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XLS Eng

Uploaded by

Harshit Arora
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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RADIO ONE INC.

Harvard Business School Case 201-025


Case Software 201-706 (4th edition)

Copyright © 2000 by the President and Fellows of Harvard College

This case was prepared as the basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.
Exhibit 2 Radio One's Acquisition Strategy
Market Number of Stations

FM AM
Washington D.C. 2 2
Baltimore, MD 2 2
Philadelphia, PA 1
Detroit, MIa 2 2
Atlanta, GA 2
Cleveland, OH 1 1
St. Louis. MO 1
Richmond, VA 7
Boston, MA 1
TOTAL 19 7
Source: Adapted from numerous SEC 10-K Filings.
a
One station is located in Kingsley, MI.
Year(s) of Acquisition

1980, 1987, 1995, 1998


1992, 1993
1997
1998
1999
1999
1999
1999
1999
Exhibit 3 African-American Demographic Information

Faster Population Growth


asterIncomGwFh
1995-2010
1980-5
Rate of Grow th (%)

25 21.2
21 10.7
20
10
13.3
15 8
10 64.3
5 4
2
0
0
General Population African-Americans
GenAfrica-mslPoput
Population
Populatin

Key Demographic Statistics


60% faster Population Growth
Largest Minority Group in the United States
Population projected to reach 40MM by 2010
150% faster Income Growth than General Population

Source: Adapted from Company Reports.


Faster Income Growth
asterIncomGwFh
1980-1995
1980-5
Ra te of Grow th (%)

12 10.7
2110.7
10
10
8
8
6 4.3
64.3
4
4
2
2
0
0
General Population African-Americans
GenralPoputiAfc-ms
Population
Populatin
Exhibit 4 Rising Urban Format Power Ratios 1991 – 2002a

0.90
0.84 0.85
0.85 0.82
0.80 0.81
0.78
0.80 0.76 0.77
Pow er Ratio

0.75 0.73 0.74


0.71 0.70
0.70
0.65
0.60
0.55
0.50

Year

Source: Adapted from Company Reports.

Years 2000– 2002 Estimated


a
Exhibit 5 Radio One's Turnaround Record

Cost(mm) 96BCF Multiple 99BCF Multiple


Washington DC $46.20 $6.30 7.3x $14.90 3.1x
Baltimore $13.70 $3.30 4.2x $11.80 1.2x
Philadelphia $20.00 $0.20 100x $1.70 11.8x
Atlanta $13.50 $1.20 11.2x $6.90 2.0x
Source: Adapted from Company Reports.
Exhibit 6 Radio One, Inc. and Subsidiaries—Consolidated Statements of Operations

1997 1998
Revenue

Broadcast revenue, including barter revenue of


$1,010,000, $644,000 and $1,821,000,
respectively ### ###
Less: Agency commissions 4,588,000 6,587,000
Net broadcast revenue ### ###

Operating Expenses
Program and technical $ 5,934,000 $ 8,015,000
Selling, general and administrative 12,914,000 16,486,000
Corporate expenses 2,155,000 2,800,000
Stock-based compensation -- --
Depreciation and amortization 5,828,000 8,445,000
Total operating expenses ### ###
Operating income $ 5,536,000 ###
Interest expense, including amortization of deferred
financing costs 8,910,000 11,455,000
Other income, net 415,000 358,000
(Loss) income before (benefit) provision
for income taxes and extraordinary item $(2,959,000) $ (734,000)
(Benefit) Provision for income taxes -- (1,575,000)

(Loss) income before extraordinary item $(2,959,000) $ 841,000


Extraordinary item
Loss on early retirement of debt 1,985,000 --
Net (loss) income $(4,944,000) $ 841,000
Net loss applicable to common shareholders $(6,981,000) $(2,875,000)
Basic and diluted loss per common share
Loss before extraordinary item ($0.53) ($0.31)
Net loss ($0.74) ($0.31)
Weighted average shares outstanding
Basic and diluted 9,392,000 9,392,000

