Radio One Inc.

-
An analysis of the proposed acquis
itions

TEAM 3
Boyega Ajayi
Ines Chen
Damon Delorenzis
Jessica Jusuf
Doreen Marcher
Case Introduction
Opportunity for Radio One as a result of div
estures by Clear Channel Communications.
Potential acquisitions of 21 stations
What is the right price?
Background
The consolidation trend in the radio station
industry.
Reduced expenses
Increased prices for radio stations
Divestiture by Clear Channel
Objective of Analysis
Evaluate the Broadcast Cash Flows (BCF) of t
he targeted radio stations
Determine and evaluate appropriate multipl
es that can be used to evaluate the potential
acquisitions
Determine an appropriate offer price for the
targeted radio stations
Decision Criteria
Multiples
Broadcast Cash Flow (BCF)
Earnings before Income Tax
Depreciation and Amortization (EBITDA)
After Tax Cash Flows
Methodology
Discount Rate Unlevered Cost of Equity

Discounted cash flow

Corporate Valuation

Forecast period

Horizon Value

Multiple Analyses
Discount Rate - Unlevered Cost of Equity

rsu=rRF+(RPM)(u)
Hamada Equation

PRM 7.2%
rRF 6.28%
u 0.61
Average asset i 0.75
Rs 10.71%
Amortization Expense

Depreciation of property and equipment

Straight line depreciation for 15 years

Capital Expense
= 21 new operating Units X $100,000 each
= $2.1M
NWC Adjustment
Actual
1997 1998 1999
Net Broadcast Revenue 32,367,000 46,109,000 81,703,000
BFC 13,519,000 21,608,000 37,444,000
Total Current Assets 17,537,000 17,641,000 284,463,000
Total Current Liabilities 3,287,000 5,041,000 10,136,000
NWC 14,250,000 12,600,000 274,327,000
Change in NWC -1,650,000 261,727,000

NWC % of Revenue 44.0% 27.3% 335.8%

NWC % of BFC 105.4% 58.3% 732.6%

Adjusted
NWC % of Revenue 44.0% 27.3% 22.0%
NWC % of BFC 105.4% 58.3% 47.9%
Incremental Corporate Expense Adjust
ment

Total
BCF(1000s) 101,548, 116,079 136,034, 158,249, 180,786 205,920
Total Corporate
Expense(1000s) 6,000 6,000 6,900 7,935 9,125 10,494

BCF - Potential
New Markets 59,014 65,041 76,436 89,711 101,966 115,277
BFC-NewMarkets
/ TotalBCF 58.1% 56.0% 56.2% 56.7% 56.4% 56.0%
Corp Expense for
Potential New
Markets (1000s) 3,487 3,362 3,877 4,498 5,147 5,875
Net Working Capital (NWC) % of Steady State
BCF 47.90% Growth 4.00%
WACC 10.71%
Tax Rate 34.00%
Year 6/Steady
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 State
1999 2000 2001 2002 2003 2004 2005
Revenue to Growth 8.22% 12.35% 12.56% 10.75% 9.89% 4.00%
Gross Revenue $120,486 $130,384 $146,488 $164,891 $182,609 $200,676 $208,703
Direct Expenses 15,094 16,243 18,176 20,432 22,624 24,857
Net Revenue $105,392 $114,143 $128,313 $144,460 $159,985 $175,820

Operating Expenses $46,376 $49,102 $51,877 $54,750 $58,020 $60,543
BCF 59,014 65,041 76,436 89,711 101,966 115,277 $119,888
Corporate Expenses $3,487 $3,362 $3,877 $4,498 $5,147 $5,875
EBITDA $55,527 $61,679 $72,559 $85,213 $96,819 $109,402
Depreciation and Amortization $0 $0 $90,000 $90,000 $90,000 $90,000 $270,000
Depreciation Capital Expenditure $0 $0 $420 $840 $1,260 $1,680 $2,100
EBIT $55,527 $61,679 -$17,861 -$5,627 $5,559 $17,722
Taxes $18,879 $20,971 -$6,073 -$1,913 $1,890 $6,026
NOPAT $36,648 $40,708 -$11,788 -$3,714 $3,669 $11,697 $11,229

