Lew Dickey is very bullish on the future of radio. He’s an advocate of long term growth, competiveness and stability through aggressive moves to extend the national scale of his company. This year alone, Cumulus has announced two major deals with a combined value of $3.1 billion aptly demonstrating this philosophy. These pending acquisitions, of Cumulus Media Partners and Citadel Broadcasting, promise to drastically raise the critical mass competitiveness of Cumulus Media.
Lew Dickey
By Fred Deane
It’s been an exceptionally active year for Lew Dickey and Cumulus Media. On January 31, the company announced its plans to wholly acquire Cumulus Media Partners, a division it already had a minority position in. Three weeks later Cumulus announced it was in talks to acquire the nation’s third largest radio broadcaster, Citadel Broadcasting. The CMP deal is scheduled to close this month, with the Citadel deal slated to later this year. Cumulus Media is now poised to play with much higher stakes and an arsenal of assets that will ensure its position as a top competitor in the multi-media landscape.
It’s been a very busy year for Cumulus with transactions. Can you first shed light on the deal involving CMI and CMP?
This was a transformational transaction for us and a very important predecessor transaction to the Citadel deal. CMP is a business we closed on five years ago and it enabled Cumulus, with a median (revenue) market size of 140, to move dramatically up market with a group with a median market size of 16. It was the perfect acquisition enabling us to move up market.
It was a watershed event for us when we entered into this partnership to purchase Susquehanna Broadcasting, and subsequently named it Cumulus Media Partners (CMP). We owned 25% going in and we equitized some junior debt about two years ago which lowered our ownership percentage (to 15%) as it did with each of our partners Bain Capital, Blackstone and Thomas H. Lee, three of the most prominent private equity firms in the country.
CMP was a business we had managed for five years and was completely integrated into our system. We’ve always run our business as one company with two balance sheets, yet we only owned 15% of CMP. All private equity firms have temporary capital with an investment horizon. Eventually they would like to exit and ultimately take their money. Knowing that, it was incumbent upon us to make sure we could tuck this into the mother-ship before the business was potentially sold away from us.
These transactions are never easy. This is something we’ve been working on for some time and I knew that in order to realistically make a run at the second larger deal (Citadel), it was imperative that CMI and CMP be together. We needed to have one balance sheet and one stock to issue for the purchase of Citadel. We were fortunate to get this deal done and get it announced, and we expect to close on it next month in May.
More recently the Citadel deal was officially announced which is a major undertaking for the company. What made Citadel such an attractive pursuit?
I view Citadel as two companies: the legacy Citadel assets that Larry Wilson assembled over a number of years and the ABC Radio assets. You can also view Cumulus as two businesses, CMI and CMP. The CMI and legacy Citadel assets match up beautifully. Both of us are mid-sized market consolidators and have market leading clusters in the majority of our markets. We built our company through a series of 145 acquisitions and Larry Wilson built his company over dozens of acquisitions, yet there was virtually no overlap other than Nashville, Flint and Harrisburg. The two platforms were perfectly complementary. Most of Larry’s focus is in markets 50-120, and most of our focus is in markets 100-175. As a result, it represents an excellent mid and small market piece that will be at 110 markets. We actually had proposed a merger back in 2001 when the company was being re-IPO-ed, so we were looking at this business ten years ago in terms of the fit.
After we announced the Susquehanna deal in 2005, we immediately began competing for the Disney assets as well, as were several other radio groups, and ultimately, Citadel emerged as the winner. It was an incredibly competitive process. We knew then the tremendous synergy value between the assets of ABC and Susquehanna. To be able to come back five years later and pick up both of those pieces that we had actively pursued 10 and 5 years ago respectively, is a tremendous opportunity for the shareholders of both companies.
What are the most notable features of this deal that strengthen Cumulus’ position in the overall media marketplace?
We will now have a true nationwide footprint with 570 stations in 120 markets. We will also be in eight of the Top 10 markets and have a network, which is an important distribution platform for content and holds much promise for growth opportunities. There’s also going to be a tremendous amount of organic growth opportunities by offering services through our technology platform which has been five years in the making. I believe a lot of stations are going to benefit from the cloud based computing enterprise software we’ve developed in our technology platform. When we purchased Susquehanna in partnership with our private equity partners, we viewed our business model as being similar to the Marriot Corporation in that we’re in the business of owning and operating, as well as managing radio stations. The ability to own, operate and manage this particular broad based group of stations strengthens many aspects of our growth prospects going forward.
