Radio giants Chancellor Media and Capstar Broadcasting have inked a $4.1 billion stock swap merger agreement to create the nation’s largest radio group, a broadcasting behemoth encompassing 463 radio stations stretching from Puerto Rico to Los Angeles.

The union of the two publicly held companies, with a combined value of more than $17 billion, had been expected for some time (Daily Variety, Nov. 10, 1997). The largest shareholder in both Chancellor and Capstar is Hicks, Muse, Tate & Furst, the Dallas-based leveraged buyout firm that has been on a TV and radio station buying spree for the past few years.

The new entity will retain the Chancellor Media Corp. moniker. Echoing the strategy of the new-model CBS, Chancellor and Capstar execs told Wall Street analysts Thursday that the key goal behind the merger is to leverage the heft of the radio group to benefit Chancellor’s TV stations, radio and TV ad sales firms and outdoor advertising holdings.

Radio biz observers on Wall Street mostly applauded the deal as one whose time had come. However, stock prices for Chancellor and Capstar were down Thursday on a day when the Dow Jones index plunged 357.36 points. Chancellor stock closed down $2, or 4.4%, to $42.75, while Capstar was down $2.29, or 10.17%, to $19.83.

Chancellor’s control

All told, the new Chancellor Media will control 463 stations spanning 105 markets and reaching an estimated 65 million listeners each week. Dallas-based Chancellor also owns the AMFM Radio Networks, whose talent roster includes Top 40 countdown king Casey Kasem.

At $4.1 billion, the Capstar purchase price represents a premium of 15.5 times the company’s projected 1999 cash flow. If the merger agreement is approved by stockholders, each Capstar share will be exchanged for 0.480 shares in the new Chancellor Media, although that exchange ratio could be hiked if Capstar’s 1998 cash flow exceeds certain targets.

Hicks Muse, which currently owns 59% of Capstar and 15% of Chancellor, will wind up with about 25% of the new company. Deal is expected to close by the middle of next year.

In announcing the long-awaited pact, Chancellor prexy and CEO Jeffrey Marcus said the combination of radio properties “will be a tremendous growth engine going forward for Chancellor. We will redefine how radio, TV and outdoor media work together in markets. We can offer advertisers ways of buying media that heretofore they have not had the ability to utilize. It will be the way advertising is sold in the new millennium.”

$2.5 billion expected

Chancellor execs predict the merged company will generate $2.5 billion in revenue next year, with cash flow in the area of $1.2 billion. Radio will account for 75% of its revenue, while the 12 TV stations (the former Lin TV group bought last year by Hicks Muse) will generate about 10%. Another 5% of the revenue will come from the 14,500 outdoor advertising “display faces” that Chancellor owns in 23 markets.

Marcus added that home shopping, electronic commerce and other Internet-related businesses will be fertile ground for a company with integrated media properties. Chancellor is at work building an online network to hook up its radio, TV and outdoor sales with Chancellor-owned ad rep firms Petry Media and Katz Media.

Capstar also brings to Chancellor its “Star System” technology model for linking radio stations in the same market or across several small markets, which allows the company to run multiple stations with a smaller staff and lower overhead costs.

“Capstar has created a new paradigm for radio in these (smaller) markets,” said Marcus.

Capstar was founded in 1996 by R. Steven Hicks, brother of Hicks Muse chairman and CEO Thomas Hicks, for the express purpose of buying up radio stations in small to midsized markets. Consolidation has been the rule for the radio biz ever since federal limits on radio ownership were largely eliminated by sweeping changes in telecom law approved in 1996.

The streamlining of Capstar and Chancellor should produce at least $70 million in cost savings by eliminating some administrative functions and other redundancies. Chancellor will have about $6 billion in long-term debt when the deal is completed, after absorbing $1.785 billion in debt and preferred stock from Capstar, execs said.

Thomas Hicks, chairman of the board of both Capstar and Chancellor, will now serve as chairman of Chancellor Media. Marcus will continue as prexy and CEO of Chancellor. R. Steven Hicks, formerly prexy and CEO of Capstar, will become vice chairman of Chancellor.

Capstar board members Steven Hicks and R. Gerald Turner will join Chancellor’s board of directors, expanding the number of seats on the board to 14 from 12.