Entercom Communications Corp. (ETM – $6.24*) Consumer: Media & Entertainment Buy; $7.75 PT; $884.8M Market Cap Coverage Initiated Wednesday, April 17, 2019
Downturn Killed the Radio Star? Valuation Suggests This Risk Is More Than Priced In; Initiating Coverage at Buy, $7.75 PT Zack Silver, CFA Summary and Recommendation 703-312-1804 We are initiating coverage of Entercom Communications Corp. (ETM) with a Buy rating and a 12- [email protected] month price target of $7.75 per share. We see ETM shares as mispriced even after factoring a Harry Warnick near-term economic downturn into our valuation framework. For radio broadcasters in general, 703-312-1845 we are intrigued by the idea of a "radio renaissance"—healthier industry dynamics (two major [email protected] players exiting bankruptcy), continued durability in audience reach, new growth opportunities with podcasting/streaming and sports betting, and a call option on deregulation. Despite our STOCK DATA enthusiasm, core advertising, which comprises over 75% of industry revenues, has been sluggish Market Cap (mil) $884.8 and would likely deteriorate further in a downturn. For ETM, however, our analysis suggests that 52-Week Range $5.16 – $10.95 the shares are significantly mispriced even after factoring in the impact of a near-term moderate 3-Month ADTV 1,398,259 Shares Outstanding (mil) 141.8 recession. Moreover, while we are comparatively neutral on the overall radio broadcasting Dividend Yield 5.86% industry, we believe ETM is best positioned to take advantage of a potential radio revival given Float (%) 84.7 its relatively low exposure to music-only stations, large market concentration, post–CBS Radio Short Interest 16,364,199 scale benefits, attractive digital offering, and lower leverage than the peer group. Beta 1.54 Enterprise Val. (mil) 2,454.0 Fiscal Year-End December Key Points EARNINGS DATA • Late cycle overshoot. Pro forma for the remaining CBS Radio synergies, ETM trades below EPS 2018A 2019E 2020E 5x free cash flow. We see this valuation as an overreaction to secular pressures for a 1Q $(0.10) $0.03 — 2Q $0.01 $0.31 — company that has produced more durable audience trends than many legacy media peers. 3Q $0.27 $0.28 — ETM generates virtually all of its revenues through advertising and is certainly exposed to 4Q $(2.81) $0.32 — cyclical risks. But, we believe the market has overshot the impact an economic downturn FY $(2.62) $0.95 $1.19 would have on ETM's equity value. Even after factoring in a moderate recession during our Estimates may not sum due to rounding. forecast period, we still see 30% upside potential. Moreover, we believe the risk/reward FINANCIAL DATA skews favorably based on current levels. We see only 20% downside in a draconian scenario of a 2008/2009 repeat and over 90% upside assuming no recession between now and 2025. FY 2018A 2019E 2020E Adj. EBITDA $310.0 $363.0 $383.0 • Trading dynamics should improve. Amplifying late cycle advertising and leverage exposure (mil) fears are unfavorable trading dynamics, which we see dissipating soon. Specifically, we Revenue (mil) $1,463.0 $1,492.0 $1,535.0 believe iHeartMedia investors are hedging their exposure to radio as they await iHeart's forthcoming IPO by shorting ETM, which is the most liquid radio stock. We believe that this BALANCE SHEET DATA dynamic has sidelined new ETM investors but that this headwind is reaching a conclusion 4Q18 and has helped to create an attractive entry point at current levels. Cash & Equivalents $123.0 • Exposure to most durable areas in radio. While radio still reaches more Americans than Total Assets $4,020.0 any other advertising platform, our analysis suggests that after years of steady engagement Total Debt $1,872.0 $ in millions. trends, time spent listening (TSL) dipped in 2018. However, a closer look at the data suggests that news, sports, and talk TSL held up much better than music station TSL, which is facing increased competition from Spotify, Apple Music, Amazon Music, and SiriusXM/Pandora. ETM is our preferred pick in the group because it generates around 40% of its revenues from non-music content and is much less exposed to new music entrants than peers. • Call option on deregulation. During a period in which FCC deregulation has powered a sentiment lift and M&A wave for TV station owners, radio broadcasters have lagged behind. This is because much of the deregulation that would help radio falls under the FCC's Quadrennial Review, which the FCC will not complete until the end of 2019 at the earliest. However, we expect to see meaningful radio station ownership regulation modernization by the middle of 2020, which could provide a boost to radio broadcaster multiples. • Price target derivation. Our $7.75 price target is the probability-weighted sum of ETM's per share equity value in three different scenarios playing out between now and 2025: a moderate recession (80% chance), no recession (10% chance), and a "Global Financial Crisis 2.0" (10% chance). ETM also pays an annual dividend currently yielding 6%.
Analyst certification and important disclosures can be found on pages 32 - 35 of this report. This document represents an abbreviated discussion of the subject issuer and should not be used as the sole basis for an investment decision. Contact your B. Riley FBR representative for complete research concerning the subject issuers, including research briefs and reports. Consumer: Media & Entertainment
Investment Thesis No matter how fearful investors might be about secular pressures and late cycle risks for traditional advertising, there is a price for every form of positive free cash flow. At a current multiple below 5x free cash flow, ETM has reached a point where we believe investors need to step up. Contrary to the dire fears priced in at this valuation, we view Entercom as a company with a durable business model and several underappreciated growth opportunities. Our investment thesis starts with a comparatively neutral outlook for the radio broadcasting industry. Our view is that, while radio audience trends are more stable than both investors and advertisers typically give these companies credit for, we struggle to find reasons why investors, at this point in the cycle, should have meaningful exposure to an industry that generates 90% of its revenues from traditional advertising and is relatively over-levered. For the industry as a whole, these negatives, in our opinion, offset potential positives in tapping new revenue pools such as podcasting, streaming radio, and sports betting, as well as a likely loosening of radio ownership rules. However, for Entercom, its post–CBS Radio merger scale provides relatively high exposure to these positives. Thus, we see the company as better positioned to buck tepid top- and bottom-line trends than the rest of the radio group, and perhaps other legacy media peers, which does not seem to be reflected in its unimpressive valuation. We note that Entercom is also less levered than the overall group. While 2018 featured numerous headwinds to fundamentals that were either one-time in nature or a byproduct of the CBS Radio integration, we see 2019 as the beginning of a multiyear growth period, which we believe will help lift investor sentiment toward ETM shares. Regarding industry positioning, we see Entercom’s content mix—skewing toward local news and sports over more commoditized music fare—as providing a relatively larger defense against Internet behemoths (Spotify, Apple Music, etc.) and SiriusXM/Pandora than more music-heavy peers. While Spotify, Apple, and SiriusXM provide strong music and nationally skewing spoken word content, they are, at this point, not focused on local content. Moreover, Entercom is currently the leading sports radio broadcaster with over 20 million tuning in daily to its sports channels. In our view, this suggests that Entercom has an outsized opportunity to capitalize on the nascent sports betting advertising category. Given both sluggish traditional advertising trends and AM/FM audience growth, radio broadcasters have focused more investment dollars on digital offerings. Among potential drivers of incremental digital revenue are the proliferation of smart speakers, Internet-delivered streaming radio platforms, and new made-for-digital media such as podcasts. Entercom says that its Radio.com Internet-streaming product is the fastest-growing digital audio app in the U.S. Importantly, given Entercom’s focus on the news, sports, and talk genres, Radio.com provides a differentiated offering to both consumers and advertisers. Entercom’s ability to leverage Radio.com in concert with scale- enhanced relationships with national brands should help power digital revenue growth beyond the peer group and help to offset tepid legacy revenue growth. Additionally, we see a meaningful hidden asset in Entercom’s 45% stake in Cadence13, the second-largest podcasting company (by monthly downloads) in the U.S. Entercom carries this investment on its balance sheet at just over $10M. However, given the valuation bogey Spotify just provided with its acquisition of podcasting studio Gimlet Media, we estimate that the actual value of Entercom’s stake in Cadence13 could be closer to $100M. We believe ETM’s share price has been under pressure since the CBS Radio merger due to reasons beyond fundamentals—a one, two punch of unfavorable trading dynamics that we see subsiding by the end of 2Q19. First, CBS and Entercom structured the CBS Radio transaction so that CBS split off its radio business to existing CBS shareholders. Presumably, many existing CBS shareholders that became Entercom shareholders jettisoned their shares in 2018, which amplified the reaction to Entercom’s fundamental woes in 2018. While results have improved since, Entercom shares are facing a new demand headwind related to the iHeartMedia restructuring. Our sense is that many of iHeart’s investors are hedging their exposure to radio by shorting Entercom (the most liquid radio name), which is effectively sidelining new investors. We believe this impact will subside after iHeart’s IPO, which we project to happen in 2Q19; thus, we see an attractive entry point here. Despite these opportunities, we believe Entercom’s exposure to macroeconomic headwinds is the biggest hurdle for investors. However, we argue that the market has already priced a moderate recession into ETM’s equity value. Our Buy rating is largely predicated on the notion that the market has overcorrected for the impact a recession would have on ETM’s equity value. Our $7.75 price target is the probability-weighted sum of ETM’s per share equity value under three scenarios: a moderate recession between now and 2025 (80% chance), no recession between now and 2025 (10% chance), and a “Global Financial Crisis 2.0” between now and 2025 (10% chance). While we save recession forecasting for those more qualified, we believe our probabilities are reasonably consistent with investor expectations. Our price target represents 23% potential upside from current levels, plus a dividend yielding 6%.
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Time to Tune Back in to Radio? Radio, in our view, is perhaps the most misunderstood advertising medium on the planet. Despite facing a wave of Internet-driven disruption over the better part of this century, radio still reaches more Americans than any other platform, with 229 million adults tuning in weekly. 3Q18 Weekly Reach by Medium (Percentage of Users among U.S. Population, Adults 18+)
Radio 92% Total TV 90% Social Networking (Smartphone) 74% Internet Video (Smartphone) 62% Desktop Internet 53% Streaming Audio (Smartphone) 46% Internet TV Devices 37% Social Networking (Tablet) 33% Internet Video (Tablet) 27% Social Networking (Desktop) 26% Internet Video (Desktop) 24% Game Console 15% Streaming Audio (Tablet) 13% 0% 20% 40% 60% 80% 100% Source: Nielsen Time spent listening (TSL) to radio has remained relatively stable over the last four years, despite the rise of on-demand streaming music services like Spotify and Apple Music, as well as continued growth in SiriusXM subscriptions. Moreover, radio’s durable reach metrics are anomalous to its broadcast and cable TV brethren, which have seen significant declines in subscribers, driven by the rise of Internet/over- the-top video competitors. As shown in the figure below, daily time spent with AM/FM radio has declined at a 1.5% CAGR from 2015 to 2018, while daily live TV viewership has declined at a mid-single-digit CAGR over the same period. Average Time Spent per Adult 18+ per Day by Medium (in Minutes), 2Q15–2Q18
300 280 279 267 261 250
200
147 150 139 112 105 103 110 110 100 Minutesday per 69 57 52 43 43 50 32 34 32 20 19 26 9 14 12 13 13 13 0
2Q15 2Q16 2Q17 2Q18
Source: Nielsen Despite these positive trends, as well as radio’s well-publicized 10x return on investment (i.e., every $1 spent on radio advertising produces $10 in incremental sales), and advertising costs per 1,000 impressions (CPMs) that skew toward the low end of available advertising vehicles, radio advertising revenue has been challenged in recent years—down low single digits excluding political advertising.