What are some of the distinct advantages Cumulus will experience in leveraging its critical mass with national and local advertisers?
We’ll now have the opportunity to provide solutions for a wide range of clients, which puts in the game to continue to considerably grow our business. On the local side we’ll have a veritable army of 2,000 professionals representing our company in 120 markets developing relationships and communicating the value of our product. They will be responsible for building and maintaining a very important local sales channel through which we’ll be able to drive a lot on-air advertising, as well as incremental opportunities for our local digital initiatives and social platform commerce. Radio is a fixed inventory business but the Internet offers endless opportunities for us to create incremental inventory where we can work with our local clients to provide integrative marketing solutions. We can bring them the power of the large communities of our listeners, which will now reach more than 60 million people on a weekly basis. The scale of this platform will give us the resources to invest in order to develop these integrated marketing solutions so we can be more relevant and helpful to our clients.
On the national side, we’ll be able to offer those 60 million listeners weekly through the O&O part of our company, and on the network side we’ll reach over 110 million people. By competing in both the spot and network pool of revenues, we’re in a position to avail ourselves to a greater array of clients in providing very significant nationwide solutions for advertisers.
How do you view local advertising versus the digital companies competing in your space?
Our local sales organization is perhaps one of our most coveted assets, and with a reach of 120 markets and 2,000 salespeople we’ll be able to go toe-to-toe with any of these competitors in providing integrative marketing solutions for our local clients. When you see the new media players like Google, Microsoft, AOL, Yahoo, FaceBook, Groupon, Twitter, and Yelp, all of these businesses are now intensely focused on penetrating the local market, and this is an area where radio has a tremendous competitive advantage, especially for us given our new reach and depth of marketing leverage for our clients.
How much vertical integration do you foresee between the two companies in the infrastructure and programming areas?
We’re in the first inning and really just getting to know the company and the individual players. We obviously have a deep respect and a great appreciation for the value of the assets and the brands we’re acquiring. There’s a great deal of heritage across the board with the Citadel stations and we believe we’re inheriting a tremendous amount of talent at the local level who serve as the stewards of these brands. But it’s early and we really don’t know everything we do have until we get in there and form relationships with these people and understand what we can learn from them and what resources we can bring to the table to be helpful.
The way we manage our business is to try to understand the key fundamentals required to operate the business in the areas of building a strong local sales organization, a great business department, an effective IT department and a great creative department. We try to understand the key fundamentals of building and maintaining great brands. We also believe there are no monopolies on great ideas so we know we’re going to glean a lot from the people that will be joining us, and we look forward to sharing a lot of their practices and ideas with the rest of our company. In turn, we’ll be able to impart some of the things we’ve learned along the way in our platform to them. We look forward to fostering the overall creativity and building the brands of all of the assets by identifying and using the best practices. I believe that’s what separates our company. We don’t silo anything. It’s very communicative and very flat in terms of organizational structure and we’re constantly looking forward to identifying the key fundamentals necessary to build and maintain great brands, generate great creative ideas, and share those across the platforms.
It’s been quite some time since we’ve seen a consolidation deal of this magnitude. Looking back to the planning stages of this deal, when did you and your management team feel confident about formulating and executing a deal of this scale?
The last big deal was five years ago when Citadel bought ABC for $2.7 billion. Ours is a $2.4 billion deal and we’re getting both ABC and Citadel. There was a dearth of activity the first half of last decade and then mid-decade we paid $1.2 billion for Susquehanna and there was the Citadel/ABC deal. Then the recession hit and the credit markets froze and there was no activity. So coming out of the fall of last year in trying to get out in front of this type of deal we saw an opportunity to buy assets for what I believe to be trough multiples and trough EBITDA. That was the genesis behind the Cumulus Radio Investors (CRI) fund that we announced a year ago which was to go out and raise a half billion dollars of capital that fully levered, was worth about a billion dollars of purchasing power.
