Cox Radio Lowball Set to Rise Up

Highlights include Cox Radio, Inc. (CXR), Cumulus Media (CMLS - Analyst Report), Emmis Communications (EMMS - Snapshot Report), Entercom Communications (ETM - Analyst Report) and Radio One, Inc. (ROIAK - Analyst Report).

Cox Radio: Lowball Tender Offer Set to Go Higher

Cox Radio, Inc. (CXR) withdrew its recommendation that its shareholders accept Cox Enterprises’ recent tender offer of $3.80 a share. The offer represented a 15% premium over Cox Radio's previous closing price and a 22% premium over the ten-day volume weighted average closing price. Simultaneously, Cox Enterprises extended the deadline to Friday, May 1.

The stock has traded at an average of $4.14 since the March 23rd announcement, reflecting investors’ doubt that the offer would be accepted at the initial price. As of the market’s close last Friday, 457,000 shares, or about 2% of the outstanding shares, were tendered.

Cox Enterprises, which divested Cox Radio years ago, currently owns a 78% stake and a 97% voting interest in the Atlanta-based radio broadcaster. Cox Enterprises’ stake has been implicitly growing since Cox Radio began repurchasing its shares in early 2005, reducing the float and bolstering EPS.

The initial tender offer recommendation by Cox Radio’s Board of Directors was, in our opinion, a breach of fiduciary duty. Not surprisingly, a proposed class action lawsuit was filed against Cox Radio, Inc, its board of directors, Cox Enterprises and Cox Media.

The opportunistic offer of $3.80 per share is 82% off of the shares’ 52-week high and just 31% above its November lows, and comes at a time when the industry is undergoing unprecedented drops in ad spending. CXR’s revenue and EBITDA plunged 23% and 62%, respectively, in 1Q09.

While secular pressures will likely moderate the eventual cyclical rebound in revenues and earnings, current results are clearly close to trough.  At some point later in 2009 or 2010, we expect ad spending to stabilize. Therefore, the current buyout multiples (6.0x ttm EBITDA and 1.8x trailing 12-month revenue) have less meaning.

In the meantime, Cox Radio is the best-positioned radio operator to weather the recession. At 3.4x (debt/EBITDA), Cox Radio is significantly underleveraged relative to its peers (radio group median is more than 6.5x), making it one of the few publicly traded radio operators with ample coverage of its debt service at a time of plummeting cash flow. To be sure, EBITDA/interest expense was a generous 8.2x in 1Q09.

This compares very favorably with Cumulus Media (CMLS - Analyst Report), which had leverage of 7.2x and growing rapidly at year-end 2008, and with Emmis Communications (EMMS - Snapshot Report), Entercom Communications (ETM - Analyst Report) and Radio One, Inc. (ROIAK - Analyst Report), all of which were levered at 6.3x or greater.

The industry levered-up over the last several years, as it bolstered decelerating growth through stock buybacks. The radio industry has been suffering secular declines in ad spending, as listeners migrate to MP3s, satellite and Internet radio, and ad dollars move to the Internet and to local media options, like cable television.