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U.S. Radio Industry Revenues, 2014–2018 ($M)
$20,000 2.5% $17,509 $17,373 $17,698 $17,618 $17,817 $18,000 2.0% $16,000 1.9% $14,000 1.5% $12,000 1.1% 1.0% $10,000 0.5% $8,000
$6,000 0.0% $4,000 -0.5% -0.5% $2,000 -0.8% -0.8% $0 -1.0% 2014 2015 2016 2017 2018 U.S. Radio Industry Y/Y % chg. Source: SNL Kagan, company reports, and B. Riley FBR Research Overall, we are intrigued by the concept of a “radio renaissance.” Cumulus emerged from bankruptcy last year, and iHeart plans to complete its restructuring in 2H19, which we believe should facilitate healthier industry dynamics and greater industry investment going forward. Audio consumption overall is showing healthy growth right now, with TSL at all-time highs. Moreover, radio is, in our view, exposed to some of the more attractive areas of audio, including podcasting, Internet streaming, and other differentiated, non-music content. We also see a call option in the potential for modernization of FCC ownership and DOJ antitrust laws, which could spur a meaningful consolidation wave. Tempering our enthusiasm regarding a possible radio resurgence is the industry’s significant exposure to a core advertising environment that has experienced persistent softness over the past few years, despite a surging U.S. economy. Given that the radio industry has not been able to meaningfully grow core advertising during a strong economic period, we are skeptical that trends in core advertising can noticeably inflect from here, particularly if the economy deteriorates. Additionally, radio broadcasters do not have exposure to a non- cyclical subscription growth story like the TV broadcasters do with retransmission revenue, which makes radio a less resilient group in the event of a downturn. Moreover, while radio audience reach has demonstrated impressive stability, daily TSL declined to an hour and 45 minutes in 2018 after years of stability at around the hour and 50 minutes per day mark. Investor sentiment toward radio stations has plunged in the past few years on several high-profile radio bankruptcies and sluggish advertising trends. But this narrative has pressured valuations for radio broadcasters so much that we believe mere improvement in expected survivability could present a compelling investment opportunity for a select group of radio companies. Assuming no changes to media ownership rules, we prefer larger players, as their greater audience reach gives them a calling card into the $60B+ national advertising market, while smaller players are largely limited to local advertisers. We also see greater financial resources (post-restructurings) enabling relatively more investment in growth areas such as podcasting and other differentiated content, new advertising technologies, and Internet streaming platforms. Top Radio Station Owners, 4Q18
Total Station Total Radio Station Ad Station Gross Rank Ultimate Parent Count Markets Revenue ($M) Revenue Share 1 iHeartMedia, Inc. 724 148 $2,326.0 23.3% 2 Entercom Communications Corp. 221 50 $1,297.4 13.0% 3 Cumulus Media Inc. 365 88 $679.6 6.8% 4 Cox Enterprises, Inc. 45 11 $237.5 2.4% 5 Beasley Broadcast Group, Inc. 56 14 $231.7 2.3% 6 Hubbard Broadcasting, Inc. 33 8 $219.7 2.2% 7 Univision Communications Inc. 47 15 $215.7 2.2% 8 Townsquare Media, Inc. 223 52 $204.2 2.0% 9 Urban One, Inc. 48 15 $198.9 2.0% 10 Salem Media Group, Inc. 66 33 $139.4 1.4% *Station count excludes repeater stations. Source: SNL Kagan and company reports
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Positives: Durability, Sizzling Audio Sector, Call Option on Deregulation Durability of AM/FM Radio We see the value of local radio stations as driven by locally focused non-music content, as well as a unique, lean-back music consumption experience punctuated by consumer loyalty to their favorite on-air personalities. This differentiated offering is largely insulated from Internet threats, as Spotify, Apple Music, and SiriusXM are not pursuing local content. Perhaps the most important contributor to radio’s continued durability is that it is free to consumers. Despite the rise in on-demand subscription music, we believe that a large subset of Americans will never be willing to pay for audio content. Moreover, even with the rise of SiriusXM, in-car smartphone connectivity, and infotainment systems, AM/FM still holds a premier position on the dash, creating a relatively frictionless in-car consumption experience. ETM Station Mix by Type
Source: SNL Kagan and company reports As shown in the figures below, AM/FM is still king of the road. Edison Research’s 2018 Share of Ear study found that, on average, radio represents two-thirds of Americans’ average 73 minutes of in-car audio consumption per day. Moreover, while the percentage of Americans 13+ who use AM/FM radio in their primary vehicles has dropped from 96% in 2003 to 84% today, AM/FM usage has held steady since 2011 despite the rise of new competitors such as Spotify.
Americans’ 13+ Share of TSL to Audio in Car/Truck, 2018 Percentage of Americans Using AM/FM in Primary Vehicles
100% 96%
90% 4% 84% 84% 5% 80% 7% 70%
60% 17% 50%
40% 67% 30%
20%
10%
0% AM/FM SiriusXM Owned music Streaming audio Other 2003 2011 2018
Source: Edison Research Source: Edison Research
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AM/FM listeners are essentially a captive audience when they are listening in-car, which should make the medium especially attractive to advertisers. While TV viewers can shift their attention elsewhere during commercial breaks and Facebook/Instagram users can generally scroll past advertisements with a finger flick, in-car radio listeners are (hopefully) focused on operating their vehicles rather than circumventing advertising. Differentiated content, durable audiences, consumer loyalty to on-air personalities, and an effectively captive audience are all part of radio’s pitch to both national and local advertisers. We see these factors as the major drivers behind radio’s relatively high return on advertising dollars. However, in reality, buyers (local advertisers, in particular) are continuing to shift dollars to digital media—placing greater importance on the lower-cost, easier-to-purchase nature of search and social media ad slots than on the efficacy of radio advertising. Payback per Dollar Spent on Radio Advertising by Category
25x 23x 21x 20x 17x 15x 15x 14x
10x 9x 6x 5x
0x
Source: Nielsen Studies (2014–2016) Audio Is Hot As shown in the figure below, weekly online audio consumption has grown at a 10% CAGR over the past decade, with the average American now consuming close to 17 hours of audio online per week. Given that radio TSL has remained relatively stable over the same period, the trend suggests that Americans are consuming more audio entertainment than ever before. Major drivers of the upward momentum have been the emergence of on-demand subscription music in the U.S. (Spotify launched in 2008, Apple Music in 2015), torrid growth in new audio formats (first Internet radio, now podcasts), and new technologies for consumption such as smart speakers. Average Weekly TSL to Online Audio and Percentage of Americans Listening, Ages 12+
1,200 100%
1,003 90% 1,000 879 80% 799 820 70% 773 728 800 716 67% 60% 64% 586 61% 557 600 57% 50% 482 53% Minutes 47% 391 45% 40% 400 39% 30% 34% 27% 27% 20% 200 10%
0 0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Avg. TSL to Online Audio per Week % of Americans Listening to Online Audio Source: Edison Research (2019 Infinite Dial study) Given that individuals generally choose audio consumption over other media when in transit (in the car, commuting on foot) or engaged in another task (exercising, working, cleaning, etc.), they are less likely to divert their attention elsewhere when an ad is aired, making audio an attractive format for advertisers. Moreover, because audio is a popular form of media consumption while in transit, advertisers can serve targeted ads based on location data, including ads based on where listeners are likely to be at a given time of day. These factors, plus the growth in audio consumption, make audio an extremely attractive format for advertisers. According to the Interactive Advertising Bureau, digital audio advertising grew 39% in 2017 to $1.6B. Because a significant percentage of online audio listeners in the U.S. subscribe to commercial-free services, digital streaming offerings from radio broadcasters, such as TuneIn and ETM’s Radio.com, are important partners.
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For the radio broadcasters, advertising revenue from these digital offerings has been a savior—helping to offset sluggish local and national spending on traditional media. As shown in the chart below, radio industry digital revenues grew at a 10% CAGR from 2009 to 2018 and now represent almost 9% of industry revenues. We note that a significant percentage of what is categorized as “digital” revenues are digital local marketing services businesses where radio broadcasters effectively act as a marketing agency for local businesses. But, monetization of owned streaming platforms still drives the bulk of digital revenues for the industry. While digital is closing in on 10% of total industry revenues, as shown in the figure below, other legacy advertising formats actually have a higher digital mix than radio, suggesting upside for radio if it is able to close the gap. Assuming no change in core advertising, if radio digital advertising grew from 9% of current industry revenues to 17% (the average digital mix for local TV, newspapers, and cable advertising), this implies almost $2B in incremental digital revenues, according to our estimates. Survey data from Borrell Research finds that while 97% of advertisers that buy radio advertising also buy digital advertising, only 25% of them buy digital advertising from radio broadcasters.
