May 31, 2016
Bishop Cheen has been one of the most well-respected stock analysts who specialize in the radio and media industries for years. Yet his experience goes far beyond Wall Street. Cheen started out as a road manager for renowned musical acts, then spent several years at the major labels and in radio, from working behind the mic to launching stations. He knows first-hand that success in radio requires more than Wall Street sizzle; the steak is in the fundamentals. Here, Cheen offers his insight into radio's business climate, both past and present.
You started out as a road manager way back in the day. Who did you work with?
Earth, Wind & Fire, The O'Jays, Street Corner Symphony, Roberta Flack and Richard Pryor. I did all that and on the promotion end, I use to co-promote a lot of concerts with radio stations in Miami, Ft. Lauderdale, Gainesville and Kansas City. I had a lot of fun in the '70s.
I was also a record rep back when major labels really mattered. I repped for a number of different big labels, which meant working new releases, making sure stores had product, local radio stations had promos, and encouraging them to play it. There was no Internet back then, which meant no disruptions. Life was pretty simple; you wanted recognition, you got it through airplay. There was no MTV, not when it mattered in the '80s. This was the '60s.
Did your radio experience impact your choice to be an analyst for the radio industry?
It did indirectly. I became interested in watching certain radio stations in my market and what they were selling for. I said, "Okay, how do we value them?" I started to do research. Again, back then when there was no Internet; you had to go to the library, call people and pick their brains. So I started to do research on how to value radio stations, and I found out you value them the way you evaluate any business -- you use the appropriate metrics, which in this case is cash flow.
I went back to business school for my MBA and my thesis was on the fair market value of radio and TV stations. Later I rewrote the thesis and sold it to the NAB, and repurposed it again for Paul Kagan. I've also published a couple valuation books; they're still sold today by the NAB and are available on Kindle through Amazon. It deals with the fundamentals ... what to look for in this kind of business. I wrote all these when radio's early disruptors were just on the horizon. Before the Internet, there were various attempts at phone radio, cable TV radio, MDS, wireless cable and LMDS, which are used by telcos now. They were offering services that explored a lot of different things in the audio marketplace, which were relatively very small compared to today's disruptions.
How did the Telecom Act change your view of radio's fair-market value, and could you tell that its passage would impact radio the way it did?
The Telecom Act was in 1996. I had already been a co-head at Kagan Media, where the appraisal division performed fair-market evaluations and asset appraisals, so I had done a lot of work within the radio industry on the value of their assets. When the Telecom Act came down, I was working for big institutions on the trading floor as a research analyst and portfolio manager.
When it came to predicting what would happen, we knew there would be a lot of buying, that Lowry Mays (founder of iHeart predecessor Clear Channel Communications) and Mel Karmazin (co-founder/CEO of Infinity Broadcasting, now owned by CBS) were hot to expand and would buy everything in sight. I would put out reports that said who were the hunters and who were the targets, because it was such a no-brainer that there would be a lot of consolidation. I even remember being investigated by the SEC, who thought I had some great nefarious inside information. I had no inside info and I didn't trade any radio or media stocks for my personal account, but it was so obvious there was going to be a lot of activity. So I knew sales would be big.
Did we know how big it was going to be? I didn't know, but we traded bonds and stocks based on arbitrages inherent in the bond and best guesses on who would be acquired. The technology considerations create arbitrage; we took advantage of it and made a lot of money.
Granted, this is hindsight, but looking back at it now, has consolidation been a plus or minus for radio?
Change always has winners and losers. The market went through consolidation, which meant that there were a lot more big players and they had a competitive advantage over small players. A small indie mom-and-pop with two signals in a market was immediately at a pricing disadvantage against big consolidators with five FMs and three AMs in the same market. They could fortress specific demos and beat you to death on pricing power in the way they sold inventory. They could also beat you when it came to luring away the best talent. Big consolidators always had that advantage.
Having said that, there are dozens of examples where it was a lot easier to buy stations and roll them up than it was to manage them. We found that out the hard way ... when you took five or six different signals and put them under one manager. If it was a great manager, you'd get five or six well-managed stations, but if the manager wasn't so good, you'd get five or six badly managed stations. And that happened a lot.