Other Data:
Broadcast cash flow ### ###
EBITDA (before non-cash compensation) ### ###
After-tax cash flow $ 2,869,000 $ 7,248,000
Capital expenditures $ 2,035,000 $ 2,236,000
Source: Company Reports
1999

###
11,557,000
###

###
30,683,000
4,155,000
225,000
17,073,000
###
###

15,279,000
2,149,000

$ 2,861,000
2,728,000

$ 133,000

--
$ 133,000
$(1,343,000)

($0.08)
($0.08)

16,137,000

###
###
###
$ 3,252,000
Exhibit 7 Radio One, Inc. and Subsidiaries—Consolidated Balance Sheets
1997 1998 1999

Assets
Current assets:
Cash and equivalents $ 8,500,000 $ 4,455,000 $ 6,221,000
Investments, available for sale -- 256,390,000
Trade accounts receivable, net of allowance for
doubtful accounts of $1,243,000 and $2,429,000,
respectively $ 8,722,000 12,026,000 19,833,000
Prepaid expenses and other 315,000 334,000 1,035,000
Deferred income taxes -- 826,000 984,000
Total current assets $ 17,537,000 $ 17,641,000 $ 284,463,000
Property and equipment, net 4,432,000 6,717,000 15,512,000
Intangible assets, net 54,942,000 127,639,000 218,460,000
Other assets 2,314,000 1,859,000 9,101,000
Total assets $ 79,225,000 $ 153,856,000 $ 527,536,000

Liabilities and Stockholder Equity


Current liabilities:
Accounts payable $ 258,000 $ 1,190,000 $ 1,663,000
Accrued expenses $ 3,029,000 3,708,000 6,941,000
Income taxes payable -- 143,000 1,532,000
Total current liabilities $ 3,287,000 $ 5,041,000 $ 10,136,000
Long-term debt and deferred interest, net of current
portion 74,954,000 131,739,000 82,626,000
Deferred income tax liability -- 15,251,000 14,518,000
Total liabilities $ 78,241,000 $ 152,031,000 $ 107,280,000
Commitments and contingencies
Senior cumulative redeemable preferred stock:
Series A, $.01 par value, 140,000 shares
authorized, 84,843 shares issued and outstanding 9,310,000 10,816,000 --

Series B, $.01 par value, 150,000 shares


authorized, 124,467 shares issued and outstanding 13,658,000 15,868,000 --
Stockholders’ equity:
Common stock—Class A, $.001 par value,
30,000,000 shares authorized, 0 and 17,221,000
shares issued and outstanding -- -- 17,000
Common stock—Class B, $.001 par value,
30,000,000 shares authorized, 1,572,000 and
2,867,000 shares issued and outstanding -- 2,000 3,000
Common stock—Class C, $.001 par value,
30,000,000 shares authorized, 3,146,000 and
3,184,000 shares issued and outstanding -- 3,000 3,000
Accumulated comprehensive income adjustments -- -- 40,000
Additional paid-in capital -- -- 446,400,000
Accumulated deficit (21,984,000) (24,864,000) (26,207,000)
Total stockholders’ (deficit) equity $ (984,000) $ (1,825,000) $ 420,256,000
Total liabilities and stockholders’ equity $ 79,225,000 $ 153,856,000 $ 527,536,000
Source: Company Reports
Exhibit 8 Radio Industry Trading Multiples as of March, 2000 based on 2001E forecasts
Ticker Company BCFa EBITDAa After-Tax Cash
Flowb
BBGI Beasley Broadcasting Group 11.8 13.7 15.4
CBS CBS 15.1 15.8 22.3
AFM AMFM Inc 14.7 15.4 14.4
CITC Citadel Communcations 14.6 15.7 21.7
CCU Clear Channel Communic. 17.2 17.9 20.1
CXR Cox Radio 17.4 18.7 24.2
CMLS Cumulus Media 17.7 19.2 37.2
EMMS Emmis Broadcasting 11 12 13.2
ETM Entercom Communications 16.6 17.7 21.1
HBCCA Hispanic Broadcasting 42.1 44.5 59.7
INF Infinity Broadcasting 18.8 19.4 26.9
ROIA Radio One 22.1 24.2 36.5
SGA Saga Communications 9.9 11.4 14.5
WOM Westwood One 24.4 25.3 38.6
AVERAGE 18.1 19.4 26.1
Source: Credit Suisse First Boston, Radio One, Inc. Equity Research Report, March 9, 2000 and casewriter estimates.
a
BCF & EBITDA: Adjusted Market Value Multiple to 2001
b
After-Tax Cash Flow: Current Price as a Multiple of 2001

c
Asset betas are equity betas adjusted for leverage by multiplying the equity beta by the equity-to-value ratio and adding the debt beta
(assumed to equal 0.25) times the debt-to-value ratio.
Asset Betac

