year as radio station prices escalated in response to a lifting of ownership limits, is exiting with a spectacularly high price — estimated to be roughly 18 times 1996 cash flow. That is higher than what CBS paid for industry leader Infinity Broadcasting last summer, which was then considered a high price.
“Viacom did a very good thing,” said Lehman Bros. analyst Tim Wallace. News of the deal sent Viacom’s stock jumping $1.62 to $35, while the stock prices of Evergreen and Chancellor were mixed. Evergreen closed down $1.25 to $31.50, while Chancellor rose 6 cents to $28.
Viacom chairman Sumner Redstone said in a statement that the sale was “one more major step in our ongoing efforts to strengthen our balance sheet while we continue to focus on growing our core business units.”
Viacom said it would use the money raised to reduce its debt, which now stands at about $9.5 billion. After paying tax, Viacom is expected to have $700-800 million for debt reduction.
Combining Viacom’s group of 10 stations with a merged Evergreen-Chancellor will produce a company with 103 stations initially, although Evergreen chairman Scott Ginsburg said about eight of those would be sold to comply with FCC ownership limits. With the remaining 95, the combined company will have a strong presence in the major markets — ownership of KKBT-FM, KYSR-FM, KIBB-FM, KLAC-AM and KZLA-FM in Los Angeles, four FM stations in New York, nine stations in Chicago and eight in San Francisco.
The Justice Department is expected to review the deal, but Ginsburg downplayed any potential antitrust problems, arguing that the combined company would not be big enough in any one market to cause a problem.
CBS owns only 89 radio stations, but its radio revenues are about $1.1 billion a year, compared with $800 million for the new company, Morgan Stanley analyst Frank Bodenchak estimated. The next largest competitor, Jacor, lags well behind, with only $400 million.
That raises the prospect of further consolidation, said Bill Steding, managing director of radio brokers Star Media Group, which brought Chancellor and Evergreen together. Anyone trying to compete against the “two behemoths” of CBS and the new company “better get bigger,” he warned, to have any hope of competing for advertising dollars.
Disney’s 21-station group, inherited with the ABC acquisition, is the fifth-biggest radio group in revenue terms, with about $295 million and cash flow of about $120 million. Viacom’s radio group, in comparison, has cash flow of $55 million-$60 million, analysts say. Given the price paid by Evergreen, Disney’s group could be worth north of $2.2 billion — as much as the House of Mouse hopes to raise from the sale of its magazine publishing interests.
But Disney’s attitude to radio is “a bit confused,” one investment banker said Monday — some execs in the group want to expand, but Disney chairman Michael Eisner’s view is not so clear-cut.
Disney did not lodge a bid for Viacom’s stations, sources said, although it’s not clear whether that means Disney plans to exit. Lehman’s Tim Wallace said that Disney’s absence could mean either “they didn’t want to participate in that kind of an auction, or they haven’t made a decision about what to do with radio.”
Indeed, while ABC execs have expressed interest in expanding in the past, they have always said they wouldn’t pay too high a price. ABC and Disney execs were unavailable for comment.
Given the high price being paid by Evergreen, its merger with Chancellor made the Viacom acquisition more “doable,” people close to the deal said, although the Viacom acquisition is not conditional on the completion of the Evergreen-Chancellor merger, the companies said.
The two companies had been talking about a potential merger for a month but had not worked out a deal by the Viacom bidding deadline of Friday, so both Evergreen and Chancellor submitted bids. But over the weekend, Ginsburg and Chancellor chairman Tom Hicks “reached a certain understanding” on a merger, Ginsburg said Monday, so the two advised Viacom that they would make a revised offer together. Ginsburg said the final offer was not more than 2% higher than “our initial offer.”
While the merger is a stock-for-stock deal, the Viacom acquisition is to be paid in cash. After asset sales estimated to be worth $250 million, the combined company will emerge with debt of about $1.85 billion, Evergreen CFO Matt Devine estimated. He added that the combined cash flow would be about $400 million, although industry execs say this estimate may be very optimistic.
The big question is whether Evergreen and Chancellor can increase cash flow rapidly to justify the price paid for the Viacom stations.
“On the surface it seems like a high multiple, but Evergreen is experienced at doing acquisitions. They obviously think there is value there, and time will tell,” said Lehman’s Wallace.
The other uncertainty is whether Ginsburg and Hicks will battle for control of the company. Hicks’ investment firm, Hicks Muse, will emerge with about 15% of the combined company, while Ginsburg will have no more than 5%. Industry sources say it is not clear whether Ginsburg plans to stick with the combined company