Previously we mentioned the legacy media might be back in vogue. It was TV, in particular an analysis on ViacomCBS. Today we’ll look at another legacy media, radio, which I think is hotter than ever! In particular, Cumulus Media. Cumulus is the 3rd largest radio operator in the US, behind iHeartMedia (formerly part of Clear Channel) and Audacy (fka Entercom). It owns and operates 400+ radio stations across 87 cities in the US, reaching 245mm people weekly.
The company delivers quality local and national audio content in sports, news, talk and entertainment shows. It collaborates with iconic brands including NFL, NCAA, the Masters, the Olympics, American Country Music Award as well as nationally recognized personalities like Ben Shapiro and Pat McAfee. Almost all of its revenue comes from advertising.
Company History
Cumulus was founded in 1998 (more on Wikipedia here). For the next 15 years, it completed $5bn of acquisitions to grow its network and radio station businesses. The most notable ones included Citadel Broadcasting for $2.5bn in 2011 and Westwood One for $260mm in 2013. These acquisitions left the company with high debt levels and little room for error. At the same time, with emergence of online and digital channels, radio advertising revenue experienced sharp drop from pre-financial crisis level and remained in slow decline over the last decade. Coupled with industry pressures, the company underperformed and was left with an unsustainable capital structure. In 2017, Cumulus filed for bankruptcy.
Through the reorganization process, the company shedded debt, sold assets and streamlined its radio station portfolio. Then the pandemic hit. Stay-at-home orders shuttered majority of economic activities. Advertising dollars plummeted. The stock went from a range bound of $10-20/share post emergence in 2018 to below $5 in 2020. The perception of radio as a declining legacy media, bankruptcy stigma of the company and its generally small market capitalization however allow for a compelling re-opening bet as economy recovers from the pandemic.
Radio Industry
As alluded to earlier, radio industry has its challenges. Internet, digital channels and smartphones have no doubt taken away much of our attention. However, AM/FM radio remains the dominant audio source used in cars. In fact, radio has the broadest weekly reach to the US population, higher than any other media platforms, including TV, smartphones, computers and tablets. Large part of the appeal of radio is its focus on local. Local news, weather, sports, community announcements and emergency conditions, while providing music entertainment either on the road driving or at home doing chores. That explains why radio advertising revenue declines at a much slower rate (low-single-digit) than one would have thought.
From an industry capacity standpoint, not only Cumulus but also iHeartMedia (the #1 radio operator) underwent bankruptcy reorganizations. Unprofitable stations were shuttered and / or consolidated. Industry profitability remains fairly healthy. Furthermore, radio companies are re-positioning themselves as audio content companies. Like video content, audio content has value at its place and time.
Financial Performance
Since bankruptcy and prior to the pandemic, Cumulus was able to maintain a flat revenue at ~$1.1bn. And EBITDA in the low-$200mm range for a roughly 20% margin. In every other even year, it has a ~$15mm EBITDA boost from active political ad spend. 2020 was an adverse year for advertising. Company revenue dropped 27% to ~$800mm and EBITDA to $80mm. The beauty of radio, or generally content, businesses is that they are capital light. In a dismal year like 2020, it still generated free cash flow.
In addition, the company completed a major asset sale. Its tower portfolio was sold for $200+mm, reducing net debt to $700mm. The accounting treatment is tricky as it required the company to book the transaction as financing liability as opposed to a true sale. It would be unwise to lump this as part of the net debt since the assets were sold for much higher multiple (~15x) than what the radio business may be valued.
Valuation
The thesis here is simple. Key question is how much EBITDA will recover from the trough in 2020. The leading indicator is radio listenership. As the country opens up, people are back to driving and going outside. In 1H 2021, radio listenership is already back to pre-pandemic level! Economic activity and advertising spend will lag. But with a simple cyclical recovery, I can see EBITDA back to $150-200mm range by next year.
Some may question what if advertisers continue to make secular shift to other digital channels. Probably so. And $150mm EBITDA would still represent a 30% drop from 2019 level. In addition, the company is actively expanding into podcasting and digital streaming, which have seen decent growth including last year. As long as its audio content is in demand, the company will find a way for people to tune in.
With the benefit of the asset sale, fixed charges (cash interest, taxes and CapEx) of the business should normalize to be ~$80mm. This implies free cash flow generation of $70-120mm by next year. As of writing, the stock has rallied 3x from the low in 2020 and is now sitting at low-teens, giving it a ~$250mm market capitalization. That’s a 30-50% free cash flow yield to the equity. Alternatively, a reasonable 7x will get you $25-30/share, i.e. a double from here. I think you are getting paid for the risk. Even if the cyclical recovery takes longer, no debt is coming due until 2026, giving it an ample runway.
Final Word on Leverage
If you break down the return, big part of it is leverage. First is operating leverage, which the company should benefit from a cyclical recovery standpoint. Second is financial leverage. The company has decent amount of debt on its balance sheet. To put it in context, if EBITDA were to stay flat from 2020, the company is close to 9x levered. By all means it’s a levered bet. And leverage is a double-edged sword. In upturn, it juices up the return. In downturn, it may hurt you more than you can afford. So make sure it is in the upturn! Until next time.