Radio Industry Digital Revenues, 2009–2018 ($M) Digital vs. Core Mix, Traditional Local Platforms (2018)
$1,400 30.0% 100.0% $1,266 10.8% 9.0% $1,189 90.0% 14.8% $1,200 $1,106 25.0% 30.0% 26.6% $1,019 80.0% $973 $1,000 70.0% $889 20.0% $767 60.0% $800 $709 $615 15.0% 50.0% $600 89.2% 91.0% $480 40.0% 85.2% 10.0% 70.0% 73.4% $400 30.0% 20.0% $200 5.0% 10.0% $0 0.0% 0.0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Yellow Pages Newspapers TV Cable Radio
Radio Industry Digital Revenues Y/Y % chg. Core Digital
Source: SNL Kagan Source: Borrell Research and Inside Radio According to digital audio data from audio measurement firm Triton Digital, average active sessions (a proxy for time spent listening) for the top 20 digital audio services grew at a 12% CAGR from December 2016 to December 2018. Spotify has powered much of this growth and now represents the majority of digital audio consumption in the U.S. (excluding Apple Music and other subscription-only services). Digital offerings from radio broadcasters have exhibited solid growth, as well, with Cumulus, Entercom, Beasley, Salem, and other broadcasters growing at an average CAGR of 5% over the same period—slightly below the overall rate but outperforming Pandora’s 3% decline. Time Spent Listening by Streaming Audio Service, December 2016 to December 2018
60% 50% 40% 30% 20% 10% 0% -10% -20%
Total Listening Spotify Pandora iHeartRadio Radio.com (ETM) Cumulus Source: Triton and B. Riley FBR Research
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Top 20 Streaming Audio Services by Time Spent Listening, December 2018
1% 1% 3% 6%
50% 39%
Spotify Pandora iHeartRadio Radio.com (ETM) Cumulus All Others Source: Triton and B. Riley FBR Research Podcasting is another growth opportunity within digital that could benefit radio broadcasters. While the hype around podcasting is plentiful, and competition is intensifying (Spotify has already acquired three podcasting companies this year, and SiriusXM is making inroads, as well), we think podcasting will produce a “rising tide” effect, lifting revenues for a large percentage of industry participants. The medium has been around for more than a decade, but consumption has accelerated sharply over the past several years. Edison Research now estimates that more than 90M Americans listen to at least one podcast per month, 23% growth from last year, and 62M listen to at least one podcast a week, up 30% from last year.
Percentage of Individuals Ages 12+ Listening to Podcasts IAB/PwC Podcasting Revenue Forecast, 2017–2020E ($M)
35% $659.0 32% $700.0 100% 90% 30% $600.0 26% $514.5 80% 25% 24% $500.0 22% 70% 21% $402.0 60% 20% $400.0 17% 17% $313.9 50% 15% 15% $300.0 15% 13% 40% 12% 28% 28% 28% 10% $200.0 30% 10% 8% 7% 20% $100.0 5% 10% $0.0 0% 0% 2017 2018 2019E 2020E 2013 2014 2015 2016 2017 2018 2019 U.S. Podcasting Revenues Y/Y % chg. Weekly Monthly
Source: Edison Research Source: Interactive Advertising Bureau and PwC Radio broadcasters, despite often being perceived as technological laggards, seem to be well positioned to ride the podcasting wave. iHeartMedia became the number one podcasting publisher in the U.S. through its acquisition of Stuff Media last year. ETM has a 45% stake in Cadence13, which is the number three podcasting publisher. Cumulus takes more of an affiliate approach, partnering with content creators and using its relationships with national advertisers, as well as its nationwide Westwood One radio network, to monetize podcasts, while also producing several popular podcasts in-house. Cumulus in 2018 reported $12.5M in revenue from its Westwood One Podcast Network, representing around 3% of total U.S. podcasting revenue.
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Call Option on Deregulation While the TV broadcasters have benefited from a wave of consolidation, largely driven by the FCC’s reinstatement of the UHF discount and case-by-case reviews of in-market ownership, the FCC’s regulatory weed-whacker has not provided much help for AM/FM radio. This is strange to us, given that the Big Tech–driven disruption of advertising dollars seems to have affected TV and radio equally. However, we see regulatory relief on the horizon, with the broadcaster-friendly FCC wrapping up its Quadrennial Review of Media Ownership Rules by the end of this year or early next year. We believe the FCC will implement the bulk of the proposal submitted by the National Association of Broadcasters (NAB), which, for radio, would mean more synergistic in-market swaps, as well as consolidation across the industry. Unfortunately for the radio broadcasters, the DOJ will also need to modernize its ownership rules for both new swaps and consolidation opportunities to be possible. But, we see the DOJ updating its local media antitrust laws for 21st century industry dynamics beginning potentially as soon as next month. Our view is that, more likely than not, we will see meaningful AM/FM deregulation by mid 2020 from both the DOJ and FCC, which will likely set off a consolidation wave similar to what we have seen in the TV broadcasting space. Additionally, we see bigger players like Cumulus and Entercom closing in on their leverage targets around this time. So, we believe that we could see the bigger players announce synergistic deals to acquire the smaller players. Unlike TV stations, the FCC does not cap radio broadcaster national ownership, but it does have in-market ownership rules in place that are fairly inhibiting for significant further industry consolidation (see figure below). Radio station transactions also need to pass DOJ muster. In general, the threshold for a potential negative action from the DOJ would be a transaction that results in one radio broadcaster controlling more than 35% of local radio advertising dollars in a given market. On the DOJ side, we believe that this 35% soft cap will be lifted—with the best-case scenario being that the DOJ expands its definition of advertising dollars to include Internet companies like Facebook and Google. Current AM/FM Ownership Restrictions by Market Size
One entity Total # of Total # of If a radio market has… can own… Markets Stations 45 or More Stations 8 79 5,396 30 to 44 Stations 7 72 2,615 15 to 29 Stations 6 100 2,311 14 or Fewer Stations 5 16 167 Source: BIA Advisory Services On the FCC side, we believe that the NAB’s proposal is a reasonable proxy for new radio ownership rules. A likely outcome (and a good one for the radio broadcasters, in our view) is that, in the top 100 markets, broadcasters can own as many AM stations as they want and can own up to eight FM stations in each market. In markets smaller than the top 100, we expect the FCC to completely eliminate ownership restrictions. According to BIA Advisory data, there are currently 1,405 unconstrained FM stations that could be consolidated in the event of FCC deregulation. This data also identifies over 400 station owners that are currently constrained under existing FCC rules. Many Radio Broadcasters Are Currently Constrained by Ownership Rules
# of AM # of FM Total # of Constrained Constrained Constrained Market Ranks Owners Owners Owners Top 10 Markets 2 18 20 Markets 11-25 0 21 21 Markets 26-50 2 29 31 Markets 51-75 3 46 49 Total 7 114 121
Markets 75-100 2 38 40 Markets 101-125 1 32 33 Markets 126-150 0 40 40 Markets 151-200+ 4 72 76 Markets 200+ 4 87 91 Total 11 269 280 All Rated Markets 18 383 401 Source: BIA Advisory Services
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While radio consolidation would, in our view, be helpful to station owners competing with global Internet players like Spotify, Facebook, and Google, we see a smaller opportunity for potential synergies than we have observed in following the TV broadcasters. Perhaps the most impactful change for TV broadcasters was to allow, on a case-by-case basis, mergers of the top four stations in local markets. In general, we estimate that the synergies from in-market TV station consolidation are around 1,000 bps of combined station revenue, in addition to the potential for revenue synergies from a stronger in-market footprint. We have seen some in-market swaps for the radio broadcasting group, but we believe the synergy potential, on average, from radio station swaps is less than that of TV station swaps. This is because, while TV stations produce the same news content between two stations, radio stations are each formatted differently, and content costs would be difficult to share. For M&A between two entire companies, the biggest synergy benefit for TV stations was that the acquired company would be able to step into the buyer’s higher retransmission per sub rates. In radio, we do not see a similar revenue synergy in mergers between companies but expect that there would be meaningful cost synergies from overhead and duplicative systems, as well as scale benefits. In general, we would expect meaningful ownership deregulation from the FCC and DOJ to boost radio broadcaster multiples, similar to what happened with TV stations. Squishy Core Advertising Trends Dampen a Story That Otherwise Intrigues Radio Industry Revenue by Type, 2018
6% 7%
14%
59% 15%
Local spot National spot Events/off-air Digital Network Source: SNL Kagan, company reports, and B. Riley FBR Research Local Spot While radio broadcasters have recently reported growth in both national spot and network advertising, recent weakness in local spot advertising (which represents 60% of overall industry revenue and an even larger percentage of Entercom’s revenue) more than offset growth in other areas last year. Radio has successfully defended its share of local advertising dollars, which continues to hover around the low 20% level. However, the local advertising pie has been shrinking at a low- to mid-single-digit clip over the last several years.
Share of U.S. Local Advertising by Medium, 2016–2018 Legacy Local Advertising Ex. Political, 2015–2018 ($M)
$70,000 0.0% 13% 14% 14% $61,290 $59,713 $57,534 -0.5% $60,000 $55,276 12% 14% 15% -1.0% $50,000 20% 17% 15% -1.5% $40,000 -2.0% -2.3% 34% 34% 34% $30,000 -2.6% -2.5% -3.0% $20,000 -3.5% 21% 22% 22% -3.6% $10,000 -3.9% -4.0% 2016 2017 2018 $0 -4.5% Local Radio Local TV Local Newspapers 2015 2016 2017 2018 Local Digital/Online Media Out-of-Home U.S. Local Advertising Y/Y % chg.
Source: SNL Kagan, Magna, and B. Riley FBR Research Source: SNL Kagan, Magna, and B. Riley FBR Research
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Local businesses shifting dollars from legacy media to lower-cost, easier-to-use social media and search advertising seems to be driving the majority of the local sluggishness. Local ad products offered by companies like Facebook and Google remove the friction of negotiating advertising rates through local sales reps and provide ad buyers with tangible, easily accessible attribution data that broadcasters cannot yet provide at scale for their traditional offerings. Moreover, the local retail vertical, which has historically been a sizable buyer of local radio spots, continues to face pressures from consumer tastes shifting toward e-commerce behemoths such as Amazon and Wal-Mart. These headwinds are forcing some local retailers to either slash their advertising budgets or orient them toward what they may perceive as more efficient offerings. Another recent headwind for local radio advertising has been soft spending in the automotive category, a large vertical for radio. According to a report by advertising research firm Borrell in October 2018, automotive advertising was slated to decline by the high single digits in 2018, as dealers were brushing up against peak levels for auto sales. Borrell projects a rebound in auto advertising in 2019 but for the majority of the auto advertising growth to flow to targeted digital media channels, which will likely continue to pressure local radio advertising. Radio broadcasters are certainly not naïve to the local advertising issues they face and are making sizable investments to help claw back lost ad dollars. On the analytics side, broadcasters have partnered with ad tech firms, like AnalyticOwl, which specialize in generating attribution data for media broadcast advertising campaigns. Radio broadcasters have seen immediate benefits from onboarding ad buyers onto these analytics/attribution programs. Entercom launched its analytics platform in late 2017 and reported in 4Q18 that the 5,000 advertisers connected to the platform increased their spending by 11% after joining the platform. Townsquare similarly reported a 20% jump in ad spending from advertisers that were participating in its Townsquare Analytics platform. An added benefit of these analytics platforms is that radio broadcasters are now collecting more tangible campaign results to use in their sales processes. We note that the 5,000 advertisers on Entercom’s analytics platform represent only 10% of the company’s total revenues. This illustrates the fragmented nature of the local advertising marketplace and why initiatives like these will, in our opinion, take many years to grow large enough to offset continued core advertising sluggishness. Still, while we are not expecting a reversal in spot advertising trends overnight, these initiatives should help keep advertising trends moderately stable over the next several years, barring major macroeconomic headwinds. For 2019, we project that local spot revenue for Entercom, excluding political advertising, will be substantially flat. Our assumption for flat local spot radio advertising reflects an easy comp in 1H19, after mid-single-digit local spot declines in the year-ago period, as well as commentary from radio broadcasters that the local spot market has been much improved heading into 2019. Based on our checks, we see the auto and retail categories as still under pressure so far this year. However, we estimate that other major local advertising categories, such as professional services, will be stable in 2019. We also believe that there could be upside from new-to-radio sports betting advertising. In our view, given the volume of sports and sports-talk content on AM/FM radio, as well as the regional/local focus inherent in state-by- state betting regulations, radio broadcasters could be one of the early beneficiaries of sports betting advertising. Network and National Spot We see an opportunity for the larger players to grow national spot and network advertising, helping to partially offset local softness. Ad dollars from national brands, on average, comprise around one-quarter of total radio advertising revenues. While the overall radio group has not seen a meaningful increase in national ad dollars, we believe broadcasters with larger footprints, as well as those operating national radio networks (iHeart, Entercom, and Cumulus), are best positioned to capture more ad spend from national brands. Radio network advertising has been one of the few recent growth areas in radio. BIA Kelsey, a local advertising research and consulting firm, projects mid-single-digit growth for radio network advertising over the next few years. There are only a handful of significant radio networks in operation today: iHeart’s Premiere Networks, Cumulus Media’s Westwood One, and Entercom’s recently launched Entercom Audio Network. These networks essentially create and syndicate programming to station affiliates across the country in return for either a slice of affiliate advertising inventory or affiliate revenue. National brands are more likely to allocate dollars to these networks than to individual station groups because the networks can promise close to nationwide reach. Notably, brands like Proctor & Gamble, Amazon, Indeed, Peleton, Google, and Uber have all recently increased ad spend on network radio.