NA
1.06
0.96
0.68
0.65
0.27
0.83
0.55
0.3
1.23
0.82
0.82
0.26
1.29
0.75

tio and adding the debt beta


Exhibit 9 Radio One, Inc. Actual and Projected Financial Performance of Existing Markets and Potential New Markets

----Pro Forma---- ----------------------Projected----------------------


1999 2000 2001 2002 2003 2004
Gross Revenue – Existing Markets
Washington 32,221 34,812 37,597 41,357 45,492 50,042
Baltimore 25,162 26,952 29,108 32,019 35,221 38,743
Philadelphia (WPHI) 6,239 7,277 8,151 8,966 9,863 10,849
Philadelphia (WPLY) 8,978 9,500 10,450 11,495 12,645 13,909
Detroit 8,309 11,075 12,736 14,010 15,130 16,341
Atlanta 15,811 17,584 19,782 21,760 23,936 26,330
Cleveland 2,415 5,488 6,311 6,942 7,497 8,097
St. Louis -- 1,028 2,056 2,467 2,837 3,064
Richmond 10,713 13,226 15,210 17,492 19,241 20,780
Boston -- 3,401 4,081 4,693 5,162 5,575
Existing Gross Revenue 109,848 130,343 145,482 161,201 177,024 193,730
Gross Revenue – Potential New Marketsa
Charlotte 1,002 1,250 2,250 3,250 4,250 4,700
Augusta 2,708 2,750 3,200 3,400 3,600 3,800
Indianapolis 5,173 5,814 6,600 8,200 9,500 11,000
Los Angeles 38,626 41,117 45,221 49,517 54,221 59,372
Miami 1,501 1,634 1,634 2,043 2,553 3,191
Cleveland 13,370 13,750 15,000 16,500 17,750 19,000
Houston 36,618 39,547 43,502 47,852 52,638 57,743
Dallas 4,756 6,120 8,500 11,700 13,500 15,188
Greenville 4,614 4,864 5,418 5,750 6,250 6,500
Raleigh 12,118 13,538 15,163 16,679 18,347 20,182
New Markets Gross Revenue 120,486 130,384 146,488 164,891 182,609 200,676
Direct Expenses – Existing Markets
Washington (4,098) (5,080) (5,486) (5,790) (6,369) (7,006)
Baltimore (3,232) (4,018) (4,339) (4,483) (4,931) (5,424)
Philadelphia (WPHI) (800) (1,078) (1,207) (1,255) (1,381) (1,519)
Philadelphia (WPLY) (921) (1,078) (1,207) (1,379) (1,517) (1,669)
Detroit (818) (1,483) (1,705) (1,961) (2,118) (2,288)
Atlanta (2,080) (2,436) (2,741) (3,046) (3,351) (3,686)
Cleveland (166) (632) (727) (972) (1,050) (1,134)
St. Louis -- (163) (326) (345) (397) (429)
Richmond (1,607) (1,982) (2,279) (2,449) (2,694) (2,909)
Boston -- (484) (581) (657) (723) (781)
Existing Gross Expenses (13,722) (18,434) (20,598) (22,337) (24,531) (26,845)
Direct Expenses – Potential New Marketsa
Charlotte (150) (189) (313) (435) (549) (607)
Augusta (406) (357) (379) (402) (426) (452)
Indianapolis (519) (607) (702) (882) (1,078) (1,257)
Los Angeles (5,155) (5,496) (6,045) (6,619) (7,248) (7,938)
Miami -- -- -- -- -- --
Cleveland (1,707) (1,650) (1,800) (1,980) (2,130) (2,280)
Houston (4,479) (4,746) (5,220) (5,742) (6,317) (6,929)
Dallas (547) (825) (1,063) (1,463) (1,688) (1,898)
Greenville (566) (603) (672) (729) (791) (858)
Raleigh (1,565) (1,770) (1,982) (2,180) (2,398) (2,638)
ROI Direct Expenses (15,094) (16,243) (18,176) (20,432) (22,624) (24,857)
Net Revenue – Existing Markets
Washington 28,123 29,732 32,111 35,567 39,123 43,036
Baltimore 21,930 22,934 24,769 27,536 30,290 33,319
Philadelphia (WPHI) 5,439 6,199 6,944 7,711 8,482 9,330
Philadelphia (WPLY) 8,057 8,422 9,243 10,116 11,127 12,240
Detroit 7,491 9,592 11,031 12,048 13,012 14,053
