Comment from Brad Smart

 
You don’t need me to tell you that COVID-19 has really stuffed things up deluxe during the course of 2020.
 
… and Radio has not escaped its wrath!
 
If you want to take a peek at a real horror show, you only have to check out what COVID has done to the value of many of this country’s radio operations. 
 
Everybody’s been talking about the collapse of advertising this year, thinking in terms of whether stations will be able to pay their bills, but few have thought of the impact on the resale value of stations.
 
In times gone by, the radio industry was such a high performer that a station’s value was something you could literally take to the Bank.
 
The concerning thing for the industry right now, is this.
 
An owner’s ability to keep their borrowings in place is normally underpinned by the valuation that their financier puts on their station and their other assets.
 
If that valuation drops dramatically, then things like, job security within the operation, could well be at risk.
 
Up until this year’s ‘great plague’, the ballpark value of a radio operation could be calculated as 8 times its EBITDA.
 
In case you’re wondering what an EBITDA is, it’s an accounting term taking into account all the revenues of the station, minus its expenses, but then giving back any interest payments, income tax, or calculations for depreciation and amortisation. 
 
In fact, it’s easier to think of it, in broad-brush terms, as the station’s operating profit.
 
Before the collapse of the advertising market, many regional stations, if they were run efficiently, could generate an EBITDA of between 20-30% of their turnover.
 
Just to get the math out of the way, for a station turning over, say, $1-million a year, based on the ‘8 times’ rule, its value could be between $1.6 – $2.4-million depending on how well their EBITDA had held up over the past few years.
 
We’ve all heard stories of deals that were done for sky-high multiples, like the sale of HOT FM on the Sunshine Coast to Prime Media around 2007. 
 
These big sales only happen when a buyer really wants a particular station and is prepared to pay anything to get hold of it, but as a general rule the 8 times multiple has always been a pretty good fit.
 
One of the biggest buys in recent memory was Southern Cross Austereo’s acquisition of Kerry Stokes’ Redwave Media in Western Australia.
 
Redwave was a regional network with stations in Bunbury, Karratha, Port Hedland, Broome, and in remote towns and mining communities across the Pilbara and the Kimberley.
 
That $28-million deal was made in the second half of last year well before any of us had heard the dreaded word, ‘Coronavirus.’
 
Sure, to you and me it sounds like a helluva lot of money, but it is believed that deal was settled at around 8 times the network’s EBITDA.
 
Simple math says the Redwave network, therefore, must have been writing about $3.5-million profit.
 
I’m sure Kerry was very happy with the result, and he’d be smiling even more broadly today, given the changed landscape.
 
If you look back to 2019, radio advertising was starting to slip away a little in the last half of the calendar year. 
 
Most industry players thought, at that point, it was just part of the normal business cycle. They saw that downturn as something that was going to be easily addressed with a little belt tightening here and there, until the issue passed.
 
Wind the clock forward to today, however, after the worst year on record for, well … everything, and the picture changes dramatically.
 
With a previously unheard of 58% collapse in radio advertising in the June quarter, word within the industry right now is that an 8 times multiple to value a radio station would be looking very rosy indeed.
 
The most likely response from industry buyers would now be ‘tell him he’s dreamin’.’
 
Shares in the publicly listed company, SCA, have fallen from 96 cents in July 2019, to a low of 9 cents at the height of the pandemic, then appeared to settle at around 16 cents, before the company recently divided its shareholding by 10, to create a more respectable share price of $1.60.
 
That gives the company a value on the stock market of $437M, well down on its multi-billion dollar price tag of a year or two ago. 
 
SCA’s current market valuation is spread across almost 90 metro and regional radio stations, and an expansive regional television network. 
 
It doesn’t take an accountant with an abacus to work out that their individual stations aren’t worth, at least on paper, what they used to be.
 
Now, I’m only using SCA as an example because their figures are readily available, but potentially all private and publicly-listed networks and station owners are facing the same dilemma.
 
Most have us always regarded the value of radio stations with the same mindset everyone viewed real estate prior to the Global Financial Crisis. Prices were always going to go up; they’d never fall.
 
