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MVP’s Elliot Evers Speaks Out in Radio Ink’s Assembled Panel of Experts

One year ago, Radio Ink assembled a panel of experts who said we should keep an eye on Alpha’s Larry Wilson, Digity’s Dean Goodman, and Jeff Warshaw at Connoisseur — they believed those three would be major players in the deal market in 2014. And they were correct. Entercom also slipped in under the radar when it purchased Journal’s radio stations.

So what’s in store for the next 12 months? Who will be the buyers, and who will be the sellers? What about the big debt crushing the big two? And where are the multiples? We get some great answers — and quite a few surprises — from our 2015 panel of expert brokers.

RI: How was business in 2014?
Evers: 2014 was excellent for MVP. Our firm did 38 transactions for $1.06 billion. Of those, 22 were radio and television transactions, probably more heavily skewed toward radio. It was an excellent year for us. 2013 was about the same. Both years, in our view, are kind of the winding down of the “workout cycle” that began back in 2009, where lenders or private equity sponsors who had sponsored deals earlier in that decade were ready to move on. Goldman Sachs with Mainline, Simmons, Quantum, those are three deals that we did. Those are a perfect example of very smart lenders and equity sponsors who just said, “There is really nothing further to wait for. The industry remains relatively flat from a revenue perspective; this is probably as good a time as any to exit.” So we saw a number of companies taking advantage of that. That was really the hallmark of the last two years, of the last five years. Not a huge difference between the two years.

RI: If we’re getting through the workout cycle, what is 2015 going to be?
Evers: Much, much slower. The list of names that fall into the category of workout or even fatigued equity sponsors is extremely short. There are very, very few names left. We think that 2015 and 2016 will see a number of family-owned companies or privately owned companies exiting, but at a much slower pace — whether it is a death or a divorce or just fatigue with ownership, with a very different dynamic, a different set of motivations than an institution saying, “OK, we are moving out of the sector.” Much lower activity in 2015 and 2016.

RI: We constantly hear about Dean Goodman, Larry Wilson, and a few others. Are they the people shaking the trees the most?
Evers: Yes. We’ve done four or five deals with Larry. He is well capitalized. He knows what he wants. He’s got a great operating team. He’s done all this before, and he wants to go public, so he’s quite acquisitive, and I think will be successful both in his effort to go public and as an operator. Dean Goodman, same thing. Dean’s working on recapitalizing his company so he can have dry powder and go out and continue to acquire. There are other potential acquirers, depending on geography and size and the profile of the deal. But those two names really stand out as far as guys who have a view of going public and who have a desire to get the scale you need to go public.

RI: What’s going on with CBS Radio?
Evers: Lots of rumors. We don’t know why CBS, which has a world-class set of assets, would feel they need to merge with Cumulus. Lew Dickey is a great operator and a great guy, but we just can’t think of why CBS would do that, nor can we think of how Lew could finance that deal. We think that particular rumor is just a lot of talk. I do believe CBS will continue to selectively grow — as Les Moonves has said many times — their presence in the largest markets, particularly where they have television stations, and prune in the smaller markets, if and when they see a really good price. They are trading close to 9-times. They are a low-basis taxpayer, and they are a net taxpayer. To do a deal with CBS, you have to give them a significant premium.

RI: Is there a surprise deal in the weeds in 2015 that you think might happen?

Evers: I doubt it. I don’t know who that would be. We look at the industry based on leverage and need for an accretive sale. So if you are iHeart now, your leverage is a multiple that makes selling extremely difficult, particularly after you pay taxes, because you have to get a multiple that the market is willing to pay in order for it to be an accretive sale. I don’t think there’s a financial institution that would back someone paying the kind of multiple that those heavily levered companies would need to pay in order to merge. Then you have the Entercoms of the world, or Salem, Saga, or another number of companies who could sell, because their leverage is less, but they don’t really have a reason to. I would say they are all acquisitive, at the right number and for the right deal.