Add: Depreciation $0 $0 $90,000 $90,000 $90,000 $90,000 $90,000
Less: Capital Expenditure $0 $0 $2,100 $2,100 $2,100 $2,100 $3,516
Less: Increase in NWC $3,662 $636 $587 $638 $51,904
FCF $36,648 $40,708 $72,450 $83,550 $90,982 $98,959 $45,809

Terminal Value $0 $0 $0 $0 $0 $710,399
FCF+Terminal Value $36,648 $40,708 $72,450 $83,550 $90,982 $809,358

Enterprise Value $669,705

NWC Balance $3,662 $4,297 $4,885 $5,522 $57,426
NPPE (CAPEX-Dep. Per year) -$87,900 -$87,900 -$87,900 -$87,900 -$84,384
NOPAT/Sale -0.08 -0.02 0.02 0.06
Sale/NPPE -1.67 -1.88 -2.08 -2.28

Multiples
Enterprise Value / BCF 11.3
Enterprise Value / EBITDA 12.1
Enterprise Value / After-Tax Cash
Net Working Capital (NWC) % of Steady State
BCF 47.90% Growth 6.00%
WACC 10.71%
Tax Rate 34.00%
Year 6/Steady
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 State
1999 2000 2001 2002 2003 2004 2005
Revenue to Growth 8.22% 12.35% 12.56% 10.75% 9.89% 6.00%
Gross Revenue $120,486 $130,384 $146,488 $164,891 $182,609 $200,676 $212,717
Direct Expenses 15,094 16,243 18,176 20,432 22,624 24,857
Net Revenue $105,392 $114,143 $128,313 $144,460 $159,985 $175,820

Operating Expenses $46,376 $49,102 $51,877 $54,750 $58,020 $60,543
BCF 59,014 65,041 76,436 89,711 101,966 115,277 $122,194
Corporate Expenses $3,487 $3,362 $3,877 $4,498 $5,147 $5,875
EBITDA $55,527 $61,679 $72,559 $85,213 $96,819 $109,402
Depreciation and Amortization $0 $0 $90,000 $90,000 $90,000 $90,000 $270,000
Depreciation Capital Expenditure $0 $0 $420 $840 $1,260 $1,680 $2,100
EBIT $55,527 $61,679 -$17,861 -$5,627 $5,559 $17,722
Taxes $18,879 $20,971 -$6,073 -$1,913 $1,890 $6,026
NOPAT $36,648 $40,708 -$11,788 -$3,714 $3,669 $11,697 $10,995

Add: Depreciation $0 $0 $90,000 $90,000 $90,000 $90,000 $90,000
Less: Capital Expenditure $0 $0 $2,100 $2,100 $2,100 $2,100 $5,274
Less: Increase in NWC $3,662 $636 $587 $638 $53,009
FCF $36,648 $40,708 $72,450 $83,550 $90,982 $98,959 $42,712

Terminal Value $0 $0 $0 $0 $0 $962,025
FCF+Terminal Value $36,648 $40,708 $72,450 $83,550 $90,982 $1,060,984

Enterprise Value $806,391

NWC Balance $3,662 $4,297 $4,885 $5,522 $58,531
NPPE (CAPEX-Dep. Per year) -$87,900 -$87,900 -$87,900 -$87,900 -$82,626
NOPAT/Sale -0.08 -0.02 0.02 0.06
Sale/NPPE -1.67 -1.88 -2.08 -2.28

Multiples
Enterprise Value / BCF 13.7
Enterprise Value / EBITDA 14.5
Enterprise Value / After-Tax Cash
Flow 22.0
Net Working Capital (NWC) % of Steady State
BCF 47.90% Growth 8.00%
WACC 10.71%
Tax Rate 34.00%
Year 6/Steady
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 State
1999 2000 2001 2002 2003 2004 2005
Revenue to Growth 8.22% 12.35% 12.56% 10.75% 9.89% 8.00%
Gross Revenue $120,486 $130,384 $146,488 $164,891 $182,609 $200,676 $216,730
Direct Expenses 15,094 16,243 18,176 20,432 22,624 24,857
Net Revenue $105,392 $114,143 $128,313 $144,460 $159,985 $175,820

Operating Expenses $46,376 $49,102 $51,877 $54,750 $58,020 $60,543
BCF 59,014 65,041 76,436 89,711 101,966 115,277 $124,499
Corporate Expenses $3,487 $3,362 $3,877 $4,498 $5,147 $5,875
EBITDA $55,527 $61,679 $72,559 $85,213 $96,819 $109,402
Depreciation and Amortization $0 $0 $90,000 $90,000 $90,000 $90,000 $270,000
Depreciation Capital Expenditure $0 $0 $420 $840 $1,260 $1,680 $2,100
EBIT $55,527 $61,679 -$17,861 -$5,627 $5,559 $17,722
Taxes $18,879 $20,971 -$6,073 -$1,913 $1,890 $6,026
NOPAT $36,648 $40,708 -$11,788 -$3,714 $3,669 $11,697 $10,761

Add: Depreciation $0 $0 $90,000 $90,000 $90,000 $90,000 $90,000
Less: Capital Expenditure $0 $0 $2,100 $2,100 $2,100 $2,100 $7,032
Less: Increase in NWC $3,662 $636 $587 $638 $54,113
FCF $36,648 $40,708 $72,450 $83,550 $90,982 $98,959 $39,616

Terminal Value $0 $0 $0 $0 $0 $1,580,995
FCF+Terminal Value $36,648 $40,708 $72,450 $83,550 $90,982 $1,679,954

Enterprise Value $1,142,621

NWC Balance $3,662 $4,297 $4,885 $5,522 $59,635
NPPE (CAPEX-Dep. Per year) -$87,900 -$87,900 -$87,900 -$87,900 -$80,868
NOPAT/Sale -0.08 -0.02 0.02 0.06
Sale/NPPE -1.67 -1.88 -2.08 -2.28

Multiples
Enterprise Value / BCF 19.4
Enterprise Value / EBITDA 20.6
Enterprise Value / After-Tax Cash
Flow 31.2
Enterprise value

Steady Growth Enterprise Value

Rate (000s)

Scenario 1 4% 669,705

Scenario 2 6% 806,391

Scenario 3 8% 1,142,621
Multiple Analysis

Enterprise Enterprise Enterprise

Value Value Value
Multiple of Multiple of Multiple of
BCF EBITDA After-Tax CF

Scenario 1 11.3 12.1 18.3

Scenario 2 13.7 14.5 22.0
Scenario 3 19.4 20.6 31.2
CASE Q1:
Liggins and Royster had to decide if Ra
dio One should purchase the stations an
d how much to offer

CASE Q2:
What purchase price range that
would make sense ?
 Multiples Analysis of BCF

Enterprise Value BCF Enterprise Value

Growth Depreciation
($ 1000s) ($ 1000s) Multiple of BCF

4% 15 year 669,705 59,014 11.3

6% 15 year 806,391 59,014 13.7
8% 15 year 1,142,621 59,014 19.4
Strengths and Weaknesses

Too many factors make it very difficult to ass

ess an Acquisition proposal accurately
The Cost of Capital for the targeted stations i
s an assumption that could be changed
Expenses such as corporate expense and net
working capital are based on assumptions th
at the targeted radio stations will have ratios
similar to Radio One
Conclusion & Recommandation

As revealed by the risk analysis, some of th

e stations may be overvalued
Radio One should acquire all 21 stations an
d we recommend an offer not greater than
21 x BCF
The management should capitalize on their
high stock price when structuring the acqui
sition of the 21 targeted radio stations

Thanks