1.

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

The DCF calculation is below
$ '000
Year 1999 2000 2001 2002 2003 2004
Net Broadcast
Revenues 105,392 114,143 128,313 144,460 159,985 175,820
Broadcast Cash Flows
(BCF) 59,014 65,041 76,436 89,711 101,966 115,277

Corporate Expenses 2,951 301 570 664 613 666

Changes in Working
Capital 25,294 2,100 3,401 3,875 3,726 3,800

Capital Expenditure 1,200 1,200 1,200 1,200 1,200

Depreciation tax shield

Free Cash Flow 61,439 71,265 83,972 96,427 109,611

Terminal Value 1,705,061

Depreciation tax shield 82 163 245 326 1,065

Total 61,521 71,429 84,217 96,754 1,815,737

NPV 1,276,512

How the cash flows are calculated

1. The BCF taken from Exhibit 9 for new markets.
2. Corporate expenses assumed at 5% of incremental BCF. 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.
3. Working capital taken as 25% of net revenues. The working capital percentage has been
declining and was 22% in 1999. 25% is average of 1998 and 1999.
4. Capital expenditure is given as $100 per station
5. The depreciation tax shield is calculated for $1,200 per year depreciated for 5 years. For years
beyond 2004, the PV of all tax shield is added together.
For terminal value, a growth rate of 5% is assumed.
6. Risk free rate is 30 years T-bond, average asset beta is 0.75 and the market risk premium is
taken as 7.2%. This gives the discounting rate as 11.75%

The amount to be paid comes to $1.277 billion

3. What price should Radio One offer based upon a trading multiples analysis?

Based on multiples, the valuation comes to $1. 398 billion ( 21.5 X 2000 BCF)
and $1.256 billion ( 19.4 X 2000 EBITDA).

4. Given that Radio One’s stock price is 30X BCF, can if afford to offer as much as 30X BCF
for the new stations?
30X BCF would give a value of 30 X 65,041 = $1.951 billion. This amount is too high in
relation to DCF calculations and in relation to multiple valuation.
Radio One should not offer such high valuation.

5. What should Radio One offer for the new stations?

As per the calculations, the value comes to

DCF – 1.277 billion/21 stations = $60.8 million
BCF multiple - $1.398 billion/21 = $66.57 million
EBITDA multiple - $1.256 billion/12 = $59.81 million

Infinity paid 1,400/18 = $78 million per station and Cox paid 380/7 = $54 million per station.
Based on the above calculations, the price is between the range of $54 million and $78 million.
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.