I thought about ETM lately and one thing that disturbed me was the recent purchase amounting to 9 million dollars that occurred in the first quarter this year.
Considering the "stellar" track record this company has in purchases and considering it had not purchased a single station for almost 3.5 years, I thought I should put some more juice into this purchase.
As I expected, information was not abundant. Nothing, absolutely nothing was mentioned in the company's 10-Q reports. I then reverted to the 8-K press releases that accompanied the 10-Q.
In this press release you can see that the purchase is mentioned. Nice, now we know where did these 9 million dollars go: to buy 98.5 K-FOX in San-Jose from Clear Channel Communications. A short research will show that this is a well known station with 20 years of history, something like Galgalatz in Israel, but does it justify the lucrative price? Was it a smart purchase?
I dug the internet long and wide and could not find a single number that shows any financial number regarding this station. Not revenue, pricing, nothing. Not even in Clear Channel reports itself. What's even more annoying is that the company did not supply shareholders with information about it to judge for themselves if the company's moves are wise or not.
As I was considering turning to emails to company's management, I thought of a nice solution: ETM reports its covenants compliance calculation – and in the calculation we can see a pro-forma estimation of this station operating income ! Yey ! Details Ladies and Gentlemen, details. In the covenant reports published since the purchase: First quarter and Second quarter, we can see that, pro-forma, if the station would have been present at ETM's portfolio for a year, it would have generated operating income between 1.875 million dollars and 1.344 million dollars.
For a 9 millions dollar investment, we get a pre-tax yield between 20.83% and 14.93%, not bad. So, wouldn't ETM be better off by using these 9 million to repay its debt? Lets see: ETM's debt bears about 3.4% interest per year. Repaying it will yield 3.4% a year, pre-tax, by saving interest payment on these 9 million dollars, or about 306K dollars, pre-tax. On the other hand, buying KFOX (wiki) will yield around 15% or over 1.3 million dollars pre-tax, given the numbers above.
Considering the numbers, this was a smart purchase.
אסף,
תודה ששיתפת אותנו במחשבותיך וחישוביך …
אך לפי דעתי, הריבית נוכחית לא רלוונטית כי בקרוב תהיה ריבית חדש(חידוש חוב).
נגיד, במקום 3.4% תהיה ריבית חדשה של פי 2 – 6.8%.
אז, תשלום עבור אותם 9 מיליון יהיה 702 אלף דולר.
סיכום:
עד חידוש החוב , רווח על אותם 9 מילון דולר שהושקעה בתחנה, יהיה 14.5-15%.
אחרי החידוש חוב : כ 11%
הכי חשוב שגם תחנה הנרכשת וגם תחנות הקיימות ימשיכו להרוויח ותזרים חופשי לא ירד וחברה תקבל תנאים טובים בחידוש החוב…
Hi Daniel,
I agree that probably the bank will increase the interest rate. But even though, pay attention that I took the lower limit, 15%, it can also be 20%.
Hi Assaf,
Nice! I was actually looking for this piece of information. Now I have it 🙂
One interesting thing I noticed is that ETM's present EV is *lower* than it was in late 2008:
2008 – total LT debt 833.7, equity at 0.67$ was 25.6, total EV of 859.3M.
2011 – total LT debt 625, equity at 5$ is 181M, total EV of 806M.
How about that?!
Shana Tova
Liron
Hi Liron,
Nice ! So we get them even cheaper than 0.67$!!!
Hi Assaf / Liron
First – Assaf, great blog ! i'm tracking it close.
I have to say that didn't understand your and Liron's logic , i guess i'm missing the point.
EV at 2008 was higher , as the leverage and probably the risk.
So – What are the news in the higher price now (lower leverage and probably lower risk) VS the lower EV ?
How Liron's details strengthen your confidence ?
Thanks!
Ofer
Hi Ofer,
Enterprise value represents a value a new owner would pay to acquire the entire company and take it private.
A new owner would need to pay to buy the equity in the market but will also need to take on the company's debt. So EV = equity + debt.
Since EV now lower than in 2008, this means a new owner can buy the company cheaper than in 2008, and with less risk !
In our case, this means the company's price is so low, just as it was at the peak of the financial crisis, but the confusion and the systemic risk that was prevalent back then is gone. So actually you are getting a better bargain now than in 2008 in $0.67 per share, in terms of risk-reward (i don't expect ETM to rise 20 fold like it did from the bottom of 2008/2009).
You can look at risk from another angle: as an owner, wouldn't you prefer buying a company for $800 million when $200 is equity and the rest is debt than buying it for $800 million when $775 is debt?
So in other wrods that's a kind of indication for a safety margin which is higher now.
In a lower safty margin case – the equity value shell increase more than the reduction in the debt thus the EV will be higher in a better situation of a company.
And we see the opposite now.
Great, thanks!
ETM קנתה תחנה חדשה ב 25M$
http://finance.yahoo.com/news/entercom-announces-agreement-acquire-san-213000870.html
Thanks. Actually I stopped following the company, I sold it around 7$ per share at the beginning of March.
From what I can see after a quick search there are not many details on the deal and it is pending some approvals for closure.
I can only hope management has done a better job with this acquisition than in the past.