Name Roll noAnand Amrit Raj 1Vivek Bhandari 4Armine Bharucha 5Prerna Bhatt 7Revati Deshmukh 11Sandra Fernandes 12Sachin Gawade 14Srirama Subramanian 24Reena Rajgor 39Nandita Sheth 44Hema Suchde 49Lavina D'souza 61

Topics Covered On Radio One

Radio One was founded by Catherine Hughes in 1980.

In 1980 Hughes and her husband raised money to purchase WOL-AM in Washington, D.C for just under $ 1 million.

Radio One the largest radio group targeting African – Americans in the country.

Market FM AM Yrs. Of Acq.

Washington 2 2 80,87,95,98Baltiomore 2 2 92 & 93Philadelphia 1 0 97Detroit 2 2 98Atlanta 2 0 99Cleveland 1 1 99St.Louis 1 0 99Richmond 7 0 99Boston 1 0 99Total 19 7

NO. OF STATION

Radio One has achieved tremendous success by purchasing underperforming radio station.

In 1995 Liggins ( CEO & President ) introduced new radio station to the Atlanta, Georgia market, African – American population.

Radio One strategy was to provide urban-oriented music, entertainment, and information to African – American audience.

Radio One pursued a clustering strategy.

They acquired two or more stations that targeted different demographic segments within African – American population.

Radio One centralized certain functions i.e. finance, accounting, legal, HRM, information system and others.

Advertisers were reluctant to pay to African-American urban listeners, as their income lagged behind listeners to mainstream radio stations.

Radio One convinced the advertisers that African – American population purchase more of certain good and services than general population.

Advertisement spending in Radio grew from 6.4% in 1992 to 7.5% in 1998 to 8.2% in 1999.

Federal Communications Commission (FCC) relaxed existing regulations to allow one company to own 2 FM stations in one market or 36 stations nationwide (18 AM & 18 FM).

The Telecommunications Act of 1996 lifted all of the limitations on ownership.

After the acquisition of the 12 urban stations, Radio One becomes the market leader.

The acquisition provides a wider scope of expansion in media such as internet, cable radio and recording.

The acquisition can create some synergies for Radio One i.e. merging some of Radio Ones departments like finance, marketing and others.

Acquisition enables Radio One to provide better service to African – American audience.

Important risk factor is the level of cannibalization.

Whether the business culture is in line with the Radio Ones existing business.

Clear Channel Communications has the obligation from FFC to divest some radio stations. Radio One why they want to sell these 12 radio stations.

Rating agencies like Moody's & S&P can cut down Radio Ones credit ratings when they have doubt about the creditworthiness after the acquisition.

Definition of Some Terminology

Capital Asset Pricing Model (CAPM).The Risk -Free Rate of Return.Equity Risk Premium.BETA , ASSET /Equity/ Debt. BCFValuation of Company

About Valuation…Definitions: Valuation:- The process of determining the current worth of an asset or company.

Enterprise Value :- “Enterprise value (EV), also called firm value or total enterprise value (TEV), tells us how much a business is worth”

Valuation Methods: Discounted Cash Flow (DCF) Comparable Companies Analysis or Trading Multiple. Precedent Transaction Analysis. LBO Analysis SOTP Analysis

About Valuation… Discounted Cash Flow Method Project the company's future unlevered cash flows and calculate the present value of those cash flows and the “Terminal value” using an appropriate cost of capital and terminal value methodology.

Terminal Value “The terminal value (TV) captures the value of a business beyond the projection period in a DCF analysis, and is the present value of all subsequent cash flows”

Methods to calculate the (TV)

Terminal Multiple Method. TV = LTM Terminal Multiple X Statistic Projected for the Last 12month of the projection period Perpetuity growth Method.