RI: Is iHeartMedia in a place where they could sell some of their smaller-market stations?
Evers: Theoretically, yes, if they wanted to just focus on getting cash in the door. But you could sell an awful lot of smaller-market iHeart stations and not move the needle at all relative to $20 billion in debt. We represent iHeart in the Aloha Trust sales, so we are familiar with what their requirements are, and people constantly assume that because they’ve got a lot of debt, they need to sell stations to lower that leverage. That’s incorrect. They are much better advised to continue to push the ball down the road. They just refinanced a chunk of debt until 2017. They paid a price for that — I think that coupon was 10.65 percent. But Wall Street loves that kind of stuff. These are big numbers, big fees. It’s almost infinite how long they can defer having to deal with that much debt. It’s much better for the company to maintain its asset base intact and refinance, refinance, refinance than to sell off individual assets at 6.5-times, 7-times, when you’ve got leverage at 10-times. It is kind of financially impossible. The exceptions to that would be, for example, the deal we did with WALK, which was in the Aloha Trust, so that is a government-mandated sale. They got a multiple for that asset that was close to accretive for them. But critically, in exchange for selling that government-mandated asset, they got all of Qantum Communications, which had no overlaps except one little baby station in Brunswick, GA, and had more cash flow than WALK. It’s difficult to think there will be more than one or two like that for them — individual sales of assets, individual cluster sales, market sales of assets for cash. They have a huge tax bite going by and they have to clear a very high multiple, an above-market multiple, in order to have it be accretive for the company. It is extremely unlikely that will happen.

RI: Do you ever see that $20 billion becoming something more manageable?
Evers: Not through operations. Something magical would have to happen in the industry — we would have to see serious single-digit top-line growth for both the industry and iHeart for them to operate their way out of that much debt. When you start talking about 10.65 percent coupons, I don’t know, in my career path, that there will be 10.65 percent top-line growth for the radio industry. It’s really not clear to me or our firm how that debt gets resolved. They can continue to recapitalize, refinance, recapitalize, refinance until, and this is critical, the debt markets become less friendly to them. If interest rates go up or the capital markets are less friendly to that deferral and refinancing, then things start to get more challenging. What happens then? Maybe there are sales of assets and the cash.

RI: Is there a surprise deal in the weeds in 2015 that you think might happen?
Evers: I doubt it. I don’t know who that would be. We look at the industry based on leverage and need for an accretive sale. So if you are iHeart now, your leverage is a multiple that makes selling extremely difficult, particularly after you pay taxes, because you have to get a multiple that the market is willing to pay in order for it to be an accretive sale. I don’t think there’s a financial institution that would back someone paying the kind of multiple that those heavily levered companies would need to pay in order to merge. Then you have the Entercoms of the world, or Salem, Saga, or another number of companies who could sell, because their leverage is less, but they don’t really have a reason to. I would say they are all acquisitive, at the right number and for the right deal.

RI: Is iHeartMedia in a place where they could sell some of their smaller-market stations?
Evers: Theoretically, yes, if they wanted to just focus on getting cash in the door. But you could sell an awful lot of smaller-market iHeart stations and not move the needle at all relative to $20 billion in debt. We represent iHeart in the Aloha Trust sales, so we are familiar with what their requirements are, and people constantly assume that because they’ve got a lot of debt, they need to sell stations to lower that leverage. That’s incorrect. They are much better advised to continue to push the ball down the road. They just refinanced a chunk of debt until 2017. They paid a price for that — I think that coupon was 10.65 percent. But Wall Street loves that kind of stuff. These are big numbers, big fees. It’s almost infinite how long they can defer having to deal with that much debt. It’s much better for the company to maintain its asset base intact and refinance, refinance, refinance than to sell off individual assets at 6.5-times, 7-times, when you’ve got leverage at 10-times. It is kind of financially impossible. The exceptions to that would be, for example, the deal we did with WALK, which was in the Aloha Trust, so that is a government-mandated sale. They got a multiple for that asset that was close to accretive for them. But critically, in exchange for selling that government-mandated asset, they got all of Qantum Communications, which had no overlaps except one little baby station in Brunswick, GA, and had more cash flow than WALK. It’s difficult to think there will be more than one or two like that for them — individual sales of assets, individual cluster sales, market sales of assets for cash. They have a huge tax bite going by and they have to clear a very high multiple, an above-market multiple, in order to have it be accretive for the company. It is extremely unlikely that will happen.