Atlanta 13,731 15,148 17,041 18,714 20,585 22,644
Cleveland 2,249 4,856 5,584 5,970 6,448 6,964
St. Louis -- 865 1,730 2,122 2,440 2,635
Richmond 9,106 11,244 12,931 15,043 16,547 17,871
Boston -- 2,917 3,500 4,036 4,440 4,795
Existing Net Revenue 96,126 111,909 124,884 138,863 152,494 166,887
Net Revenue – Potential New Marketsa
Charlotte 852 1,061 1,937 2,815 3,701 4,093
Augusta 2,302 2,393 2,821 2,998 3,174 3,348
Indianapolis 4,654 5,207 5,898 7,318 8,422 9,743
Los Angeles 33,471 35,621 39,176 42,898 46,973 51,436
Miami 1,501 1,634 1,634 2,043 2,553 3,191
Cleveland 11,663 12,100 13,200 14,520 15,620 16,720
Houston 32,139 34,802 38,282 42,110 46,321 50,814
Dallas 4,209 5,295 7,438 10,238 11,813 13,289
Greenville 4,048 4,261 4,746 5,021 5,459 5,642
Raleigh 10,553 11,769 13,181 14,499 15,949 17,544
New Markets Net Revenue 105,392 114,143 128,313 144,460 159,985 175,820
Operating Expenses – Existing Markets
Washington 13,480 13,827 14,864 15,734 16,316 16,807
Baltimore 9,860 10,260 11,030 11,737 12,121 12,425
Philadelphia (WPHI) 3,779 3,957 4,254 4,618 4,926 5,240
Philadelphia (WPLY) 5,815 3,622 3,743 3,791 3,853 3,875
Detroit 6,421 6,578 7,071 7,495 7,776 8,032
Atlanta 6,799 7,503 8,066 8,393 8,716 8,994
Cleveland 1,774 3,791 4,075 4,234 4,451 4,667
St. Louis -- 1,440 1,548 1,912 2,199 2,358
Richmond 5,914 7,648 8,222 9,627 10,319 10,709
Boston -- 2,243 2,411 2,783 2,998 3,137
Existing Operating Expenses 53,842 60,869 65,284 70,324 73,675 76,244
Operating Expenses – Potential New Marketsa
Charlotte 665 1,023 1,249 1,461 1,659 1,781
Augusta 1,361 1,584 1,669 1,758 1,851 1,949
Indianapolis 2,954 3,206 3,463 3,848 4,255 4,639
Los Angeles 14,448 15,621 16,176 16,584 17,581 18,642
Miami 510 584 584 862 1,224 1,313
Cleveland 4,862 4,600 4,700 4,958 5,101 5,149
Houston 10,129 10,592 11,046 11,469 11,850 12,035
Dallas 4,012 4,195 4,938 5,238 5,500 5,900
Greenville 1,919 1,928 2,071 1,945 1,922 1,574
Raleigh 5,516 5,769 5,981 6,627 7,077 7,561
New Markets Operating Expenses 46,376 49,102 51,877 54,750 58,020 60,543
BCF – Existing Markets
Washington 14,866 15,904 17,246 19,833 22,808 26,229
Baltimore 11,846 12,673 13,738 15,799 18,169 20,894
Philadelphia (WPHI) 1,658 2,242 2,689 3,092 3,556 4,090
Philadelphia (WPLY) 2,500 4,800 5,500 6,325 7,274 8,365
Detroit 1,069 3,013 3,959 4,553 5,236 6,021
Atlanta 6,933 7,645 8,975 10,321 11,869 13,650
Cleveland 470 1,066 1,510 1,737 1,997 2,297
St. Louis -- -575 182 209 241 277
Richmond 3,192 3,596 4,709 5,415 6,228 7,162
Boston -- 674 1,090 1,254 1,442 1,658
Existing BCF 42,534 51,038 59,598 68,538 78,820 90,643
BCF – Potential New Marketsa
Charlotte 187 38 688 1,354 2,042 2,312
Augusta 941 809 1,152 1,240 1,323 1,399
Indianapolis 1,700 2,001 2,435 3,470 4,167 5,104
Los Angeles 19,023 20,000 23,000 26,314 29,393 32,794
Miami 991 1,050 1,050 1,181 1,329 1,878
Cleveland 6,800 7,500 8,500 9,563 10,519 11,571
Houston 22,009 24,210 27,236 30,641 34,471 38,780
Dallas 197 1,100 2,500 5,000 6,313 7,389
Greenville 2,129 2,333 2,675 3,076 3,538 4,068
Raleigh 5,037 6,000 7,200 7,872 8,871 9,982
New Markets BCF 59,014 65,041 76,436 89,711 101,966 115,277

