Radio One Inc Case Solution
Moreover, the free cash flows have been estimated from 2001 to 2004 based on the projections made by the owner of Radio One. The broadcasting cash flows for the new markets that are to be acquired have been taken and based on the ratios of 30.75% and 84% the corporate expenses and the depreciation and amortization expenses have been deducted and synergies added. Tax has then been deducted at 35% to calculate the net income and then depreciation has been added back as a non-cash expense. The incremental working capital would be zero and the capital expenditure for 21 stations has been deducted for each of the years to calculate the free cash flow.
Lastly, the terminal value has been calculated for the new market based on the average BCF multiple of 18.1 of all the comparable companies. Moreover, the terminal value and the free cash flows have been discounted to calculate the 21 radio stations value of $ 1395 million. The sensitivity analysis has been performed based on the future growth rates ranging from 2% to 10%. Slight difference in the growth rates causes the valuation to differ significantly. Therefore, the management needs to take care while estimating the future growth rate of the new markets.
The football field valuation analysis has been performed for the 21 new radio stations based on the multiple trading comparable analyses and the precedent transaction analysis.
Trading Comparable Analysis
The trading comparable analysis has been performed for the company based on the multiples of the industry and the multiples of Radio One. Three multiples have been used to estimate the value of the company. These three multiples are the BCF multiple, EBITDA multiple and the After-tax cash flow multiple. In order to calculate the values of the 21 radio stations, the asset values for the year 2001 have been used. This is because unlike the discounted cash flow method approach, the comparable trading method calculates the current values for the companies.
Based on the BCF, EBITDA AND After-tax cash flow for the 21 radio stations, the valuations have been calculated to be around $ 1242 million, $ 1294 million and $ 1736 million. Similarly, the multiples for Radio One have then been used to value the radio stations and these figures are $ 1689 million, 1798 million and $ 2692 million. Therefore, based on the comparable trading method, the range for the valuation of the 21 radio stations of Clear Channel Communications is from $ 1242 million to $ 2636 million. One important thing to note here is that the multiples have been used from exhibit 8; however, the multiples of Hispanic Broadcasting have been excluded only due to their huge size as compared to all the other comparable companies.
Comparable Transaction Analysis
In the comparable transaction analysis or the precedent transaction analysis, the valuation of the 21 new radio stations has been performed based on the valuations of the past acquisitions. The first company that has been used as the basis for calculating the valuation of the 21 radio stations is the Infinity Company. Infinity Company had acquired around 18 radio stations from Clear Channel Communications in the year 2000 for 1.4 billion or 21.5 times 2000 BCF. The 2000 BCF for the new markets is around $ 65051. Based on this, the valuation estimate has been calculated to be around $ 1398 million. As 18 radio stations were purchased by Infinity therefore the cost of a single station is around $ 77 million.
Similarly, the valuation estimate based on a second past acquisition was of Cox Radio when it had purchased around 7 radio stations for 380 million or 18.4 times the 2000 BCF. Therefore, based on this the valuation estimate is around $ 1196 million and the cost per station is $ 171 million approximately. Lastly, the owner of Royster had estimated that he would be willing to pay around 20 times 2000 BCF for the new 21 radio stations. Based on these figures, the valuation estimate and the cost per radio station have been calculated to be around $ 1300 million and $ 62 million per radio station.
If we look at the valuation performed on the basis of the discounted cash flow then it was seen that the cost of one radio station should be $ 66 million. Based on the multiple comparable methods, the cost of a single radio station should be around $ 80 to $ 128 million while on the basis of the precedent transaction approach the cost should be in the range of $ 62 million to $ 171 million. Therefore, the management of Radio One should be ready to pay the price within the range of $ 62 million per station to $ 171 million per station. Further valuations should also be performed after incorporating the synergies as they become known…………………………
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