Management is still very much a science and an art. Radio is a management-intensive business, yet so many financial players came in and treated radio like a commodity, the latest example being when you don't really serve advertisers or listeners, but focus on the financial end of it with Wall Street venture hedge funds. At Cumulus, that created an inappropriate balance sheet for years. It finally caught up with them, and now they're trying to dig their way out. So bigger is not always better. Consolidation does have decided advantages in most cases, but at the same time it has also suffered from the slings and arrows of financial mismanagement for two decades now.
The bottom line is that radio is a very mature business. It was tough enough before the 2008 market crash and 2009 recession and the more recent Internet boom, which made it a lot tougher and more fragmented. That's why we've seen year after year of little or no topline growth in radio. The RAB claims a good month is up 1.5-2%, but most of the time it has been flat or down for the last six to seven years. To succeed, you have to have an appropriate balance sheet to match your income statement.
Yet there are operators in radio making a good living. They have their certain niches and don't carry a lot of debt or have no debt service. A low-growth industry cannot support lot of debt service; iHeart is finding that out hard way. Eight years in and they have a huge $21 billion debt. Why? Because they completed their deal just before recession of 2009. Now iHeart is still doing twists and turns, trying to not succumb to the burden of a balance sheet with all that debt.
They just staved off a bullet from very nervous bondholders who seized on very technical aspect of the covenant to say iHeart was in default. The court disagreed. But remove yourself from this minutae and look at it from a few thousand feet to see the big picture. There are a couple walls of debt that iHeart faces between now and 2018. iHeart has been restructuring their balance sheet last eight years; they keep extending and amending the due dates and covenants of their balance sheet. There are still huge debt repayment hurdles ahead, so while it's great they didn't go into default, they're not out of the woods.
Predictably, the news of that court decision sent iHeart's stock up over 40% -- and many other radio stocks went up as well. Do you attribute that to a "ripple effect" from the court decision, or more due to the fact that the Dow Jones went up around 200?
There is a ripple effect because radio is still an industry of comps. Investors prefer comps, which is why eight to 10 radio stocks went up as well. Again, you have to look at the big picture: iHeart stock went up 43% on the day of the court ruling. But even after that, iHeart is still going at "a dollar a holler." iHeart stock is very thin and it's 90% owned subsidiary Clear Channel Outdoor has a public stock that is only 10% of equity, with 90% being privately held by iHeart. There's so much institutional trading based on algorithms, so when iHeart has a good day, other radio stocks will usually have a good day, but none of the fundamentals have changed for the radio industry.
Look, there are some very well-run companies. One that continues to attract the most institutional support is Entercom. It's a second-generation company, probably the most respected publicly-held radio company with good management and great assets. Investors very much believe in that company.
But look at the big picture, such as the SNL Kagan radio index. The two most common ways to look at group of stocks is, first, Year To Date (YTD), and secondly, how it's been doing past the 52 weeks - such as what was it like May 24th 2015 to May 23rd 2016. YTD the radio average is down 5.3% while the S&P is up 1.6%. That's through the end of trading on Tuesday, May 24th. When you look at the last 52 weeks, the gap is worse. Of course, it was a very tough close to 2015 and opening to 2016. That radio average is down 36.9% vs, the S&P down 1.3%.
Investors are very busy people; they like snapshots ... and what's going on in the radio industry has been tough. The industry is not a darling of Wall Street. Clearly Cumulus' predicament has dragged down the overall average, but as I said before, radio is not a growth industry and investors worship growth industries, which these days are Net-related kinds of companies in media and telecoms. Although the Net could benefit radio, it's still probably more of a disruption.
Radio continues to promote its reach as a means to attract more advertisers. You buy it?
You look at Edison Research and see that 90% of American ears are still on good old-fashioned terrestrial radio. That's great, as is the share of TSL that still goes to terrestrial radio, although that's less each year because more listeners are going to Net-generated radio podcasts and such. Yet radio doesn't capture 90% of ad dollars because those dollars are fragmented. You're not just competing against other stations; you're competing against everything. Net is becoming a greater disruption, which fragments ad budgets even further, as ad buyers move up the learning curve on how to do mobile and web-based advertising. Plus, you're also competing against outdoor and cable and TV. That's a lot of disruptions chasing too few ad dollars.
With all this in mind, do you think radio owners such as Larry Wilson should stay private?
It depends on the operator and the timing. When Townsquare went public, most people went, "What ... are you nuts?" Even though everyone supposedly hates radio, it worked out well for them, probably because 25% of Townsquare is not radio, but events such as local concerts and car shows. But it worked out.
Even so, I think it would be a tough sell to take a radio company public. Larry Wilson has talked about it; he has very smart advisors and I like and respect him. Larry is a very smart guy who reached critical mass after buying the Digity properties. He'll figure it out. It'll come down to a question of price and value - and he's got to do it at the most opportune time in the market.
Right now, the best kind of IPOs -- even those in the digital industries -- aren't setting the world on fire by going public. That ship may have sailed for now; the window started to close in 2015 ... and what about the back half of 2016 and into 2017? The markets move to opportunistic windows and for the foreseeable future, it's not a welcoming or a very gratifying market to go public. But again, at some point that may change.
Which brings us to the current speculation on CBS Radio. Do you think the whole division will be sold to one buyer?
One buyer for all the stations? I don't believe that will happen. I think it'll ultimately be spun off to CBS shareholders. That way, it will become a reward for shareholders rather than a cap creating event. CBS would love to sell the whole group for whatever billion, then take that money to invest in operations or issue dividends to shareholders, but I don't think they're going to find one buyer to maximize their value.
How do things like this impact those working at CBS radio stations? And how would this impact the shareholders?
Stations still have to operate under the fundamentals to compete in the radio industry. But CBS Radio is still a force with a huge fleet of stations in top-down markets. The biggest groups in the country are iHeart and CBS, and I expect them to continue to compete every day.
In terms of the second question, about valuation and rewards to shareholders, you can reward shareholders two ways - you can "earn" your way to value or "event" your way to value through mergers & acquisitions, divestitures, and dividends. M&A has been going on for 20 years ago, since the Telecom Act. Whole companies being swallowed is an "event" way to value shareholders. A slow, bumpier road is earning way your way to value through quarterly earnings. CBS shareholders probably won't have a chance to profit from the "event" way but they will own a new public stock. They may sell a group of stations here or there, but there won't be a huge event. They'll have to earn their way to value for the time being.
The problem with being public is that you're operating inside a room with a lot of big windows. Investors watch every move you make, which has to be geared toward quarterly earnings. If you focus on investor perception to the extreme, you run the risk of being Cumulus, spending so much of your time doing somersaults and tricks for hedge funds and less time on the fundamental product. It's a lot easier to be a private company and to operate on the fundamentals.
Let me give you an example: The Kennedy family in Atlanta owns Cox Enterprises, which has, among other entities, Cox Communications and Cox Radio. They went private with their cable companies 20 years ago and took their radio division private seven years ago. They weren't comfortable being public and thought they would do better and it would be more conducive to operate as a private company. Other operators yearn to be public for obvious benefits, which is mainly liquidity. It depends on the operators, but being private or public take very different styles.
In your eyes, what's the best way for radio to grow in 2016?
There's no one single best way. It depends on what is suitable for the operator and suitable for the assets. You have to have free cash flow that grows; that makes it simple for analysts to talk about comparing one company to another -- what are the margins and multiples. It's really all about free cash flow - what's left over after you pay your debt service and cash taxes and capital expenditures. That's what it's all about; that shows you can use that cash for dividends or capital reinvestment. You've got to have an appropriate set of expenses and topline revenue to achieve great free cash flow.
You've retired from regular work to consult for SNL Kagan. Do you ever wish you were back in radio?
It was a lot fun and I'm still in touch with lot of my friends, back in the day, who were in radio PDs and such. Dean Goodman, who sold Digity to Larry Wilson and Alpha, is one of my oldest and closest friends. We used to launch and run radio stations together; we go way back. When we get together, we'll share a "back in the day" story and have a lot of laughs. I'm still in touch with my friends in the music business, too, but I have no burning desire to own a station, or to be a DJ again. It was a lot of fun at the time, but I can tell you there's no burning desire to get out on the road for a grueling tour. I am pretty happy doing what I'm doing right now ... like talking with you about the business. Thank you.