Radio One Wants to Purchase Term Paper

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After the acquisitions are made, the stock price will drop back down to a more normal multiple. It is the more normal multiple that Radio One has to keep in mind when considering the long-run dilutive effect of the purchase.

The rate at which Radio One should pay should reflect the future cash flows of the businesses it is buying. Normally, the company buys underperforming stations and then turns them around. That strategy allows it to take stations that are not doing well and bring up their performance -- this justifies a higher valuation than the current multiple on those stations. However, there is no evidence that the ClearChannel stations are underperforming. They are being divested to comply with antitrust regulations, which is an entirely different situation. RadioOne is, therefore, much less likely to add significant value to these stations.

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In addition, ClearChannel is a motivated seller. It must divest these stations as part of its agreement with antitrust regulators. In addition, the FCC would prefer that ClearChannel sells to a minority owner, since the stations serve the African-American community. Radio One is basically the only potential buyer from the community that can purchase a block of For the sake of simplicity and pragmatism, ClearChannel would most likely prefer to deal with Radio One, rather than selling the stations to multiple different buyers.

The premium over the present value of expected future cash flows that RadioOne should pay is therefore not as large as it would normally pay, simply because it is not going to add as much value as it normally does. A rate between 20x and 22x BCF is therefore more reasonable than anything close….....

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