Entercom's Radio Play

When you think of terrestrial radio operators, Entercom (NYSE:ETM) might not be the first name that springs to mind. CBS (NYSE:CBS) and Clear Channel (NYSE:CCU) may be more publicly prominent, but Entercom recently made a deal with CBS to snap up some radio stations in several markets.

According to its filings with the SEC, Entercom plans to purchase 15 stations in four markets -- Austin, Cincinnati, Memphis, and Rochester -- from CBS. (CBS Radio was formerly known as Infinity Broadcasting.) Entercom plans to shell out $262 million on that acquisition. It also said it would buy one radio station from Radio One (NASDAQ:ROIA) for $30 million.

This shouldn't surprise to investors who follow this industry, given that CBS' last earnings report listed radio as one of the company's sticking points. Revenue in that segment fell 8% in the quarter, and much was made of well-known shock jock Howard Stern's recent defection to Sirius Satellite Radio (NASDAQ:SIRI).

In the June issue of Motley Fool Income Investor, Mathew Emmert recommended Entercom to subscribers, describing it as a solid player in a good, cash-generating business, with a juicy current dividend yield of 6.2% and a solid balance sheet. It's the fourth-largest radio operator, behind Clear Channel, CBS, and Cox Radio (NYSE:CXR).

I got a chance to chat briefly with Mathew about the acquisitions, and although he can appreciate Entercom's efforts to build out its stations, he does have some concerns. For one thing, Entercom is paying a premium in a weak radio market, and it has a history of overpaying. Mathew plans on alerting the Income Investor community to his thoughts on this acquisition with a post to the discussion boards and a full update. (If you're interested in what he has to say, consider a 30-day free trial to the newsletter.)

Personally, I lack interest in traditional radio stocks; I can't get past the encroaching competition that vies with them, such as satellite-radio providers Sirius and XM Satellite Radio (NASDAQ:XMSR), as well as technologies like Internet radio and digital music devices like Apple's iPods. I think these influences have taken good advantage of terrestrial radio's limitations. Of course, plenty of people -- Mathew included -- feel such concerns are overblown.

Regardless of your thoughts on terrestrial radio, Entercom might be dialing up a challenge, given the high price tag. I plan to stay away from Entercom's stock, at least until it proves it can generate a solid return on this acquisition investment.

For more on terrestrial radio, see the following Foolish articles:

• Is Clear Channel getting clearer?
• There are challenges ahead for CBS.
• In April, one Fool theorized that terrestrial radio bites back.

Entercom is a Motley Fool Income Investor recommendation. XM Satellite Radio is a Motley Fool Rule Breakers selection. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned.