The price is about 14 times 1999 cash flow, significantly lower than the multiples of 20 that radio stocks were trading at earlier in the summer.
Comedown for Zell
The slide in Jacor stock represents a significant comedown for Chicago investor Sam Zell, the company’s largest shareholder who, through the Zell/Chilmark Fund, controls 27% of Jacor. Zell, whom Prudential Securities analyst James Marsh Jr. has long regarded as “a financial player” rather than “a radio operator,” has shopped his radio interests on several occasions in recent years.
His most recent attempt began last summer when he hired Donaldson, Lufkin & Jenrette Securities Corp. to find a buyer for the company. Clear Channel and CBS Corp. were believed to be keenly interested, with both suitors appearing to be just as complementary a merger partner as the next.
Sources said last month, however, that Zell’s preference for cash or stock would likely settle the issue as CBS was expected to want to pay with cash, whereas Clear Channel stock has traded at a higher valuation than CBS.
Zell settled for a stock deal in which Jacor shares will be converted into those of Clear Channel at a ratio determined by the average closing price of Clear Channel stock for 25 days leading up to the closing date.
Using Wednesday’s closing prices as an example, each Jacor share would be converted into 1.4 Clear Channel shares, thus giving Jacor shareholders the 29% premium over the stock’s closing price of $40.125.
The transaction, slated for completion next Sept. 30, should leave Zell and Jacor’s other shareholders with about 25% of the combined company.
The merged unit is expected to contribute to Clear Channel’s after-tax cash flow (earnings before interest, taxes, depreciation and amortization) from the get-go.
What’s more, the value of Clear Channel stock given up to absorb Jacor is about 14 times Jacor’s projected cash flow for next year, representing a considerable discount from multiples of 15.5 times cash flow obtained by radio sellers in recent blockbuster deals.
In terms of operations, Jacor consistently ranks among the industry’s best radio programmers, a talent Clear Channel can use in its own outlets.
In addition, Jacor, in combination with its wholly owned Premiere Radio Networks, ranks as the country’s third-largest provider of syndicated radio programming, disseminating a hit list that includes the leading talk programs “The Rush Limbaugh Show” and “The Dr. Laura Schlessinger Show.”
This historic emphasis on vertical integration should result in Jacor’s becoming a major vendor of top-flight programming to its new parent company.
Indeed, continuity in Jacor’s operations has already been signaled by Randy Michaels agreeing to stay on as Jacor’s CEO and Bobby Lawrence continuing as Jacor’s president.
Equally promising for Clear Channel is the lack of cluster overlaps in all but a few markets.
Snapping up stations
Major radio players have responded to the Telecommunications Act of 1996 by snapping up as many as eight stations in a single market, then appealing to local advertisers to use the resulting “cluster” of stations to reach mass or segmented audiences.
Although Clear Channel and Jacor together will operate in 101 domestic markets, averaging 4.5 stations in each, an analyst who declined to be identified noted that antitrust scrutiny will produce “almost no issues.”
The analyst also noted that Jacor should benefit handsomely from the cross-promotion opportunities promised by its new parent’s outdoor operations. “About 40% of Jacor’s revenues come from markets where Clear Channel has a major outdoor presence” as well as TV stations, he said.
Shareholder approval seems assured in that the merger, aside from being backed by Zell, was engineered by the Mays family, which is Clear Channel’s largest shareholder with 15%.
Salomon Smith Barney acted as financial adviser to Clear Channel, while DLJ continued to handle Jacor.
Clear Channel stock fell 1% to $36.62 a share Thursday, while Jacor gained 1% to $40.56.
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