RI: Do you ever see that $20 billion becoming something more manageable?
Evers: Not through operations. Something magical would have to happen in the industry — we would have to see serious single-digit top-line growth for both the industry and iHeart for them to operate their way out of that much debt. When you start talking about 10.65 percent coupons, I don’t know, in my career path, that there will be 10.65 percent top-line growth for the radio industry. It’s really not clear to me or our firm how that debt gets resolved. They can continue to recapitalize, refinance, recapitalize, refinance until, and this is critical, the debt markets become less friendly to them. If interest rates go up or the capital markets are less friendly to that deferral and refinancing, then things start to get more challenging. What happens then? Maybe there are sales of assets and the cash coming in the door is more important than the fact that the multiple might be accretive or not. They are a long, long ways from that. I don’t know what event triggers a change in that set of facts.

RI: Who is investing in radio these days?
Evers: Unfortunately, not as many people as we would like. There have definitely been meaningful rotations out of a growth-oriented investor into a yield-oriented investor. We do see new names coming in. Garrison, which is backing Dean Goodman, is a new name. Cyrus Capital, which backed Mary Quass, was a new name. We still see institutions that understand that with the right operator and the right set of assets, you can get a pretty darn good cash-on-cash yield.We don’t see growth-oriented private equity investors, who obviously flocked to the industry in the 1990s and early 2000s. Those folks have pretty much left the building. So we are seeing family offices that say, “Commercial real estate cap rates just don’t work for me anymore, and I’ve got a good operator and I believe that the business is not going to necessarily grow that fast, but it won’t dry up and blow away, so I will take a close look at the radio industry.” We have seen some prior legacy owners and operators come back in — Steve Adams and his team have been buying smaller markets selectively. So people know the business and/or have an operator they feel good about. From a buyer’s perspective, even if you don’t have a lot of growth, the business looks pretty good at 6.5-times compared to 12- or 13-times back when.

RI: Do you believe advertisers are spending more money on digital and taking it from radio?
Evers: Yes and no. I talked to a group owner who called on the same car dealer for years. Smaller market. The car dealer said, “My co-op money is mandated to go to all digital. I can’t buy radio and get my co-op from Detroit.” That was a little startling. It’s not one thing. People are discovering music in places other than radio, whether it’s Spotify or Pandora or whatever. It seems that every time the industry has an initiative — whether it’s NextRadio, or Townsquare trying to have a significant digital presence in each of its radio markets — there’s some technological evolution that just leeches the growth out of the industry. We don’t see any catalyst in the near term for meaningful top-line growth. Technology just keeps evolving. Having said that, there are people who get that the radio business is very long-tailed and that the radio business will continue to deliver pretty darn good cash-on-cash returns at these prices.

RI: What are the multiples today?
Evers: Six and a half-times, 5.5 for smaller markets or less attractive assets. Eight-times would really be high — it would have to be something great for that. But, all in, 6.5-times has become pretty identifiable as the sweet spot.

RI: What one thing would you like to see the radio industry do better?
Evers: That’s a good question. Give more people more reasons to listen — maybe less clutter, better content, all of the above. Give advertisers more reasons to either stick with the industry or come back. That’s obviously a catch-all, but it is a multi-faceted, multi-layered thing that has to occur here. I think you have to be realistic about the likely prospects for growth. But if we can do those things, at least we won’t slip backwards — we can maintain the share of the ad pie and the listener pie that’s been traditional.

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