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Radio Industry National Spot Advertising, 2014–2018 ($M) Radio Industry Network Advertising, 2014–2018 ($M)
$3,000 1.0% $1,200 2.0% $2,730 $1,086 $1,093 $1,098 $1,107 $2,648 $2,664 $2,584 $1,072 0.6% $2,512 0.5% $2,500 $1,000 1.0% 0.0% 1.3% 0.6% 0.8% 0.0% $2,000 -0.5% $800 0.5% -1.0% -1.0% -1.0% $1,500 $600 -1.5% -2.0% $1,000 -2.0% $400 -3.0% -2.5% $500 -2.8% $200 -3.0% -3.0% -3.0% -4.0% $0 -3.5% $0 -4.5% -5.0% 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 National spot advertising Y/Y % chg. Network advertising Y/Y % chg.
Source: SNL Kagan, company reports, and B. Riley FBR Research Source: SNL Kagan, company reports, and B. Riley FBR Research National spot advertising differs from network in that a national advertiser is buying inventory on one station group rather than a radio network. This category has not been as buoyant as network advertising. However, we believe that, for the larger players, national spot could be a growth opportunity and should outperform local spot over the next few years. iHeart Media, despite its balance sheet woes, has reported better organic revenue trends than the overall industry. This is largely due to its national spot and network performance. iHeart is nearly double the size of the next closest broadcaster and has invested considerably in ad tech like analytics and programmatic capabilities—both factors boosting its appeal with sophisticated national advertisers. We believe that Entercom, which has recently built out a national sales team to sell directly to large advertisers and has recently deployed new analytics capabilities, should similarly outperform the industry in national spot advertising over the next several years. 2018 Revenue Mix, B. Riley FBR Estimates
Total Radio Total Advertising, Radio % Rank Parent Company Advertising, 2018 2018 of Total 1 Deutsche Telekom Ag (T-Mobile) $119 $1,700 7.0% 2 Comcast Corp. $98 $7,036 1.4% 3 Home Depot Inc. $61 $1,156 5.3% 5 AT&T Inc. $53 $5,100 1.0% 7 Lowes Cos Inc. $36 $963 3.7% 8 Amazon.com Inc. $35 $8,200 0.4% 10 Procter & Gamble Co. $34 $7,103 0.5% 11 Macys Inc. $34 $1,108 3.1% 12 Softbank Corp (Sprint) $29 $1,300 2.2% 14 Walt Disney Co. $26 $2,800 0.9% 17 Yum Brands Inc. $24 $1,208 2.0% 19 OReilly Auto Parts Inc. $22 $81 26.5% 20 Capital One Financial Corp. $20 $2,174 0.9% 21 Progressive Corp. $19 $1,422 1.3% 24 Walmart Inc. $19 $3,500 0.5% Source: AdAge, company reports, and B. Riley FBR Research The radio industry often points to Procter & Gamble’s recent decision to allocate more advertising dollars to the medium as the first domino in a resurgence of national brand interest in radio. To detect any sentiment shift toward radio for other national advertisers, we scanned recent public filings and transcripts of the top 200 national advertisers in 2018. Our findings were mixed, with Lowe’s and Dick’s Sporting Goods both mentioning that radio was an important part of their advertising budgets and LendingTree guiding for a doubling of its broadcast (radio and TV) ad dollars from 2018 to 2019. For Norwegian Cruise Lines, radio is such an important part of its advertising spend that it actually had iHeart radio personality Elvis Duran give a presentation at its 2018 investor day. Other national brands, however, seemed less bullish on traditional advertising in general, with Yum! Brands suggesting that it was shifting ad dollars away from traditional advertising (including radio) and toward proximity marketing and Clorox declaring that it earned higher ROIs through digital advertising than traditional platforms.
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Radio broadcasters often make the argument that there is a mismatch between their audience share and their advertising revenue share. Specifically, according to Nielsen, radio comprises around 16% of Americans’ daily time spent with media, while radio only captures around 7% of the $200B+ U.S. advertising market. In our experience, the more mature the platform is, the more difficult it is to correct mismatches between platform engagement and advertising revenue. Still, we note that the radio industry closing this gap implies a near doubling of radio advertising revenues, from $17.8B to $34.9B. Forecasted Industry Revenue Lift if Engagement Share and Ad Dollar Share at Parity ($M)
Total 2018 U.S. Advertising $217,971 / 2018 Radio Advertising $17,817 Radio share of total 8.2%
Total 2018 U.S. Advertising $217,971 x Radio % of media usage 16.0% Radio advertising at engagement parity $34,875
Incremental advertising $17,059
% lift 95.7% Source: Nielsen, SNL Kagan, and B. Riley FBR Research Scale Matters; Market and Station Composition Matter More Our analysis suggests that, while higher scale (as measured by a company’s total number of owned and operated stations) is generally correlated with higher margins, station market composition and genre mix seem to be the biggest drivers of operating performance variance among broadcasters. While iHeart’s revenue and AEBITDA are two times and three times higher, respectively, than those of its closest peer, Entercom, it actually ranks near the middle of the group for revenue per station and AEBITDA per station. However, Entercom ranks first in both revenue per station and AEBITDA per station, despite generating half of iHeart’s total revenue and AEBITDA. Meanwhile, Cumulus, which owns nearly six times as many stations and generates more than twice as much revenue as smaller Beasley, actually ranks below Beasley on revenue per station and AEBITDA per station.
PF Revenue and AEBITDA by Company, 2018 ($M) PF Revenue/Station, AEBITDA/Station by Company, 2018 ($M)
$3,611 $7.0 $3,500 $6.3 $6.0 $3,000 $5.0 $2,500 $4.3 $4.0 $4.0 $2,000 $1,463 $3.0 $2.6 $1,500 $1,140 $976 $1,000 $2.0 $1.2 $1.3 $1.3 $434 $500 $310 $1.0 $0.5 $0.7 $234 $263 $0.3 $98 $44 $0 $0.0 IHRT ETM CMLS TSQ BBGI IHRT CMLS TSQ ETM BBGI
2018 PF Revenues 2018 PF AEBITDA Revenue per station AEBITDA per station
Source: Company reports and B. Riley FBR Research Source: Company reports and B. Riley FBR Research
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Total Owned and Operated Stations by Operator and Top 50 Stations As a Percentage of Total
900 848 50% 47% 47% 800 45% 700 40% 35% 600 30% 500 433 25% 400 321 20% 300 18% 234 15% 200 9% 10% 64 100 5% 0 0% 0% IHRT CMLS TSQ ETM BBGI
Total O&O stations % of stations in Top 50 markets
Source: Company reports, B. Riley FBR Research, and SNL Kagan We see Entercom’s best-in-class revenue per station and AEBITDA per station metrics as a product of the company’s outsized exposure to top 50 markets (with nearly half of its stations in large markets), as well as its greater percentage of non-music stations. On average, non- music stations generate higher revenue than music stations and are less sensitive to ratings. Given our view that Spotify, Apple Music, and SiriusXM/Pandora will continue to pressure time spent listening on AM/FM all-music stations, we like Entercom’s odds of outperforming the group, as it has less exposure to music station ratings deterioration. Entercom Overview Entercom is the second-largest domestic radio broadcasting company, owning more than 235 AM and FM radio stations across the U.S. Entercom’s station footprint covers approximately 60% of the entire U.S. 12+ population (P12+) and tallies 110M million unique listeners per month. Relative to the overall industry, Entercom’s footprint is more concentrated in large radio markets, reaching close to 90% of P12+ in the top 50 radio markets. Given this top-heavy concentration, ETM generated over 50% of its revenues from just 10 markets last year, which included New York City, Los Angeles, San Francisco, and other major metropolitan areas. As discussed, its station mix skews, by design, toward news, sports, and other local talk, rather than music, with advertising on proprietary spoken word content generating approximately 40% of company revenue. Station Ownership in Top 25 Radio Markets
# of Music #1 or #2 #1 or #2 Local Ad Market # of Stations in News Sports Share Rank Market Stations Top 20 Station Station (%) 1 New York, NY 9 3 Yes Yes 23% 2 Los Angeles, CA 7 4 Yes No 20% 3 Chicago, IL 7 3 Yes Yes 23% 4 San Francisco, CA 7 1 Yes Yes 17% 5 Dallas-Ft. Worth, TX 9 3 No Yes 18% 6 Houston-Galveston, TX 6 4 No Yes 17% 7 Washington, DC 6 3 No Yes 20% 8 Atlanta, GA 4 2 No Yes 16% 9 Philadelphia, PA 7 3 Yes Yes 34% 10 Boston, MA 8 3 No Yes 34% 11 Miami-Ft. Lauderdale-Hollywood, FL 8 4 No Yes 23% 12 Seattle-Tacoma, WA 6 5 No No 21% 13 Detroit, MI 8 3 Yes Yes 27% 14 Phoenix, AZ 4 3 No No 14% 15 Minneapolis-St. Paul, MN 3 2 Yes No 18% Total (Top 15) 99 46 7 11 As % of Overall Total 42% Source: Company reports, B. Riley FBR Research, and SNL Kagan
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Entercom generates virtually all of its revenues through advertising, primarily by selling broadcast time slots to local, regional, and national advertisers. In May 2018, Entercom launched Entercom Audio Network (EAN), a premium network offering that allows national brands to buy advertising slots across Entercom’s national footprint. Entercom’s market share of the $1.1B radio network advertising market is only around 3% today, but the company expects to double its penetration over the next several years as it ramps EAN. Entercom generates around 9%, or $128M, of total revenues from digital offerings, which include its Radio.com internet radio service and a digital marketing services group that helps local advertisers design and implement digital marketing strategies. Nontraditional advertising, such as creating live events for advertisers, comprises 8% of total revenues and is growing at a mid-teens clip. Entercom is also involved in the production and monetization of podcasts through its 45% stake in Cadence13. 2018 Revenue Mix, B. Riley FBR Estimates
2% 1%
8%
9%
18% 62%
Local Core National Core Digital Event/other Network Trade
Source: B. Riley FBR Research and company reports 2017 Merger with CBS Radio Merger Background Entercom completed its merger with CBS Radio on November 17, 2017, acquiring CBS’s radio operations via an all-stock Reverse Morris Trust transaction for $2.5B. Prior to its merger with CBS Radio, Entercom was the fourth-largest radio broadcaster with 126 total stations; it generated $460M of revenues and $115M of AEBITDA in 2016. At the time of the acquisition announcement in February 2017, CBS Radio was generating TTM revenues of $1,216M and TTM AEBITDA of $353M, more than double that of Entercom, pre-acquisition. Following the transaction, CBS shareholders that participated in the split-off owned over 70% of the pro forma entity, though we suspect a smaller percentage of legacy CBS shareholders currently remain. The rationale for the transaction was multifaceted. Most importantly, it gave Entercom the scale and market reach it needed to have a realistic shot at attracting large national advertisers to its platform. Additionally, the addition of the CBS Radio stations and programming rights cemented Entercom as a category killer for AM/FM sports and news broadcasting. Post-merger, Entercom owns local rights to broadcast 45 professional sports teams and owns seven of the top eight most listened to all-news stations in the U.S. Operationally, Entercom saw an opportunity to improve CBS Radio, which CBS managed as more of an afterthought relative to its television assets. While legacy Entercom was growing revenues by the low to mid single digits per year, CBS Radio revenues were declining 2%–3% per year. Entercom expects to realize $110M in net synergies from the deal by the middle of this year. Mixed Reviews So Far, but the Heavy Lifting Is Done Entercom laid out some very ambitious 2020 financial targets around the time of the merger, which included $535M in 2020E AEBITDA, 31% growth from 2017 pro forma AEBITDA, $2.05 in FCF per share, 67% growth from pro forma 2017 PF FCF/share, and net leverage of 2.5x by the end of 2020. Given the operational woes in 2018, it seems unlikely to us that Entercom will achieve these targets. However, in our view, factors largely unrelated to the merger drove a far greater share of 2018 difficulties than issues at CBS Radio. After a long period of sluggish ratings performance under CBS stewardship, Entercom grew ratings at the CBS stations by 4% in 1H18, with some CBS stations up by more than 20%. Entercom replaced 17 legacy CBS Radio general managers and reformatted several large CBS stations last year. While the operational changes and reformatting affected Entercom’s total revenues by a low-single-digit percentage last year, we believe the short-term pain caused by these station optimizations will produce longer-term benefits for the consolidated entity. Synergies appear to be on track, with Entercom exiting 4Q18 having realized $58M of the $110M net synergies, and it expects to achieve the remainder this year.
