The deal market ground to a halt shortly after world health officials declared the coronavirus a global pandemic on March 11. Deals already in the pipeline were paused as buyers and sellers focused on far more pressing matters. The result: Radio and TV dealmaking dollar volume in second quarter 2020 sank to its lowest level in 37 years. But as spring turned to summer, conversations began to resume. "Now we're seeing some pretty significant activity but most of it surrounds stick stations," says Greg Guy, Managing Partner at media brokerage Patrick Communications, referring to a station bought solely for its license and transmitter. As a refresher, stick deals are situations where a buyer just wants the signal, not the programming - such as when religious broadcaster Educational Media Foundation laid out $103.5 million to buy six stations from Cumulus Media last year.
What will take longer to come back, likely much longer, are cash-flow based station sales, where buyer and seller agree on a price based on a multiple of the station's cash flow. That's because radio revenue for most stations plummeted severely during second quarter due to COVID disruptions.
"It's almost impossible to forecast what cash flow will look like," Guy explains. "How you value those assets that were based on a multiple of cash flow becomes very difficult." Since 2020 is an aberration, should prices be based on 2019 cash flow? Or 2021 projected cash flow?
"There's no trailing 12
months cash flow and everyone's business is way off," says Michael Bergner of the Bergner & Co. brokerage. "The only one who would buy a radio station now is someone currently in the business for whom it's a strategic purchase."
Generally speaking, prices and deal flow are down because revenue is down, brokers say. But prices for sticks, which often involve larger and regional groups with stronger balance sheets looking to expand in a specific market, haven't been affected to the same degree. "The buys right now are very strategic," Guy says.
While the art of the deal has always involved narrowing the chasm between what a seller thinks an asset is worth and what the market will pay, that's been exacerbated by the current economic climate. "There are fewer deals because sellers want to value their stations at pre-COVID levels and buyers don't view that as a current reality," says Bob Heymann from the Chicago office of Media Services Group. "This is a classic bid/ask gap and hence, fewer deals."
Buyers may call today's depressed market conditions the new reality and try to use it to pay a rock bottom price. Sellers may call it a blip and argue that things will get back to normal. "Figuring out those valuations and bridging those gaps is much more challenging than it is on stick deals," Guy explains.
Uncertainty Reigns
A crucial component of any station transaction is certainty. And right now that's in short supply. "The buyer has to be certain of the value of the assets he or she is acquiring," says Heymann. "Broadcast cash flow (BCF) usually is the basis of that valuation. Unfortunately, it is extremely difficult to determine current BCF since radio revenue has been so dramatically impacted by the virus. Similarly, sellers have to be certain that they are receiving a fair market price for their stations, which is very hard to figure under current conditions."
While dealmakers expect the deal spigot to eventually open wider, they say it will parallel a broader economic rebound which won't be instantaneous or return to pre-pandemic levels. "There will be a ratcheting up because you will see both buyers and sellers get their arms around what the world looks like now and what their vision is for the future of stations they own or stations their looking to acquire," Guy says.
Several dealmakers who spoke to Inside Radio for this story said a "normal" deal market won't return until 2021. "Things have to settle down. We have to see what these things will bill on a running 12-month cash flow basis," Bergner says. "Radio is hostage to the virus getting cured."
Any potential larger deals would require buyers with heathy balance sheets and novel approaches to structuring a deal. Two of the biggest transactions of the past four years, Beasley Media Group buying Greater Media and Entercom acquiring CBS Radio, required highly creative, head-scratching financial maneuvers such as a Reverse Morris Trust in the case of the latter - a move designed to reduce the size of a tax hit. "There could be some larger transactions once the crisis is resolved, which I don't see happening until 2021 at the earliest," Heymann says.
The deal market could also open up next year as owners who were reluctant to sell at existing multiples decide to pull the trigger. "In 2021 I think you'll see some of those assets probably come to market," Guy says.
But brokers say it will take a sustained period of normal economic activity with an uptick in radio revenue for the deal market to get back to pre-pandemic levels, already considered slow compared to the pace of buying and selling seen at the start of the century. "Radio is an industry driven by local business and when local business gets back to normal, radio will get back to normal and the deal market as well," says Guy.