Case ID: 201025
Solution ID: 17
Words: 2137
Price $ 75

Radio One Inc

Overview of Case Solution

Following a merger, Clear Channel is implementing a divesture of a number of its radio stations. Radio One, a radio channel targeting African-Americans, is interested in twelve of the radio station that are part of the divesture. These radio stations are from the top fifty markets within the US, and they represent a significant growth opportunity for Radio One. We estimate the projected after-tax cash flows from the new station, and then use the appropriate discount rate to value the new radio stations using discounted cash flow approach. The value from this approach is also substantiated by employing an independent multiples based valuation. In the end, the values derived from these approaches are compared to suggest an appropriate acquisition price for the radio channels.

Excel Calculations

Calculation of After-tax Cash Flow (amounts in thousands of dollars)

Free Cash Flow (after-tax), Net Working Capital

Discount Rate Calculation

 Cost of Debt. Cost of Equity, WACC

Discounted Cash Flow Valuation (amounts in thousands of dollars)

Terminal Value Calculation, Terminal Value (in 2004), Total Value of the New Stations, Present Value of Cash Flows

Value Based on Trading Multiples

 BCF, EBITDA, After-tax Cash Flow, Average Value (trading multiples)

Questions Covered

Why does Radio One want to acquire 12 urban stations from ClearChannel Communications in the top 50 markets along with the nine stations in Charlotte, NC, Augusta, GA, and Indianapolis, ID? What are the benefits and risks?

Are the cash flow projections for the potential new markets reasonable?

What are the incremental after-tax cash flows for 2001 through 2004 for the potential new markets? Use the information in Exhibit 9 along with your estimate of capital expenditures, working capital, and taxes to estimate the after-tax cash flows.

What discount rate is appropriate for valuing the after-tax cash flows?

What terminal value should be used to estimate the value of cash flows beyond 2004?

What price should Radio One offer based on the discounted cash flow analysis?

What price should Radio One offer based on a transaction and trading multiples analysis?

Assuming that Radio One’s stock price is 30X BCF, can it offer as much as 30X BCF for the new stations?

What should Radio One offer for the new stations?

Keywords

Acquisitions, Mergers, Present value, Valuation