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Avoiding 2018 Déjà Vu While integration impacts certainly caused headwinds for Entercom’s 2018 results, we believe the key issues were less related to the CBS Radio merger and more related to factors that produced short-term pain but should create a healthier company in the long term. The primary drag on revenue and AEBITDA was the shuttering of Entercom’s former traffic advertising partner, United States Traffic Network (USTN). Entercom partnered with USTN to resell its short-form ad inventory during traffic reports. USTN typically paid Entercom $45M per year, of which 90%+ was incremental AEBITDA. Due to USTN mismanagement, the company was unable to pay Entercom in 2018; as a result, Entercom did not recognize any traffic ad revenue in 1H18. After Entercom terminated its relationship with USTN and brought traffic operations in-house, it generated $15M of revenues in 2H18 and expects to generate $35M in 2019, but the USTN issue still produced a 2% headwind for 2018 revenues, or 50% of the 2018 decline. Unlike the unexpected USTN fiasco, Entercom inflicted two other revenue headwinds by design, in an effort to create longer-term benefits. First, Entercom reformatted several of CBS Radio’s larger stations in top five markets. Advertisers are largely unwilling to buy spots from stations undergoing reformats until ratings data is available, which hurt these stations for at least part of the year. Additionally, Entercom discontinued a former practice in which it sold bulk inventory to resellers for deep discounts. Entercom made the decision to claw back the reseller inventory because, with CBS Radio, it sees itself as having the scale necessary to sell this inventory to national advertisers that will pay CPMs (cost per thousand impressions) three times higher than resellers were paying. While we believe these issues are behind Entercom as we move through 2019, Entercom also flagged a weak local ad market in 1H18 (improving slightly in 2H18) as a contributor to headwinds. Unlike Entercom, we are not as optimistic about core advertising trends and bake into our estimates slight declines for core.
Entercom Pro Forma Revenues, 2017–2021E Entercom Pro Forma AEBITDA, 2017–2021E
$1,800 5.0% $450 26.0% $1,558 $391 $1,600 $1,521 $1,492 4.0% $400 $383 $1,473 $1,535 $363 25.0% $340 $350 25.1% $1,400 3.0% $310 24.9% 24.0% $1,200 2.9% 2.0% $300 24.3% $1,000 1.0% $250 23.0% 1.3% 1.6% $800 0.0% $200 22.0% $600 -1.0% $150 21.0% $400 -2.0% $100 21.1% 21.0% 20.0% $200 -3.0% $50 -3.1% $0 -4.0% $0 19.0% 2017 2018A 2019E 2020E 2021E 2017 2018A 2019E 2020E 2021E
Revenues ($M) Y/Y % chg. AEBITDA ($M) Margin %
Source: B. Riley FBR Research and company reports Source: B. Riley FBR Research and company reports Prior to its merger with CBS Radio, Entercom was the fourth-largest radio broadcaster with 126 total stations and generated $460M of revenues and $115M of AEBITDA in 2016. At the time of the acquisition announcement in February 2017, CBS Radio was generating TTM revenues of $1,216M and TTM AEBITDA of $353M, about double that of Entercom, pre-acquisition. Following the transaction, CBS shareholders that participated in the split-off owned over 70% of the pro forma entity, though we suspect a smaller percentage of legacy CBS shareholders currently remain. Despite Soft Core Ad Trends, We See Bankable Growth in 2019 While our current estimates for 2% growth in 2019 revenues to $1,492M and 17% growth in AEBITDA to $363M are close to the consensus, we believe the market remains spooked by last year’s declines. In our 2019 forecast, we assume nothing heroic for core advertising, which we see declining 1%. Entercom said on March 8 that 1Q19 revenues were pacing up 3% and on April 8 issued an 8-K disclosing that 2Q19 revenues were pacing even better, up 4%. Comparisons get more difficult in 2H19, where Entercom laps the traffic advertising lapse and comps against political ad revenues from the 2018 mid-term elections. Against low expectations, we believe Entercom only has to hit our and consensus estimates to be rewarded with multiple expansion.
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2019E Revenue Bridge ($M)
Source: B. Riley FBR Research and company reports The $30M bridge between 2018 revenues and our 2019 forecast can be broken down into six parts. We see decent visibility into the four growth drivers and the decline in political, while core remains the wild card. We see Entercom generating $17M in incremental traffic advertising, slightly exceeding its $30M conservative outlook for 2019, after only recognizing $15M last year due to USTN. We expect digital (local marketing services and Radio.com, primarily) to grow 11%. Entercom said its digital ad agencies had increased Radio.com bookings by 40% in 2H18, and we see some upside in a newly launched sports-centric “Radio.com Sports” offering. Our checks indicate that Entercom’s live events business, pro forma for the merger, is growing at a rate similar to Live Nation’s concert revenues, which implies $17M of incremental event revenue this year. Entercom will anniversary the launch of its national radio network this summer and expects to increase penetration of the $1.1B radio network market (which is growing by mid single digits) from 3% in 2018 to 6% in 2019, sufficient for $13M in incremental network revenue, we estimate. Offsetting these growth drivers is a loss of $10M in political revenues earned in 2H18—and the balance being a $21M decline in core advertising. We expect 2019 AEBITDA growth of 17% to meaningfully outpace revenue growth given that Entercom expects to realize around $50M in incremental annualized synergies, net of new investments, this year. We estimate that 2% growth in underlying expenses will offset a full $50M flow-through to AEBITDA but that the net effect of the revenue growth and synergies should produce 310 bps of margin expansion. Valuation Details What the Market Says about Entercom The core tenet of our positive recommendation is that, even if we tipped into a recession tomorrow, ETM shares still look too cheap to us. To determine market expectations for Entercom, we consider two metrics: the long-term levered FCF growth rate implied by current share prices and the “time to death” implied by current share prices. The perpetuity growth rate implied is essentially a mathematical exercise to determine, using a presumed cost of capital and the current-year estimate for FCF to the equity, at what rate the cash flow to the equity must decline (or grow) to have the NPV of cash flow in perpetuity equal ETM’s equity value. The “time to death,” as we define it, is essentially how many years of the current levered FCF it would take to equal ETM’s current market value, using a reasonable discount rate for FCF. What we found is that, using a 10% discount rate as a base case, the market is pricing in an 11% decline in long-term FCF/share and implying six years “to death,” which we think is too harsh for a company that we see on solid footing. What the Market Says about Entercom’s FCF Decline Rates
Cost of equity 8.0% 10.0% 12.0% Blended FY1/FY2 FCF/share $1.32 $1.32 $1.32 Implied LT FCF growth rate -12.9% -10.9% -8.9% Years to death 6.5 6.0 5.5 Source: Company reports, B. Riley FBR Research, and FactSet
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Capital Structure Entercom currently has a market cap of $869M and an enterprise value of $2.5B. Pro forma net leverage of 4.5x includes the remaining synergies that Entercom expects to realize in 2019, and it would be just over 5x excluding these synergies. Entercom’s net leverage target is 3.5x, which we see it achieving by the end of 2020. Other non-equity adjustments include $20M in land sales that Entercom closed on in 1Q19, as well as $70M of proceeds from other asset sales moving out of restricted cash subsequent to the end of 4Q18. Enterprise Value ($M, except per share)
Date 04/15/2019 Price ($) $6.14
Class A shares outstanding (M) 137.7 Addt'l Shrs -- treasury method (M) 0.1 Total Class A Fdil. Shrs (M) 137.9
Class B shares outstanding (M) 4.0 Addt'l Shrs -- treasury method (M) 0.0 Total Class B Fdil. Shrs (M) 4.0
Total Fdil. Shrs (M) 141.9 Market capitalization $871
ETM adjustments Plus: debt $1,872 Plus: deferred comp $31 Less: cash ($123) Less: restricted cash ($69) Less: AFS pending sales ($20) Less: Cadence13 (45% stake), other investments ($109) Total adjustments $1,582
Enterprise value $2,454
Less: NOL value ($45) Adjusted enterprise value $2,408 Source: Company reports, B. Riley FBR Research, and FactSet We value Entercom’s 45% stake in Cadence13 at $109M, despite Entercom carrying the investment at $10M on its balance sheet. We believe that investors underappreciate this “hidden asset,” as we estimate that its value carried at a private market valuation provides an 11% lift to Entercom’s equity value per share. We believe Entercom will most likely exercise an option to buy the remaining 55% of Cadence13 sometime this year for a predetermined price far below what we see as its private market value. We derive our $242M valuation for Cadence13 using Spotify’s recent acquisition of Gimlet Media (for a reported $230M, according to Recode reports). Our rough math is as follows: Gimlet Media generates an average of 12M podcast downloads per month. Taking Gimlet’s acquisition value of $230M and dividing it by annualized downloads implies that Spotify paid $1.60 per download. Cadence13, however, generates closer to 600M podcast downloads per month. Taking this same $1.60 rate and applying it to Cadence13’s annual downloads produces an astonishingly high valuation of $950M. However, our sense is that (1) Spotify probably paid up to get a name brand to use as a label for its podcasting business, and (2) our checks suggest that, while Gimlet’s and Cadence13’s economics are sufficiently similar, Gimlet owns the rights to more in-house content than Cadence13. We haircut our value per download by a healthy 75%, which implies a total valuation of $242M and $109M for Entercom’s 45% stake.
