ETM Q3 2011 report

By | 02/11/2011

ETM released its third quarter results yesterday. The results were predictable and much as I expected them to be. After the release, the company held the regular earnings conference call.

ETM's earnings conference calls are in listening mode only, for some odd reason, and questions for the call are sent by email. I've sent questions as a managing partner in Eden, and my questions were answered during the conference call. Here is the email I sent:

My name is Assaf and I work for Eden partnerships, a private investment fund.

Here are Eden's questions for today's conference call, ordered by importance.

For Stephen:
1. As the senior debt facility approaches maturity on June 30 next year, when does the company expect to issue a new facility or extend the current, and are the facility terms expected to change materially?
2. What is the target debt level of the company ?
For David:
1. Are any more acquisitions like KFOX planned for the foreseeable future?
2. Going into 2012, could you please estimate if station expenses will decrease, as deployment of new equipment and content will be completed?
3. Could you please, on next the purchases, disclose more financial information regarding the deals – like expected station revenue, EBITDA, expenses, etc? In particular it would be interesting to hear how KFOX is doing under ETM.
The company has another nasty habit of removing the record of the conference call from their site two weeks after the conference call. To make sure everybody can listen, I've downloaded the call to my site. You can listen to it here:  [audio:http://www.assafnathan.com/wp-content/uploads/2011/11/ETM_2011_Q3_Earnings.mp3]

I urge you to listen carefully.

We learn from the call many things, some I already said in the past:

  • Station expenses are up because of upgrades to equipment, content and systems deployment. It was predictable and the company stated expenses will be elevated through 2011. We can expect lower expenses in 2012. I already talked about this. Since we are comparing to 2010 Q3, it is obvious we shall see a decline in operating profit as station expenses are up.
  • Political revenue is down. Political revenue is different from other kinds of revenue because it does not depend on the economy status but on the political cycle. To compare quarters and years one must adjust the revenue and remove the political revenue – so he can compare apples to apples.
  • If adjusting for San-Francisco and Boston, two markets with major changes, and adjusting for political campaigns as I mentioned, ETM's revenue is up 3% from last year.
  • Refinancing is not a question of "if" but a question of "under what terms", no risk is seen here.
Talking about refinancing the debt facility that matures on June 30th, 2012, we can take a look on similar companies to compare, as Steve suggests in the call. I chose Radio-One, a much, much more leveraged company, with a much much worse debt structure (one of the worst in the industry). Here is a summary of the terms of the credit facility this company entered on March this year:

Applicable Interest Rates. At the Company’s option, loans may be maintained as (x) base rate loans, which shall bear interest at the base rate (or, in the case of term loans only, if greater at any time, the base rate floor plus the applicable margin (as defined below) or (y) LIBOR loans, which shall bear interest at LIBOR (or, in the case of term loans only, if greater at any time, the LIBOR Floor ),plus the applicable margin.  The “applicable margin” is a percentage per annum equal to (i) in the case of term loans (A) maintained as base rate loans, 5.00% and (B) maintained as LIBOR loans, 6.00%; (ii) in the case of revolving loans (A) maintained as base rate loans, 4.50%, and (B) maintained as LIBOR Loans, 5.50%.  The base rate is the highest of (x) the prime lending rate announced by the Administrative Agent  from time to time and (y) 1/2 of 1% in excess of the overnight federal funds rate and (z) LIBOR for an interest period of one month plus 1.00%.  The base rate floor and LIBOR floor are 2.50% and 1.50% per annum, respectively.

LIBOR 1 month rate is 0.25%, FED rate is 0.25%, so the maximum interest rate Radio-One pays on the worst part of its debt is 7.5% (minimal base interest of 2.5% plus margin of 5% = 7.5%; or minimal LIBOR of 1.5% plus margin of 6% = 7.5%).

This case represents:

  • The highest possible interest rate of ROIAK (Radio One) on the worst part of their bank debt (other loans will bear lower interest)
  • A company that is in VERY bad shape comparing to ETM
As a prudent and conservative measure, we can expect ETM to refinance its debt and bear interest rates of no more than 7.5%. A more optimistic approach would be that ETM, a much better managed and financed company, will be able to achieve a much lower rate than Radio-One's, say, 6%.
If we take worst case scenario of 7.5% interest rate and assume that ETM will not repay debt till June 30th 2012, we get that interest payment would be 45 million dollars per year. ETM's pays 22 million currently, so worst case would be a 23 million dollars markup. Again, we assumed that ETM's rate would be 7.5% (I assume it would be around 6%) and that ETM will not repay nothing in the coming 3 quarters, whereas ETM repayed 44.5$ million over the last 3 quarters. I'd say that one heck of a pessimistic approach, but if you are pessimistic, mostly you get good surprises.
Over the last 3 quarters, since year start, ETM generated 57.6$ million dollars net cash from operations (adjusted for changes in working capital) and expensed 4$ million on CAPEX. This leaves us with 53.6$ million FCF for 9 months. The first quarter in radio business is mostly the weakest comparing to other quarters. Taking 53.6$ million and dividing by 0.75 to get an extrapolation for a full year will give us, again, a pessimistic results since it assumes that the 53.6$ million were earned equally over the first 3 quarters of the year. We get to 71.5$ million FCF for 2011, by a pessimistic calculation.
Taking 71.5$ million minus 23$ million interest expense difference, we get to 48.5$ million FCF per year, or over 25% yield on the current market price.
Lets also remember that 2011 was a year of changes, more expenses that are expected to drop next year, and that core station revenues are climbing. Lets also remember that 2011 was a very tough year for most businesses, and ETM passed through it with little harm.
Moreover, next year will represent a significant rise in political revenue due to the presidential elections.
So what did we have?
  • We assumed 7.5% interest rate when refinancing, a rate a much worse company got on its worst loan
  • We assumed debt level stays at 606$ million for the next 3 quarters, although on the last 3 quarters the company repaid 44.5$ million
  • We assumed yearly FCF for ETM by linear extrapolation from 53.6$ million on the first 3 quarters, although first quarter FCF is significantly lower then Q2 and Q3
  • We ignored that 2011 is a year characterized by an elevated rate of expenses due to many changes the company is doing
  • We ignored presidential elections next year that can easily contribute another 9$ million to revenue (that will go almost straight to the bottom line)
  • We ignored that 2011 is a BAD year for most businesses, especially in media, and next year can be better
And still, we get a company that generates almost 50$ million FREE cash flow, but is traded for less than 200$ million. Worst case.
Given all these margins above, I think current price represents an adequate margin of safety. A little more optimistic-realistic approach will easily take us to over 40% FCF yield over the current price.
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