TV = Fcfn x (1+g) / WACC - g

Allocation rate corporate overhead expenses to potential markets 0.31Allocation rate corporate depreciation and amortization to potential markets 0.84Taxes 35%Company Rating AGrowth Rate ( After 2004 ) 2%Market Risk Premium 5%

ASSUMPTIONS

Ratio for corporate expenses and depreciation & amortization based on exhibit 6 & 9. Corporate expenses were $4,155,000 in 1999 and for potential market plus Radio One were $6,000,000. So $1,845,000 of $6,000,000 ( 30.75%).

Same is done for depreciation and amortization.

Assumption 1

Corporate Overhead - Exhibit 6 [ Consolidated statement of Operation as of 1999 ] 4.16$ Only for Existing MarketCorporate Overhead - Exhibit 9 [ Actual & Projected Financial for Exsiting and New Market as of 1999 ] 6.00$ Exsting and New Market

Additional Corporate Expenses projected for new Market will Be 1.85$

Allocation of Rate Corporate overhead expenses to potential market 0.3075

Assumption 2

Depriciation and Amortization - Exhibit 6 [ Consolidated statement of Operation as of 1999 ] 17.07$ Only for Existing MarketDepriciation and Amortization - Exhibit 9 [ Actual & Projected Financial for Existing and New Market] as of 1999 ] 107.52$ Exsting and New Market

Additional Corporate Expenses projected for new Market will Be 90.45$

Allocation of Rate Corporate overhead expenses to potential market 0.8412

Assumption 3

Corporate Tax 35%

Assumption 4

Company Rating A Refer Exhibit 10 for Bond Rating

Assumption 4

Growth Rate (After 2004) 2%

Assumption 5

Market Risk Premium 5%

When Applying the CAPM ( Capital Assets Principle Model ) , an equity risk Premium of between 3.5% to 5% appears reasonable at the current time.

DCF Step 1

• Calculation of Firm Free Cash Flow of Potential Market for 2001 & 2004 (planning period)

Dcf step 2

• Determination of Cost of Capital

DCF Step 3

• Determining Terminal Value after 2004.

• (needs to understand with CDG)

DCF Step 4

• Determining Enterprise Value as of 2000.

• (needs to understand with CDG)

Offer based on Transaction Multiple

Company name Paid Paid / BCF BCF No of station Paid per Station

Infinity Broadcasting $1.4 Million 21.5 $65.12 18 $ 77.77 m

COX Radio $380Million 18.4 $20.65 7 $ 54.28 m

• Royster (CFO) anticipated offering at least 20x BCF for targeted 12 Station which is very similar quality of those purchase by above company.

• Offering Price would be :- 20 x $65.04 M BCF = $13 Billion. (BCF for potential market taken from exhibit 9 )

What is Transaction Multiple ? Explain

Trading Multiple

• What is Trading Multiple ? Explain with the Exhibit 8?

Trading Multiples• BCF & EBITDA trading multiple of “Hispanic

Broadcasting company (HBCCA)” are outliner.

• We calculated new suitable ratio by excluding the Multiple of HBCCA Company.

• New EBITDA & BCF Average Ratio of Radio Industry is 17.42 & 16.25 respectively.

Station Valuation With Respect of BCF multiple..

(BCF-potential New market * BCF AVG radio Industry )

= 76.44 X 16.25 = $ 1.24 Billion

Station Valuation With Respect of EBITDA multiple..

Correct EBITD for potential new Market (21 Channels) is

$76.43 – ( 6.9 * 0.3075) = $74.31 EBITDA. (EBTIDA -potential New market * EBTIDA OF AVG

radio Industry ) = 74.31 X 17.43 = $ 1.29 Billion

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When Radio One offers 30 times its BCF, the company will make a bid of $ 1531.14 million ( 30 x $ 51.038 million ).

This is $ 200 million higher than we found using the DCF analysis, and the Transactions & Trading Multiples Approach.

DCF – $ 1334.03 million. Transaction - $ 1300.82 million.Trading Multiples - $

Hence the bid of 30 times the BCF of Radio One is too high for acquiring the radio stations.

• Analysis of Three Valuation and Decision.

• Solution # 5 in from PDF.