Total BCF 101,548 116,079 136,034 158,249 180,786 205,920

Corporate Expenses 6,000 6,000 6,900 7,935 9,125 10,494


EBITDA 95,548 110,079 129,134 150,314 171,661 195,426
Non-cash Compensation 225 0 0 0 0 0
Depreciation and amortizationb 107,520 107,520 107,500 107,500 107,500 107,500

EBIT (12,197) 2,559 21,634 42,814 64,161 87,926

Source: Adapted from company reports


a
Potential acquisitions in Charlotte and Augusta were from Davis Broadcasting; in Indianapolis from Shirk, Inc
and IBL,LLC; and the remaining potential acquisitions were from Clear Channel Communications, Inc.
b
Includes about $90 million of tax deductible depreciation and amortization in each year beginning 2001 and
ending in 2015, as a result of the potential acquisitions.
otential New Markets
Exhibit 10 Corporate & Government Bond Rates as of March 1, 2000
Government Bond Yields
Maturity Rate
3 months 5.36
6 months 5.68
1 year 5.84
3 years 6.14
5 years 6.19
10 years 6.28
30 years 6.35

Corporate Bonds (10-year maturity)


Rating Rate
AAA 7.1
AA 7.18
A 7.34
BBB 7.7
BB 9.1
B 9.68

Source: Federal Reserve Statistical Release; Bloomberg

Common questions

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Radio One's acquisition strategy is tightly aligned with their financial objectives, aiming to consolidate radio stations in markets with significant African-American populations to leverage demographics for revenue growth. By acquiring stations in areas like Washington D.C. and Baltimore with multiple FM and AM stations, Radio One can achieve operational efficiencies and tap into advertising markets that cater to African-American listeners. Their strategy is evidenced by multiple acquisitions between 1998 and 1999, reflecting a focused expansion approach to increase broadcast revenue, as seen with significant interest in existing and potential new markets such as Atlanta and Cleveland . This strategy aligns with broader financial goals by enhancing market share and increasing the company's overall asset value.

Projected revenue trends for Radio One indicate significant growth in both existing and potential new markets up to 2004. Existing markets, such as Washington, show an increase from $32.2 million in 1999 to $50 million in 2004, while potential markets like Los Angeles are projected to grow from $38.6 million to $59.4 million in the same period . These trends imply that Radio One's strategic focus on urban-centered markets with substantial African-American demographics is expected to result in considerable revenue expansion. As these markets mature, the revenue growth will likely enhance the company's strategic priorities, strengthen their market influence, and increase overall shareholder value.

