Why does Radio One want to acquire the 12 urban stations from Clear Channel Communications in the top 50 markets along with the stations in Charlotte, N.C., Augusta, Georgia, and Indianapolis, Indiana? What the sources of potential benefit and risk with these acquisitions? Radio One wants to acquire 12 urban stations since it feels that the opportunity which has come is something which does not happen everyday. If it is able to buy these 12 channels, it would double the size of Radio One and give it a national presence. The potential benefits would be a. The acquisition would make Radio One market leader in African-American radio stations. It would give national presence. These two things combined would help increase advertising revenues b. There would be cost benefits to Radio One. Radio One already had many centralized functions and so adding these radio stations, the costs would not increase so much and there would be synergy benefits c. The African-American radio listeners were increasing at a faster rate and the income was also increasing. Having more radio stations would help in generating more revenue d. The acquisition would serve as base for expansion into other media – cable, recording industry and internet The sources of risk would be a. The size of the deal is very large. It would double the number of radio stations and so managing the integration may be difficult. b. There may be some cannibalization from the existing listeners and so the synergy benefits may be lower than anticipated. c. The income statement shows that the company is making losses. The acquisition would need more cash and so servicing the debt may be a problem. d. Radio One has no expertise in the other media of cable, recording industry and internet. 2. What price should Radio One offer based upon a discounted cash flow analysis? Are the cash flows in the exhibits reasonable? (The points below may be of assistance in your analysis.) a. Assume an effective tax rate of 34% going forward b. The new capital investments required each year will generate additional depreciation expenses beyond the 90 million noted in the case exhibits. You might simplify your analysis by assuming that these additional capital investments will each have five year life and might be depreciated on a straight line basis. c. In addition to the new capital investments, this expansion will require a commitment of net working capital. You might consider using the balance sheet and income statement data for the prior three years to establish a relationship between revenue net of commissions and net working capital. d. General corporate expenses might be allocated based upon BCF and/or assumed to decline due to economies of scale. e. Assume a market risk premium at the time of the case of 7.2%. In order to calculate the price, we need to do a discounted cash flow analysis

4. 398 billion ( 21. the valuation comes to $1.875 1.75 and the market risk premium is taken as 7. 25% is average of 1998 and 1999. the PV of all tax shield is added together.392 59. 2.611 1.820 115. 6. The BCF taken from Exhibit 9 for new markets.429 245 84.217 96.439 2001 128.972 3.200 96.265 2002 144. For terminal value. Capital expenditure is given as $100 per station 5.200 71.014 2. What price should Radio One offer based upon a trading multiples analysis? Based on multiples.521 82 163 71.143 65.256 billion ( 19.200 per year depreciated for 5 years.800 1. a growth rate of 5% is assumed. The depreciation tax shield is calculated for $1. average asset beta is 0.754 326 1999 105. Given that Radio One’s stock price is 30X BCF.065 1. Corporate expenses assumed at 5% of incremental BCF. For years beyond 2004. can if afford to offer as much as 30X BCF for the new stations? .5 X 2000 BCF) and $1.100 1.512 61. It is expected that corporate expenses will not increase significantly with the new acquisition since Radio One already has centralized functions which can handle the new acquisitions.737 How the cash flows are calculated 1.200 109. 3.815.711 664 3.460 89.985 101.401 1.277 666 3.951 25.4 X 2000 EBITDA). Working capital taken as 25% of net revenues.200 61.436 570 3. This gives the discounting rate as 11.061 1.The DCF calculation is below $ '000 Year Net Broadcast Revenues Broadcast Cash Flows (BCF) Corporate Expenses Changes in Working Capital Capital Expenditure Depreciation tax shield Free Cash Flow Terminal Value Depreciation tax shield Total NPV 1.313 76. Risk free rate is 30 years T-bond. 4.75% The amount to be paid comes to $1.705.294 2000 114.200 83.277 billion 3.276.041 301 2.427 2003 159.2%.966 613 2004 175. The working capital percentage has been declining and was 22% in 1999.726 1.

Radio One should not offer such high valuation.81 million Infinity paid 1.256 billion/12 = $59.277 billion/21 stations = $60.$1. 5.8 million BCF multiple . This amount is too high in relation to DCF calculations and in relation to multiple valuation.041 = $1. Based on the above calculations.400/18 = $78 million per station and Cox paid 380/7 = $54 million per station.57 million EBITDA multiple . What should Radio One offer for the new stations? As per the calculations.30X BCF would give a value of 30 X 65. the value comes to DCF – 1.398 billion/21 = $66. So Radio One should start at the lower end of the range at say $60 million and be prepared to go up to $66 million the maximum based on multiple.951 billion. .$1. the price is between the range of $54 million and $78 million.

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