The purpose of that was to create a hunting license to pursue key assets generally in the Top 50 markets where we thought we had an opportunity to buy them right and operate them profitably for the long term. We remain stalwart believers in the future, relevance and economic viability of this medium long term. We’re making a big bet by buying CMP and Citadel and in placing a wager on the future of this industry as part of a viable part of the media landscape. Not everyone shared our philosophy which is why a few years ago some radio groups talked about paring or selling, but these divestitures largely never happened because the credit markets froze and it was very difficult for both financial buyers and strategic buyers. Financial buyers couldn’t get the leverage against the equity and so the returns aren’t there, and most strategic buyers found their leverage go up materially when the radio revenues in the industry went from $21 billion to $15.5 billion. That $6 billion that left the industry was most of the cash operating margins of the industry, and consequently everybody’s leverage increased by a couple of turns or more. Debt was fixed, but EBITDA went backwards because you have negative operating leverage at that point and everyone found themselves in a bit of a predicament in terms of leverage and operating covenants. Hence you saw bankruptcies in all market sizes because most of these deals were financed or recapped in 2007 just shortly before the economic collapse.
Given the improving economy and a more opportunistic credit market, do you foresee a flurry of radio groups buying and selling assets, or even a second wave of consolidation?
Looking at the future and economic prospects of the business, I’ve been predicting a second wave of consolidation for a long time and clearly the recession got in the way. Shortly after the big deals in ’05 closed, I was predicting much more to come and then we had the crash in 2008, but the credit markets started to close up in August of ’07. Things got progressively worse throughout ‘08/’09. We finally started to come out of it in 2010 with thawing credit markets and I believe you’re going to see a great deal more activity in this space. Just in Q1 alone between the CMP and Citadel acquisitions, we’ve announced $3.1 billion of deals, and the Hubbard’s recently bought $550 million of Bonneville assets. You’re starting to see things jump start again.
I believe as the industry continues to consolidate people are going to make some decisions as to whether or not they want to operate independently or they want to be part of a larger company. I certainly believe scale is going to be increasingly more important to be competitive long term because it’s going to be a much more competitive landscape for local advertising, and radio is 85% local. Larger companies will ultimately be better suited to meet the demands of providing integrative solutions based on investments in digital platforms for local advertisers which is what the customers are demanding now.
Transactions like this really start to compel other people to rethink their strategic direction and other issues start to surface at that point. My expectations would be that over the next 24 months you’ll see more transactions occur.
You learn a lot about yourself when you face extreme adversity. What were the most significant things you learned about you and your company during those trying recessionary times?
It was a very, very difficult period of time. A number of people lost their companies and other folks, like us, had to scramble to survive. Lessons learned are many. You have to be extremely close to your business at all times. A big part of the CEO job is to manage leverage, liquidity and risk, and those all came into play when we saw this reset in revenue. I don’t think anybody’s model had a sensitivity analysis projecting revenue down 25%. We certainly didn’t have it in ours and I don’t know any of our peers that had it in their’s. Here’s an industry that had never really been down more than a couple percent in any given year and you watch it plummet ten times that. That’s catastrophic in terms of magnitude. It’s difficult to be prepared for that so you have to be very nimble.
It taught everybody a lesson about leverage and the ability to move quickly to cut costs where necessary to survive. You have an obligation to your shareholders to preserve the solvency of the business in difficult times and you have to make tough choices. It was very difficult to lay-off a number of people, and to furlough and ask people to work without getting paid. These are very tough things to do, but everybody on our team understood this and came together to enable us to live to fight another day. I’m very proud of the way our guys pulled together to say that we weren’t going to let the ship go down, and we were going to work together to make sure the proper sacrifices were made at the times they had to be made and keep operating through this. The result is we were able to play through the storm and position ourselves to now get dramatically bigger. We’ve come a long way since the dark days of 2009 and it’s really a testament to the sacrifices of our people and the teamwork throughout this process. I’m very grateful for it and very proud of how our people responded to a very adverse set of circumstances. If that doesn’t test your mettle, I don’t know what does.
Are the complementary new media platforms as important to radio’s future as the on-air product, and do you foresee them eventually usurping on-air’s value?