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Cadence13 Valuation ($M, except per download)
Gimlet Media acquisition price $230.0 / Gimlet podcast downloads per year (M) 144.0 Gimlet Media EV per download $1.6
Cadence13 annual downloads (M) 600.0 x EV per download at 25% of Gimlet valuation $0.4 Cadence13 implied valuation $242.0 x ETM ownership stake 45.0% Value of ETM's Cadence13 stake $108.9 Source: Company reports, B. Riley FBR Research, and FactSet Price Target Factors in Recession Risk For levered companies with significant advertising exposure, such as our radio group, how these equities might fare in a recession is a critical factor in their valuation. To capture recession risk, we have assessed the impact that an economic downturn would likely have on Entercom’s free cash flow during and immediately following a recession. We use the 2008/2009 global financial crisis as a proxy for potential FCF declines. As shown in the figures below, Entercom certainly felt the impact of the financial crisis. Revenue Y/Y Percentage Changes, Pre– and Post–Global Financial Crisis
15%
10% 9% 6% 4% 5% 3%
0% -1% -5% -4% -6% -10% -8%
-15% -14% -14%
-20% -18%
-25% -22% 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 Source: Company reports and B. Riley FBR Research AEBITDA and FCF Y/Y Percentage Changes, Pre– and Post–Global Financial Crisis
150% 135%
100%
54% 50% 34% 25% 21% 19% 16% 11% 7% 3% 5% 0% -2% -2% -3% -15% -16% -25% -22% -25% -24% -50% -32% -51% -59%
-100% 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 AEBITDA FCF Source: Company reports and B. Riley FBR Research
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Our base case is that another recession between now and the end of our forecast period (2025) is highly likely. However, we also assume that this recession will not have as severe of an impact on Entercom as did the 2008 meltdown. We assume this hypothetical recession begins in 4Q21, driving Entercom’s FCF down 4% in the first year and 10% in the second year, before a 5% rebound in year three. Using a 9.5% WACC and a terminal multiple of 7.1x 2024E/2025E AEBITDA, we calculate $6.97 in per share equity value assuming no share repurchases between now and 2025 and an $8.24 per share equity value assuming $150M in share repurchases from now until 2025, consistent with Entercom’s guidance of $30M in buybacks per year after hitting its leverage target. While we believe it would be prudent for Entercom to buy back as much stock as it can given its levered FCF yield of over 20%, we assume there is a 50% chance that Entercom will repurchase shares between now and 2025. DCF Analysis Assuming Moderate Recession ($M, except per share)
RONIC at 8% RONIC at 9% RONIC at 11% PV of Interim Cash Flow $1,167 $1,167 $1,167 $1,167 $1,167 $1,167 $1,167 $1,167 $1,167
Term Gr. -1.0% 1.0% 3.0% -1.0% 1.0% 3.0% -1.0% 1.0% 3.0%
NOPLAT, 2 yr. avg. terminal year + 1 $239 $244 $248 $239 $244 $248 $239 $244 $248 Terminal Value, undiscounted $2,573 $2,487 $2,308 $2,515 $2,566 $2,617 $2,476 $2,618 $2,822 AEBITDA, 24E/25E $360 $360 $360 $360 $360 $360 $360 $360 $360 Terminal Multiple 7.1x 6.9x 6.4x 7.0x 7.1x 7.3x 6.9x 7.3x 7.8x
PV of TV $1,363 $1,318 $1,223 $1,333 $1,360 $1,387 $1,312 $1,388 $1,495 % of total FV 53.9% 53.0% 51.2% 53.3% 53.8% 54.3% 52.9% 54.3% 56.2%
Total Enterprise Value $2,530 $2,485 $2,390 $2,500 $2,527 $2,553 $2,479 $2,554 $2,662 AEBITDA, 19E/20E $373 $373 $373 $373 $373 $373 $373 $373 $373 Multiple 6.8x 6.7x 6.4x 6.7x 6.8x 6.8x 6.6x 6.8x 7.1x
Non-equity adjustments ($1,537) ($1,537) ($1,537) ($1,537) ($1,537) ($1,537) ($1,537) ($1,537) ($1,537) Mkt. Cap. $993 $948 $853 $963 $990 $1,016 $942 $1,017 $1,125
Shares 141.9 141.9 141.9 141.9 141.9 141.9 141.9 141.9 141.9 Per Share $7.00 $6.68 $6.01 $6.78 $6.97 $7.16 $6.64 $7.17 $7.93 % chg from current 14.0% 8.8% -2.1% 10.5% 13.6% 16.6% 8.1% 16.8% 29.1% Source: Company reports and B. Riley FBR Research Per Share DCF Analysis Assuming Moderate Recession ($M, except per share)
RONIC at 8% RONIC at 9% RONIC at 11% PV of Interim Cash Flow $8.64 $8.64 $8.64 $8.64 $8.64 $8.64 $8.64 $8.64 $8.64
Term Gr. -1.0% 1.0% 3.0% -1.0% 1.0% 3.0% -1.0% 1.0% 3.0%
NOPLAT, 2 yr. avg. terminal year + 1 $1.86 $1.90 $1.94 $1.86 $1.90 $1.94 $1.86 $1.90 $1.94 Terminal Value, undiscounted $20.09 $19.42 $18.03 $19.64 $20.04 $20.43 $19.34 $20.45 $22.04 AEBITDA, 24E/25E $2.81 $2.81 $2.81 $2.81 $2.81 $2.81 $2.81 $2.81 $2.81 Terminal Multiple 7.1x 6.9x 6.4x 7.0x 7.1x 7.3x 6.9x 7.3x 7.8x
PV of TV $10.65 $10.29 $9.55 $10.41 $10.62 $10.83 $10.25 $10.84 $11.68 % of total FV 55.2% 54.4% 52.5% 54.6% 55.1% 55.6% 54.3% 55.6% 57.5%
Total Enterprise Value $19.29 $18.93 $18.20 $19.05 $19.26 $19.47 $18.89 $19.48 $20.32 AEBITDA, 19E/20E $2.67 $2.67 $2.67 $2.67 $2.67 $2.67 $2.67 $2.67 $2.67 Multiple 7.2x 7.1x 6.8x 7.1x 7.2x 7.3x 7.1x 7.3x 7.6x
Non-equity adjustments ($11.02) ($11.02) ($11.02) ($11.02) ($11.02) ($11.02) ($11.02) ($11.02) ($11.02) Per share equity value $8.27 $7.91 $7.18 $8.03 $8.24 $8.45 $7.87 $8.46 $9.30 % chg from current 34.7% 28.9% 16.9% 30.8% 34.2% 37.6% 28.2% 37.7% 51.5% Source: Company reports and B. Riley FBR Research In the unlikely event that the economy continues to hum along with no recessionary period from now until 2025, we see Entercom’s per share value equating to $11.91. We assume that Entercom buys back $150M of stock in this scenario.