Well, the GFC destroyed that myth with real estate, and it appears COVID may be doing the same thing to radio stations, at least in the short term.
 
When a buyer looks to acquire stations, they have to look at them with an investor’s eye. In most cases, the profit is made in the buying of the station, not the selling.
 
If buyers are going to pay a hefty multiple, then they want to know the station is going to be performing well and have the potential to perform even better under their ownership.
 
Given the massive worldwide drop in radio advertising throughout 2020, it’s little surprise that the value of radio stations is now falling.
 
A multiple of 8 times for any industry is high and can only be sustained while that industry is the flavor of the month with investors and financiers.
 
Unfortunately, right now, that’s not the case for either metro or regional radio.
 
From a purely pragmatic viewpoint, it’s highly likely that the new ‘COVID normal’ for radio stations could see a drop in station values to a multiple of just 4 to 5 times their EBITDA.
 
Few deals have been done this year, but I understand, other than 2CH, they have been on less than favorable terms for the seller.
 
One heritage station operation being quietly offered on the market recently, could only attract ‘fire sale’ offers, which tends to back up my thinking on the direction that multiples are taking.
 
The situation gets even worse for stations that aren’t producing a positive EBITDA, which is a real possibility given this year’s drop in revenues.
 
Obviously, with a loss-making station, the multiple formula doesn’t work, and potential buyers are left trying to estimate a fair intrinsic value, that will be attractive enough to get them over the line.
 
Prospective buyers have to consider how long it’s going to take to get that station back in the black, and how much cash they’ll have to inject to get it on the road to profitability.
 
Smart buyers over-estimate their costs and under-estimate their potential revenues in putting their offer together.
 
Unfortunately, in the case of that particular station, the owners had unrealistic expectations of its market value based on its current performance.
 
I suspect they were still thinking of the ‘good old days’ when you could write your own ticket on your selling price, but COVID has put paid to that concept, probably for quite some time to come.
 
One growing concern is that once financiers start to delve into recent radio station returns, they’re likely to start looking for ways to get out of, or modify, their current loan agreements.
 
If there’s one group that will do anything to protect themselves from the slightest risk, it’s banks. They don’t care who they have to throw under the bus, as long as they’re protected.
 
When they realise that stations, they’ve financed, may no longer be worth what they used to be, these guys could start circling the wagons.
 
Existing owners with high debt/equity ratios and depressed valuations could find themselves in breach of their loan agreements, and under ever-increasing pressure from their shareholders.
 
Even though money is relatively cheap to borrow right now, you still have to be able to get access to it and service the debt.
 
If highly geared stations can’t grow revenues in these tough times, their only alternative will be to start cutting costs, and the greatest cost of all in radio, is staff.
 
We’ve already seen Southern Cross Austereo cancel 21 breakfast shows in regional areas. Sure, some staff have been reassigned within their business, but many others have had to be shown the door.
 
Grant Broadcasters, ARN and NOVA have all have had to face commercial reality this year and shed staff.
 
I don’t know too many regional stations that are prepared to operate with non-essential people on their payrolls. Regional radio is not that kind of business.
 
My great fear is that the post-COVID legacy for commercial radio could well be a long-term reduction in the quality of services provided to regional communities, because of forced staff cuts.  
 
I certainly hope it’s not going to come to that, but radio station ownership is a tricky business. Management has to walk a fine line between meeting financial obligations and their desire to provide the best possible programming for their listeners.
 
The much-trumpeted COVID-19 bumper-sticker slogan of ‘We’re all in this Together’ may ring true for government and public service fat cats, but down where the real pain has been felt in private industry, that saying is little more than an insult.
 
Same thing within commercial radio.
 
We’re not all in this together.
 
I don’t want to sound alarmist, but I think radio station owners and their staff are going to face some very tough times over the next year or so, as they struggle to get their businesses back performing to pre-COVID levels.
 
 

About the Author

Brad Smart previously owned and operated the Smart Radio Network through regional Queensland.

He sold his stations to the then Macquarie Radio Network.

He has been a journalist, broadcaster and film producer for over 30 years.

Brad is available as a freelance writer, voiceover talent and consultant.

Brad’s articles and podcasts are also available through his website www.bradsmart.com.au 

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