My belief is that the consumers will always prefer push content over pull or customized content. I feel that the point-to-multi-point distribution platform of terrestrial radio will always be superior to the individually addressable streams in terms of efficiency of delivery and ultimately acceptance by the consumer. A lot of the ability to customize audio or deliver personalized radio via technology to engage consumers isn’t as practical, at least for the vast majority of people. It’s a niche offering and we need to be in that game, so we want to make sure we have those offerings as complementary products. I don’t know that it ever, or at least not for a long, long time, usurps the main idea which is live and local push programming that has connectivity to local communities.
There’s tremendous value in what programmers do on a daily basis to be able to curate audio entertainment and deliver on the most efficient delivery platform there is. This isn’t going away. It is still very relevant and a product that’s in demand. Nielsen and Arbitron both corroborated within independent studies the amount of radio that people listen to. The facts are that it’s 18+ percent of their time spent listening, with 93.5% of Americans listening to the radio on a weekly basis. In terms of a local medium, its efficacy is unmatched from an advertiser’s perspective and there’s really no technological threat or substitute for our medium that’s on the horizon as we can see it. The competitive dynamic is far different in-home than it is out-of-home.
How important is it for radio groups to have the necessary tech IQ to maximize its efforts in audience connection and engagement?
It’s extremely important which is why I get back to my point that scale is essential to compete long-term in the digital arena. You have a lot of very smart people outside of the industry who are thinking about ways to compete with us every day and making investments to do so. There’s no doubt about it, we take this very seriously. It’s very easy to dismiss radio and dismiss our prospects going forward simply because technology exists today that from their perspective can be a substitute. I disagree and think it’s our game to lose because in the context of our programmers we have the institutional knowledge of the consumer and the experience of having done this for so long enabling us to use this new technology to continue to remain relevant and appeal to the listeners. But it’s going to take investments and experimentation and we have to make the necessary investments to stay relevant within the technology ecosystem (particularly mobile) that our listeners have at their disposal. We can’t be on the outside looking in.
What traditional values should radio hold on to even in today’s fast paced, ever-changing world?
I’m a big believer in operating fundamentals and it goes back to the book I wrote on branding in 1994, detailing the key fundamentals of building and maintaining a great brand. I could go back and update that book to reflect the change in today’s lifestyle and the dramatic leaps in technology 17 years later, but the principles of building and maintaining a great brand remain constant.
What we’ve learned over the years is that with most formats people want that connectivity to their personalities, and the “music box” formats that have proliferated throughout time have shorter lifecycles. The fundamentals of building a great morning show that is relevant, topical and humorous, understands its audience and reflects the local community, are very difficult to create, build and maintain – but they work. There really is no substitute in trying to take a shortcut and feel you can be competitive with, for instance, a Top 40 station just playing twelve records an hour in the morning. It may get quick ratings, but in the long term those are not winners, and it’s very difficult to remain a great brand if you don’t have the Total Radio Experience including everything that’s between the music. Ultimately, you have to bring a playlist to life and the stations that do a great job of this use compelling personalities and stationality to create a great audio experience. Those are the stations and brands that endure successfully over a long period of time and stay relevant generation after generation. The key fundamentals are the strength of great radio. It takes a lot of hard work and people must possess a high level of passion to execute it. The best stations in the country today have those key fundamentals in place and continue to enhance and evolve their brands.
What areas of radio are you most bullish on?
I believe radio is about to enter its own renaissance. Conventional wisdom has written us off over the last ten years, be it with satellite and now Internet radio, and yet radio is back again in gross share in 2010, which the pundits said was never going to be possible, and I feel it’s going to grow share again in 2011. I believe radio is uniquely positioned to compete in the digital era. As the preeminent vehicle for local, out-of-home media and with the advent and importance of mobile going forward, radio’s application will be further enhanced. We’re making bets in this $17 billion dollar space and we’re not doing it lightly. We’re making these bets because we genuinely believe that as the in-home segment of media becomes intensely fragmented, the out of home local segment is going to be increasingly important and we believe radio is going to be uniquely positioned to grow its share and reassert its leadership. For that reason we are making very big investments and are very optimistic about the future of our medium.
[eQB Content by Fred Deane]