|11100 Santa Monica Blvd., Ste. 800 Los Angeles, CA 90025 |www.brileyfbr.com | 20 Consumer: Media & Entertainment
Per Share DCF Analysis Assuming No Recession ($M, except per share)
RONIC at 8% RONIC at 10% RONIC at 11% PV of Interim Cash Flow $9.89 $9.89 $9.89 $9.89 $9.89 $9.89 $9.89 $9.89 $9.89
Term Gr. -1.0% 1.0% 3.0% -1.0% 1.0% 3.0% -1.0% 1.0% 3.0%
NOPLAT, 2 yr. avg. terminal year + 1 $2.29 $2.34 $2.38 $2.29 $2.34 $2.38 $2.29 $2.34 $2.38 Terminal Value, undiscounted $24.65 $23.83 $22.12 $24.10 $24.59 $25.07 $23.73 $25.09 $27.04 AEBITDA, 24E/25E $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 Terminal Multiple 7.0x 6.8x 6.3x 6.9x 7.0x 7.2x 6.8x 7.2x 7.7x
PV of TV $13.06 $12.63 $11.72 $12.77 $13.03 $13.28 $12.57 $13.29 $14.33 % of total FV 56.9% 56.1% 54.2% 56.4% 56.8% 57.3% 56.0% 57.3% 59.2%
Total Enterprise Value $22.95 $22.52 $21.61 $22.66 $22.92 $23.17 $22.46 $23.18 $24.22 AEBITDA, 19E/20E $2.67 $2.67 $2.67 $2.67 $2.67 $2.67 $2.67 $2.67 $2.67 Multiple 8.6x 8.4x 8.1x 8.5x 8.6x 8.7x 8.4x 8.7x 9.1x
Non-equity adjustments ($11.02) ($11.02) ($11.02) ($11.02) ($11.02) ($11.02) ($11.02) ($11.02) ($11.02) Per share equity value $11.93 $11.49 $10.59 $11.64 $11.90 $12.15 $11.44 $12.16 $13.19 % chg 94.3% 87.2% 72.5% 89.5% 93.7% 97.9% 86.4% 98.1% 114.9% Source: Company reports and B. Riley FBR Research In the unfortunate event that we experience a recession as impactful as the 2008 global financial crisis, we see Entercom’s per share equity value at $4.78. In this scenario, we assume Entercom does not have the latitude to buy back shares. DCF Analysis Assuming Global Financial Crisis 2.0 ($M, except per share)
RONIC at 8% RONIC at 10% RONIC at 11% PV of Interim Cash Flow $1,063 $1,063 $1,063 $1,063 $1,063 $1,063 $1,063 $1,063 $1,063
Term Gr. -1.0% 1.0% 3.0% -1.0% 1.0% 3.0% -1.0% 1.0% 3.0%
NOPLAT, 2 yr. avg. terminal year + 1 $202 $207 $211 $202 $207 $211 $202 $207 $211 Terminal Value, undiscounted $2,180 $2,108 $1,957 $2,131 $2,174 $2,217 $2,099 $2,219 $2,391 AEBITDA, 24E/25E $305 $305 $305 $305 $305 $305 $305 $305 $305 Terminal Multiple 7.1x 6.9x 6.4x 7.0x 7.1x 7.3x 6.9x 7.3x 7.8x
PV of TV $1,155 $1,117 $1,037 $1,129 $1,152 $1,175 $1,112 $1,176 $1,267 % of total FV 52.1% 51.2% 49.4% 51.5% 52.0% 52.5% 51.1% 52.5% 54.4%
Total Enterprise Value $2,218 $2,179 $2,099 $2,192 $2,214 $2,237 $2,174 $2,238 $2,329 AEBITDA, 19E/20E $373 $373 $373 $373 $373 $373 $373 $373 $373 Multiple 5.9x 5.8x 5.6x 5.9x 5.9x 6.0x 5.8x 6.0x 6.2x
Non-equity adjustments ($1,537) ($1,537) ($1,537) ($1,537) ($1,537) ($1,537) ($1,537) ($1,537) ($1,537) Mkt. Cap. $681 $642 $562 $655 $677 $700 $637 $701 $792
Shares 141.9 141.9 141.9 141.9 141.9 141.9 141.9 141.9 141.9 Per Share $4.80 $4.52 $3.96 $4.61 $4.77 $4.93 $4.49 $4.94 $5.58 % chg from current -21.9% -26.3% -35.5% -24.9% -22.3% -19.6% -26.9% -19.5% -9.1% Source: Company reports and B. Riley FBR Research Our $7.75 price target is the probability-weighted sum of the three scenarios. We assign an 80% probability of a moderate recession in the next six years, a 10% probability of no recession, and a 10% probability of a recession as severe as the 2008 financial crisis.
|11100 Santa Monica Blvd., Ste. 800 Los Angeles, CA 90025 |www.brileyfbr.com | 21 Consumer: Media & Entertainment
Probability-Weighted Price Target Derivation ($M, except per share)
Outcome Probability PT for Outcome Moderate recession between now and 2025 80% $7.60 No recession between now and 2025 10% $11.93 Financial crisis 2.0 between now and 2025 10% $4.76 Probability-weighted price target 100% $7.75
Current $6.14 Potential Return to Target 26.3%
+ Dividend Yield 6.4% = Potential Total Return 32.7%
19E/20E FCF/Shr $1.32 Yield @ PT 17.1% Multiple @ PT 5.9 Source: Company reports, B. Riley FBR Research, and FactSet Our price target implies multiples of 7.1x 2019E/2020E blended AEBITDA and 5.9x 2019E/2020E blended FCF/share. We use these blended multiples to factor in incremental high-margin political advertising revenues during even numbered years. As shown in subsequent figures, these multiples are still well below Entercom’s two-year average AEBITDA and FCF multiples. Implied AEBITDA and FCF Multiples at Price Target ($M, except per share)
19E/20E AEBITDA $373 x Est Multiple 7.1 = EV $2,650
- Adjustments ($1,550) = Equity Value $1,100
/ Shares (M) 141.9 = Per share $7.75
Current $6.14 Potential Return to Target 26.3%
+ Dividend Yield 6.4% = Potential Total Return 32.7%
19E/20E FCF/Shr $1.32 Yield @ PT 17.1% Multiple @ PT 5.86 Source: Company reports, B. Riley FBR Research, and FactSet
|11100 Santa Monica Blvd., Ste. 800 Los Angeles, CA 90025 |www.brileyfbr.com | 22 Consumer: Media & Entertainment
ETM Historical FY1 EV/EBITDA Multiples
12.0x
10.0x 8.6x 8.0x
6.0x
4.0x
2.0x
0.0x
FY1 EV/EBITDA 2-year average
Source: Company reports, B. Riley FBR Research, and FactSet ETM Historical FY1 P/LFCF Multiples
12.0x
10.0x
8.0x 6.9x 6.0x
4.0x
2.0x
0.0x
FY1 P/LFCF 2-year average
Source: Company reports, B. Riley FBR Research, and FactSet Stock Ownership, Management, and Board Joseph Field, the current Chairman Emeritus, founded ETM in 1968. He owns over 80% of the supervoting class B shares (10 votes per share). His son, David Field, the current CEO and chairman, owns the balance of the B shares. Taking the A shares and B shares combined, Mr. J. Field and Mr. D. Field own a 16% economic interest in ETM and control 33% of the vote. At the beginning of March, Joseph Field purchased 500,000 shares of ETM on the open market.
|11100 Santa Monica Blvd., Ste. 800 Los Angeles, CA 90025 |www.brileyfbr.com | 23 Consumer: Media & Entertainment
ETM Class A Ownership
Number of Class A Shares Outstanding (M) 138.574 Shareholders Outstanding shares (%) Ownership Summary Insider 15.3% Float 84.7%
Institutional 86.0% Short % of float 13.9%
Top 5 Insider Ownership Field, Joseph M 8.2% Field, David J 2.5% Rubicon Advisors 1.9% Boynton, Edwin R 1.7% Kramer, Louise C 4.3%
Top 10 Institutional Ownership The Vanguard Group, Inc. 7.9% JPMorgan Investment Management, Inc. 6.3% Fidelity Management & Research Co. 6.1% BlackRock Fund Advisors 5.9% Scopia Capital Management LP 4.3% Capital Research & Management 4.2% Sessa Capital IM LP 3.8% Principal Global Investors LLC 3.4% Dimensional Fund Advisors LP 3.2% Harbor Spring Capital LLC 2.5% Source: Company reports and B. Riley FBR Research ETM Named Executive Officers
Name Age Years at Position Experience ETM David. J Field 56 32 Chairman, President & Mr. Field currently serves as chairman, president & chief executive officer for Chief Executive Officer Entercom. Field has served as Entercom’s CEO since 2002 and its president since 1998. Prior to becoming Entercom’s president, Field served in a number of positions with the company, including chief operating officer and chief financial officer. Before joining Entercom, he was an investment banker at Goldman, Sachs & Co. in New York.
Louise C. Kramer 63 19 Chief Operating Officer & Ms. Kramer serves as chief operating officer for Entercom. Kramer joined Executive Vice President Entercom in January 2000, as a regional vice president, overseeing five markets. She has been instrumental in driving the company’s growth and was elevated to her current role in 2014. Notably, she spent 12 years at CBS Radio, where she rose to become a VP and a Market Manager.
Richard J. Schmaeling, CPA 54 2 Chief Financial Officer & Mr. Schmaeling serves as chief financial officer & executive vice president Executive Vice President for Entercom. Prior to joining Entercom in 2017, Schmaeling served as the chief financial officer at Travel Leaders Group, the largest travel agency company in the United States. Earlier, he served for seven years as chief financial officer at LIN Media, a local TV and digital media provider.
Andrew P. Sutor, IV 46 17 Secretary, Executive VP Mr. Sutor is currently secretary, executive vice president & general counsel & General Counsel for Entercom. Sutor joined Entercom in 2002. Prior to his current role, he served as vice president and corporate counsel. Previously, he was an associate for Saul Ewing.
Robert Philips NA 2 Chief Revenue Officer Mr. Philips is the chief revenue officer at Entercom. A 28-year broadcast veteran, Philips previously held various roles at CBS Radio. Most recently, he served as CBS Radio’s chief revenue officer for two years, and prior to that he spent the majority of his career at the market level.
Source: Company reports and FactSet
|11100 Santa Monica Blvd., Ste. 800 Los Angeles, CA 90025 |www.brileyfbr.com | 24 Consumer: Media & Entertainment
ETM Board of Directors
Name Age Board Position Experience Tenure David. J Field 56 32 Chairman, President & Mr. Field currently serves as chairman, president & chief executive officer for Chief Executive Officer Entercom. Field has served as Entercom’s CEO since 2002 and its president since 1998. Prior to becoming Entercom’s president, Field served in a number of positions with the company, including chief operating officer and chief financial officer. Before joining Entercom, he was an investment banker at Goldman, Sachs & Co. in New York.
Joseph M. Field 87 51 Chairman-Emeritus Mr. Field founded Entercom in 1968, served as president, chief executive officer and chairman from formation until 1998, as chief executive officer and chairman from formation until 2002, as chairman until 2017, and as a director at all times since inception. Before entering the broadcasting business, Mr. Field practiced law for 14 years in New York.
David. J Berkman 57 20 Independent Director Mr. Berkman has served as a director since the consummation of ETM's initial public offering in January 1999 and has served as independent lead director since October 2017. Since January 2000, Mr. Berkman has served as the managing partner of Associated Partners, LP, a private equity firm primarily engaged in telecommunications infrastructure investments.
Joel Hollander 63 6 Independent Director Mr. Hollander has served on the board for Entercom for 6 years. Since May 2007, Mr. Hollander has been serving as president and chief executive officer of 264 Echo Place Partners, an investment advisory firm. Mr. Hollander previously served as president and chief executive officer of CBS Radio from 2002 until 2007.
Susan K. Neely 64 <1 Director Ms. Neely has served as one of Entercom’s directors since December 2018. Since September 2018, Ms. Neely has served as the president and chief executive officer of the American Council of Life Insurers. Formerly, she was the president and CEO of the American Beverage Association from May 2005 through August 2018.
