Investor Perception of Radio May Be Affecting Entercom/CBS Radio
Lack of investor interest in the radio industry is affecting Entercom joining with CBS Radio, attorneys and analysts said in interviews Wednesday. Though its revenue has grown, unlike much of the industry, Entercom stock slid 35 percent this year, causing CBS shareholders to have doubts about the deal, said Justin Nielson, senior researcher for S&P Global Market Intelligence. Wells Fargo analyst Marci Ryvicker called the situation “messy” in an email to investors. The sliding shares stem from a perception the radio industry is shrinking, exacerbated by looming likely restructurings of the industry’s two largest companies, Cumulus and iHeartMedia, attorneys and analysts said. The lack of clarity about the future of those companies is causing uncertainty for the industry, said Fletcher Heald broadcast attorney Dan Kirkpatrick.
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“Not a lot of investors are looking at the industry in terms of growth,” Nielson said. This is partly because of a history of flat revenue growth, industry officials said. It’s also because radio is seen outside the industry as out of date compared with more futuristic tech, even though it's extremely widely used, Kirkpatrick said. There’s been a perception that radio is on its way out for decades, but “it keeps chugging along,” Kirkpatrick said. If radio were dying, “you would have seen significant declines in revenue as you’ve seen in the newspaper industry,” said broker Bob Heymann of the Chicago office of Media Services Group. “Industry-wide revenue has been flat over the past few years.”
The expected restructuring of Cumulus and iHeart caused an “overhang” that drags on the industry, Nielson said. Those processes could lead to divestitures and have other effects that keep the rest of the industry uncertain, Kirkpatrick said. Entercom Chief Financial Officer Richard Schmaeling also pointed to the overhang as a problem for radio (see 1706150073). Analysts saw Entercom/CBS as boosting the industry by creating a big player that wasn’t suffering from the same debt issues (see 1702020070). Entercom and CBS Radio didn’t comment.
The decline of Entercom’s shares has a direct effect on the deal because it's a stock transaction, Nielson said. The deal is based on CBS Radio shareholders receiving Entercom stock, Entercom said in its agreement announcement. With the share price dropping, the price the CBS Radio stockholders are being paid is also declining, Nielson said. Projections of the near future exacerbate the problem, analysts said. Consistently a huge source of radio revenue, automotive sales are slipping and not expected to improve, and the radio industry hasn’t performed as well as expected this year, Nielson said.
The stock decline while waiting for the deal to happen is typical of a company in Entercom’s position, said Hubbard Radio President Drew Horowitz. Though conceding radio isn't a growth industry, he disputed that it’s a problem. “Wall Street is not a great arbiter” of a healthy industry, Horowitz said. A lot of companies in radio don’t have oversized debt loads and radio has “a great core business,” he said.
Despite the stock drop, the deal is still expected to go through, Ryvicker said. “We've been asked if there is a stop-gap to this deal should ETM's stock fall below a certain price. As we understand it, the answer is no.” Either board could pull out for a $30 million fee, she said. Noble Capital Markets analyst Michael Kupinski said in email to investors expected approval has been pushed back to Q4 “reflecting a slow government approval process.”