Despite a host of challengers to the traditional radio segment's popularity, including newer streaming services like Apple's iTunes Radio, the industry was able to hold on to its local advertising market share in 2013, estimated at 11.5% by market researcher BIA/Kelsey.
Industry consolidator Cumulus Media (CMLS +48.72%) has been banking on a continuation of that trend for the roughly 100-year-old communications medium, cobbling together the nation's second-largest network of stations, which reaches approximately half of the domestic population. Investors seem to like the company's focused strategy, driving shares up sharply over the past 12 months. So, should new investors get on board?
What's the value?
While Cumulus started out as an aggregator of stations in smaller tertiary markets, it has more recently been using asset swaps to move into larger bicoastal markets, like Fresno, Calif., and Newark, N.J. The company has also used its competitors' financial missteps to gain significant critical mass at favorable prices, as highlighted by its purchase of major competitor Citadel Broadcasting out of bankruptcy in 2011. The culmination of the company's activities has been a geographically diverse network of roughly 520 stations around the country, complemented by more than 5,000 independent, affiliated stations that use Cumulus' content.
In fiscal year 2013, Cumulus has continued to benefit from its prior investments in scale, reporting a double-digit rise in operating profit on a slight gain in its top line. While higher royalty payments to music composers hurt the company's margin, it offset the negative effect with better efficiency in its corporate overhead, one of the drivers of its deal-making activity. More important, Cumulus maintained a solid level of operating cash flow during the period, which allowed it to make a further down payment on its hefty acquisition-related debt.
Of course, with federal limits on direct ownership of radio stations, a further increase in shareholder value will hinge on Cumulus' ability to generate content for its thousands of affiliated stations. While the company continues to build proprietary content, it saw a good opportunity to buy critical mass in this area with its August acquisition of struggling content provider Dial Global for roughly $45 million in cash plus the assumption of debt. The deal increased Cumulus' affiliated network to roughly 10,000 stations while adding popular content like the Dennis Miller and Dr. Phil shows.
Up against big media
While Cumulus may claim to be the largest of the domestic, pure-play radio players, it is fairly small potatoes compared to the integrated size of its key content competitors like Disney and CBS (CBS +0.00%) through their ABC Radio and CBS Radio units, respectively. CBS has been particularly active in the radio space, launching a sports radio network in January 2013 that capitalizes on its parent company's global reach and strength in the sports category.
In FY 2013, CBS' radio segment generated flat revenue growth versus the prior-year period due to station dispositions that saw the unit's network get pruned down to 127 stations, heavily concentrated in the nation's 25 largest markets. Despite the strategic downsizing, though, radio remains a solid profit center for CBS and is a key marketing outlet for the company's content, especially for its sports and news divisions.
Also a competitive threat is Sirius XM Radio (SIRI +0.00%), which owns the satellite-radio market but is also trying to expand its presence into cyberspace with its Sirius On Demand streaming platform. True, the company isn't nearly as cheap as it was when billionaire John Malone's Liberty Media holding company famously picked up a 40% stake in February 2009 via a term loan with attached warrants. However, Sirius continues to leverage its tight relationship with the world's automakers to build a strong membership base, with more than 25 million members at last count, roughly 80% of whom are self-paying members.
In FY 2013, Sirius has continued its upward growth trajectory, reporting an 11.5% top-line gain that was aided by increases in both average pricing and its overall subscriber base. More important, the company's low monthly subscriber turnover and its relatively strong ability to turn trial subscribers into paying customers have led to efficiencies in its overhead, producing rising operating profitability. Liberty Media's interest in taking Sirius private, via a previously announced buyout offer, would indicate that Sirius has more value than might be accounted for in its current share price.
The bottom line
Cumulus has built a strong presence in the traditional, ad-supported radio sector, but the company is a work in progress as its future growth seems tied to its ability to distribute winning content to its vast network of affiliated partners. Unfortunately, that strategic road map likely places Cumulus in even more direct competition with the content development activities of larger competitors, like CBS and Sirius. As such, investors might want to wait to see the benefits of its latest acquisition prior to placing a bet.
