Bleak Near-Term Picture for Radio with More Write-Downs Seen
The outlook for the U.S. terrestrial radio industry is bleak through next year, with no letup in a decline in ad sales that has led to devaluations of stations, plunging stock prices and write-downs, said executives, analysts and lawyers who arrange deals. They said the upshot is that few radio stations are being sold, although many are on the market, and sellers may increasingly serve as lenders to buyers. The industry continues to face competition for ad dollars from Web sites and other new media, but radio audiences haven’t declined much, they said.
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Last quarter saw six radio companies take $3.75 billion total in write-downs to goodwill, asset impairments and other charges, most not affecting cash on hand, our analysis found. Radio executives and industry lawyers expect additional write-downs. Plunging stock prices make it hard for companies that need money to sell equity for financing, they said. The RBR Radio Index of 13 companies has fallen 72 percent this year through Wednesday. Penny stocks used to be removed from the index, but because the shares of so many companies trade below $1, that’s not being done for now, said Jack Messmer, executive editor of the publication that puts the index together.
Additional write-downs can be expected on shrinking cash flows, said Martin Gausvik, chief financial officer of Cumulus Media, the company with the second most U.S. stations. “I would tend to believe there could be more,” because “the economy is continuing to worsen,” he said. “Right now, there’s virtually no financing out there. The credit markets have been closed for about a year. It’s been getting tough. You've got to be creative if you want to sell an asset.” Deals are few despite an ample inventory of stations and much interest among would-be buyers, Gausvik and others said.
To jump-start deals, more sellers probably will offer to finance deals, said Gausvik and Jeff Smulyan, the CEO of Emmis. “There are a lot of people strategically who would love to buy assets, but they're having trouble finding financing,” said Smulyan. “You always see seller financing when the capital markets are closed.” The arrangement all but disappeared in the late 1990s, said Francisco Montero, a radio lawyer and a director of the Spanish Broadcasters Association. “Just like layaway is back, you're going to see seller financing is back,” he added. “There’s a lot of inventory out there that’s on the market. The problem is no one wants to give it away.”
Ad sales probably won’t rise again until the economy starts growing, and economists don’t expect that until at least the second half of 2009, Smulyan said. “Clearly all media, now all American business, is challenged like nobody has seen in many many years, so we're all waiting for the dust to settle,” he said. “Until you see some stability both in the capital markets and in the advertising markets you'll certainly see a decline” in station values. The total value of deals 2008 through October fell 44 percent from a year earlier, BIA Advisory Services said Tuesday. “When the year ends, this will be at the lowest level since 1992.” Third- quarter ad sales fell 9 percent to $5 billion, the Radio Advertising Bureau said.
“Radio is headed for the worst year since 1954 at down 9 percent” in ad revenue, said a report last week by analyst James Boyle of C.L. King & Associates. “Radio faces cyclical and secular challenges that appear to be having unprecedented impact,” he told us. “The radio audience levels that are frequently cited by the CEOs are not as healthy as they would like you to believe,” because the audience hasn’t expanded with the population since 2004, he added. Yet people are “increasingly mobile,” he added, making “more purchases at the last minute, so local radio should still be crucial for marketers looking to reach consumers on the go or in the office.”
Radio ad sales have dropped more than justified, especially in big cities, said Emmis’ Smulyan. “Radio listening has actually held up remarkably well, and I think that’s a disconnect in all of this,” he said. Radio audiences may grow as more people tune in for financial and political news, said John Crigler, a radio lawyer. “There’s an irony there, if ad rates are falling when listenership is up,” he said. But, he cautioned, “it doesn’t matter how many people are listening if your advertiser can’t afford the increase.”
Many stations are “struggling” to integrate their broadcast service” and Web sites so they're “compelling to advertisers” as a package, said Crigler, citing his clients’ experiences. “They know they have to be on the Internet.” Although Emmis has a large interactive division, Web streaming in general hasn’t been a “particularly profitable venture,” Smulyan said. “In many ways it’s more a promotional idea. I don’t know any of the streaming-only companies that have made any money. It’s one of the things that consumers like but you can’t monetize.”