Radio One's pro forma financial projections for potential new markets suggest aggressive growth and expansion strategy implications. By integrating markets like Los Angeles and Houston, projected to contribute significantly to revenue and BCF growth, Radio One aims to diversify and amplify its revenue streams . This not only indicates the company’s confidence in market potential but also necessitates effective operational scaling and risk management strategies. These projections endorse Radio One's underlying operational strategy of pursuing high-growth urban markets and leveraging demographic shifts, potentially leading to increased market share and valuation advantages.

Radio One’s management of liabilities over 1997 to 1999 illustrates strategic responses to financing growth. In 1997, Radio One had total liabilities of $78.2 million, which increased significantly to $152 million in 1998, driven mainly by a rise in long-term debt to finance acquisitions . By 1999, liabilities decreased to $107.2 million, reflecting possible debt repayments and a strengthened capital structure. The reduction in liabilities amidst increased total assets and acquisition activities showcases Radio One's leverage management and fiscal strategy to ensure sustainable growth during its expansion phase.

The document cites several demographic trends contributing to Radio One’s strategic focus on African-American audiences. First, the African-American population is projected to reach 40 million by 2010, marking it as the largest minority group in the United States. Additionally, this demographic group is experiencing a 60% faster population growth rate compared to the general population and has a 150% faster income growth rate than the general population from 1980 to 1995 . These factors indicate significant potential for market expansion and increased purchasing power within the African-American demographic, aligning with Radio One's acquisition strategy focused on these communities.

Radio One's financial performance metrics, particularly its BCF and EBITDA multiples, indicate a strong position relative to industry averages. Radio One reports BCF and EBITDA multiples of 22.1 and 24.2, respectively, compared to industry averages of 18.1 and 19.4 . This performance suggests that Radio One is commanding higher market value expectations and is efficiently converting revenue into cash flow relative to competitors. Furthermore, this superior performance reflects effective management of acquisitions and operational efficiencies in targeting African-American markets, supporting their decision to focus on these potentially lucrative segments.

Radio One's acquisitions significantly improved their EBITDA, demonstrating the financial effectiveness of their strategy. The document indicates an increase in EBITDA (before non-cash compensation) from $95.5 million in an earlier period to $195.4 million projected for 2004, an increase driven by both existing and potential new markets . The substantial improvement reflects not only the successful integration of the acquired stations but also the full exploitation of economies of scale and operating efficiencies facilitated by acquisitions across key markets. These actions align with the company's strategic emphasis on expansion and market penetration.

The trading multiple data from March 2000 suggests a positive market perception of Radio One. With a BCF multiple of 22.1 and an EBITDA multiple of 24.2, both exceeding the industry average of 18.1, Radio One is valued highly relative to peers . This indicates investors' confidence in Radio One’s strategic direction and growth potential, particularly in leveraging its demographic focus. These multiples reflect the market's anticipation of continued strong cash flows and operational success, largely attributed to their targeted acquisitions in key African-American markets.

The consolidated balance sheet of Radio One from 1997 to 1999 indicates substantial changes due to their acquisition strategy. The total assets rose dramatically from $79.2 million in 1997 to $527.5 million in 1999, notably due to increases in property and intangible assets linked to station acquisitions . Additionally, long-term debt displays an initial increase reflective of acquisition financing, peaking at $131.7 million in 1998 before reducing in 1999, suggesting a strategic refinancing or improved cash flows post-acquisition. These changes signify an aggressive acquisition-driven growth model focused on expanding Radio One’s footprint in target markets, demonstrating how balance sheet modifications are integral to executing their acquisition strategy.

Radio One's acquisition strategy had a transformative effect on its stockholders' equity from 1997 to 1999. Initially, the company reported a stockholders' deficit of $984,000 in 1997, turning into a significant stockholders’ equity of $420.3 million by 1999 . This shift reflects the positive impact of acquisitions on asset accumulation, as seen from substantial increases in intangible and physical assets. The transition illustrates effective use of acquisitions to substantially enhance company value, realized through asset revaluation and expanding market share, benefiting shareholders with increased equity value and indicating a successful implementation of acquisition strategy.

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