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While the sector faces challenges, businesses like CBS Radio generate solid cash flow.

by Chris Nolter & Jaewon Kang

CBS Corp.'s announcement that it will consider a sale of its radio division has brought focus to radio consolidation, which has lagged.

"As you know, for a while now, we've been reducing our footprint here," chairman and CEO Les Moonves told shareholders Tuesday afternoon at the company's investor day presentation. "Just as we did, when we separated outdoor, the aim here is to unlock value for our shareholders."

The move comes as advertising sales for the industry continue to decline and standard bearers such as iHeartMedia Inc. and Cumulus Media Inc. are struggling to manage their debt. While the sector faces challenges, businesses like CBS Radio generate solid cash flow. The unit could tempt a private equity firm, even though iHeartMedia Inc.'s battle with creditors provides a cautionary tale. A sale of the entire business to another radio group may be a longshot, but the company could explore a tax-friendly structure like a reverse Morris trust merger with a smaller rival.

CBS owns 117 radio stations in 26 U.S. markets and has a presence in New York, Los Angeles, Chicago, Philadelphia, Dallas, San Francisco, Washington and Boston. CBS is in the review's early stages and will take time to explore alternatives for the radio unit, he added.

Radio industry advertising revenues fell 1% in 2015, the Radio Advertising Bureau reported this month. While overall sales declined, the drop was moderate. "There is a lot of misconception in the marketplace," said Peter J. Solomon Co. banker Mark Boidman. "Everybody thinks radio is dead."

The sector includes high cash flow businesses that have low capital expenditures, he said. "Traditional radio is not going away any time soon. Digital continues to grow. There is going to be consolidation," Boidman said.

There is a gap between buyers and sellers. Boidman said the bid for radio generally is 5 to 6 times Ebitda, while sellers want 8 to 10 times.

"A PE firm could get comfortable owning this business, using cash flow to pay down debt creating equity value over time and at the same time capitalizing on some of the digital growth opportunities in radio," he added.

The company groups radio and TV stations together in its local broadcasting unit. Sales for the local unit fell to $2.6 billion last year, from $2.75 billion the year before. The company said that CBS Radio fell 5% in the fourth quarter. One source put Ebitda at about $350 million in Ebitda and revenue at $1.2 billion of revenue.

That person agreed that CBS Radio is a logical leveraged buyout candidate for about $1.7 billion to $2 billion, or 5 to 6 times its Ebitda, adding that it could be appealing to sponsors resembling Blackstone Group LP (BX). The private equity firm could not be reached on Wednesday morning for comment.

CBS could also choose to pursue a reverse Morris trust transaction. The tax-friendly structure would involve spinning off the radio business and merging it with a smaller peer such as Entercom Communications Corp. (ETM). A representative of Entercom could not immediately be reached Wednesday.

Some are less optimistic about sale prospects for CBS Radio.

"I actually don't think their timing is so good. They should've moved a long time ago," said a second industry source familiar with the matter, who spoke on condition of anonymity.

CBS should have started to look at options at least a year and a half ago when there was more of an appetite for radio assets, that person said, adding that the media company's price expectation has simply been too high.

"They will get a lot of calls to strategically sell off certain markets to certain buyers, but I don't know who can buy the entire business," the source explained.

A sale of CBS Radio as a whole to another radio group is not likely. Other broadcasters are either too leveraged or too small to make such a large acquisition.

"We just don't see any realistic buyers for the whole kit and caboodle," Wells Fargo Securities LLC analyst Marci Ryvicker wrote in a recent report.

Large groups such as iHeartMedia and Cumulus are "bordering on financial distress (which, quite frankly, is being polite)," she observed.

Meanwhile, Entercom, Emmis Communications Corp. (EMMS) and Radio One Inc. (ROIAK) lack the scale for such a deal. "Maybe these three would be interested in a one-off or two, but not the whole thing," she suggested.

While consolidation has slowed, there have been deals.