Sean R. Creamer 54 2 Independent Director Mr. Creamer has served as one of Entercom’s directors since November 2017. Since April 2016, Mr. Creamer has been executive vice president, chief financial officer and a member of the board of directors of Merkle Inc. Formerly, he was executive vice president and chief financial officer of The Madison Square Garden Company (“MSG”) from 2014 to 2015.
Stefan M. Selig, MBA 55 2 Independent Director Mr. Selig is the founder of BridgePark Advisors LLC, a firm which provides personalized strategic advice on a broad range of critical business and financial issues and transaction execution. Mr. Selig served as Under Secretary of Commerce for International Trade at the U.S. Department of Commerce from June 2014 to June 2016.
David R. Levy 56 4 Independent Director Mr. Levy has served on the board for Entercom for 4 years, and currently is president at Turner Broadcasting System. Previously, he was president at Turner Sports.
Mark R. LaNeve 60 5 Independent Director Mr. LaNeve has served as one of Entercom’s directors since March 2014. Since January 2015, Mr. LaNeve has been serving as vice president, Marketing, Sales and Service U.S. & Canada of the Ford Motor Company. From August 2012 through January 2014, Mr. LaNeve served as chief operating officer of Global Team Ford, an agency that serves as the marketing and advertising agency for the Ford Motor Company Source: Company reports and FactSet
|11100 Santa Monica Blvd., Ste. 800 Los Angeles, CA 90025 |www.brileyfbr.com | 25 Consumer: Media & Entertainment
Radio Broadcaster Comparables Radio Broadcaster Comparables, EV/EBITDA Multiples
Price Mkt Cap EV Calendar Year EV/EBITDA Radio Broadcasters Ticker 4/15/2019 ($M) ($M) '18A '19E '20E Beasley Broadcast Group BBGI $3.76 $104 $343 7.1x 7.4x 6.7x Cumulus Media CMLS $18.57 $374 $1,458 6.2x 6.1x 5.9x Entercom Communications ETM $6.14 $871 $2,454 7.9x 6.8x 6.4x Saga Communications SGA $32.33 $192 $167 6.3x NM NM Salem Media SALM $2.19 $57 $311 8.7x 7.6x NM Townsquare Media TSQ $5.90 $111 $607 6.2x 6.3x 5.9x Urban One UONEK $1.98 $90 $997 7.1x NM NM Radio Broadcasters mean 7.1x 6.9x 6.2x Radio Broadcasters median 7.1x 6.8x 6.2x Source: Company reports, B. Riley FBR Research, and FactSet Radio Broadcaster Comparables, P/LFCF Multiples
Price Mkt Cap EV Calendar Year P/FCF Radio Broadcasters Ticker 4/15/2019 ($M) ($M) '18A '19E '20E Beasley Broadcast Group BBGI $3.76 $104 $343 NM 6.0x 4.9x Cumulus Media CMLS $18.57 $374 $1,458 11.8x 3.3x 3.1x Entercom Communications ETM $6.14 $871 $2,454 5.6x 5.2x 4.2x Saga Communications SGA $32.33 $192 $167 NM NM NM Salem Media SALM $2.19 $57 $311 NM NM NM Townsquare Media TSQ $5.90 $111 $607 NM NM NM Urban One UONEK $1.98 $90 $997 NM NM NM Radio Broadcasters mean 8.7x 4.8x 4.1x Radio Broadcasters median 8.7x 5.2x 4.2x Source: Company reports, B. Riley FBR Research, and FactSet Radio Broadcaster Trading Comparables
Price % chg % from % from % chg % chg Short Int. Company Ticker 4/15/2019 YTD 1-mo 3-mo 6-mo 12-mo Yr. High Yr. Low C2018 C2017 % of float Beasley Broadcast Group BBGI $3.76 0.3% -6.7% -16.8% -39.9% -63.3% -69.5% 15.7% -72.0% 117.9% 2.3% Cumulus Media CMLS $18.57 71.9% -2.5% 54.8% 12.5% N/A -28.6% 91.4% N/A N/A 0.6% Entercom Communications ETM $6.14 7.5% 1.2% -13.3% -10.9% -36.4% -43.9% 19.0% -47.1% -29.4% 13.9% Saga Communications SGA $32.33 -2.7% -2.9% -3.2% -10.7% -14.9% -19.4% 7.6% -17.8% -19.6% 1.2% Salem Media SALM $2.19 4.8% -21.5% -18.9% -32.0% -34.6% -65.0% 7.9% -53.6% -28.0% 0.8% Townsquare Media TSQ $5.90 44.6% 2.3% -1.2% -19.7% -24.9% -39.7% 49.4% -46.9% -26.2% 0.4% Urban One UONEK $1.98 23.0% -2.5% 2.1% -2.7% -3.4% -17.8% 23.8% -8.0% -39.7% 11.5% Average 21.3% -4.7% 0.5% -14.8% -29.6% -40.5% 30.7% -40.9% -4.2% 4.4% Source: Company reports, B. Riley FBR Research, and FactSet
|11100 Santa Monica Blvd., Ste. 800 Los Angeles, CA 90025 |www.brileyfbr.com | 26 Consumer: Media & Entertainment
Income Statement—Entercom Communications Corp. (ETM) $ in millions, except per share
Period 2017 2018A 1Q19E 2Q19E 3Q19E 4Q19E 2019E 2020E 2021E Net Revenue $593 $1,463 $311 $387 $386 $409 $1,492 $1,535 $1,558 Y/Y % chg. 27.6% 146.7% 3.4% 3.9% 1.9% -0.7% 2.0% 2.9% 1.6%
Broadcast revenue $531 $1,328 $281 $351 $351 $356 $1,340 $1,365 $1,372 Y/Y % chg. NM 150.3% 2.5% 3.0% 0.9% -2.3% 0.9% 1.9% 0.5% % of net revenue 89.5% 90.8% 90.5% 90.7% 91.1% 91.1% 89.8% 89.0% 88.0%
Event and other revenue $51 $115 $26 $32 $30 $44 $133 $150 $167 Y/Y % chg. NM 124.4% 15.0% 15.0% 15.0% 15.0% 15.0% 12.8% 11.5% % of net revenue 8.7% 7.9% 8.4% 8.4% 7.9% 7.9% 8.9% 9.8% 10.7%
Trade and barter revenue $11 $19 $4 $3 $4 $8 $19 $20 $20 Y/Y % chg. NM 77.7% 2.5% 3.0% 0.9% -2.3% 0.1% 2.3% 0.0% % of net revenue 1.8% 1.3% 1.2% 0.9% 1.1% 2.0% 1.3% 1.3% 1.3%
Station operating expenses ($444) ($1,099) ($247) ($270) ($276) ($293) ($1,086) ($1,107) ($1,121) Y/Y % chg. 39.1% 147.9% -3.4% -2.3% -1.3% 1.7% -1.2% 2.0% 1.3%
Corporate G&A expenses ($48) ($69) ($14) ($13) ($13) ($13) ($52) ($53) ($54) Y/Y % chg. 43.6% 45.2% -27.2% -31.8% -19.6% -19.1% -24.9% 2.0% 2.0%
Depreciation and amortization ($16) ($44) ($14) ($14) ($14) ($14) ($56) ($55) ($48) Impairment, M&A costs, other 1x ($73) ($515) ($4) ($4) ($2) $0 ($10) $0 ($0) Operating Income $13 ($266) $32 $86 $81 $89 $288 $319 $334 Y/Y % chg. -87.7% -2210.8% 464.4% 212.5% 2.7% 123.5% 208.3% 10.7% 4.9% Operating Margin 2.1% -18.2% 10.3% 22.3% 21.0% 21.7% 19.3% 20.8% 21.4%
Net Interest expense ($33) ($101) ($25) ($25) ($25) ($24) ($99) ($97) ($95) Other non-operating ($4) $0 $0 $0 $0 $0 $0 $0 $0 EBT ($24) ($367) $7 $62 $56 $64 $189 $222 $240
Income tax expense (benefit) $257 $4 ($2) ($18) ($17) ($19) ($57) ($55) ($60) Effective tax rate -1068.0% -1.1% -30.0% -30.0% -30.0% -30.0% -30.0% -25.0% -25.0%
Net Income $233 ($363) $5 $43 $39 $45 $132 $166 $180 Shares outstanding, Fdil. 52.9 138.1 138.7 139.0 139.2 139.5 139.1 140.1 138.2
GAAP EPS, diluted $4.38 ($2.62) $0.03 $0.31 $0.28 $0.32 $0.95 $1.19 $1.30 Y/Y % chg. 326.3% -159.7% 133.1% 2590.9% 5.5% 111.5% 136.3% 25.2% 9.5%
Dividends per share $0.52 $0.36 $0.10 $0.10 $0.10 $0.10 $0.40 $0.44 $0.46 Y/Y % chg. 128.9% -30.1% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 5.0% Proprietary to B. Riley FBR, Inc. April 17, 2019 Zack Silver, CFA . 703-312-1804 . [email protected] Source: B. Riley FBR Research and company reports
|11100 Santa Monica Blvd., Ste. 800 Los Angeles, CA 90025 |www.brileyfbr.com | 27 Consumer: Media & Entertainment
Adjusted EBITDA and FCF—Entercom Communications Corp. (ETM) $ in millions, except per share
Period 2017 2018A 1Q19E 2Q19E 3Q19E 4Q19E 2019E 2020E 2021E Net income $232 ($361) $5 $43 $39 $45 $132 $166 $180 + income tax expense (benefit) ($257) ($4) $2 $18 $17 $19 $57 $55 $60 + net interest expense $33 $101 $25 $25 $25 $24 $99 $97 $95 + non-cash compensation exp. $10 $15 $2 $2 $2 $2 $9 $9 $9 + D&A $16 $44 $14 $14 $14 $14 $56 $55 $48 + restructuring charges $17 $6 $0 $0 $0 $0 $0 $0 $0 + integration expense $0 $25 $4 $4 $2 $0 $10 $0 $0 + impairment loss $1 $494 $0 $0 $0 $0 $0 $0 $0 - net gain on sale of assets $12 ($12) $0 $0 $0 $0 $0 $0 $0 +/- other $50 $2 $0 ($0) ($0) ($0) $0 $0 $0 AEBITDA $112 $310 $52 $106 $99 $105 $363 $383 $392 Y/Y % chg. -5.7% 175.7% 74.3% 29.6% 14.3% -5.7% 17.0% 5.6% 2.3% AEBITDA Margin 19.0% 21.2% 16.9% 27.5% 25.7% 25.7% 24.3% 25.0% 25.2%
+/- transaction impacts $227 $0 $0 $0 $0 $0 $0 $0 $0 PF Adj. EBITDA $340 $310 $52 $106 $99 $105 $363 $383 $392 Y/Y % chg. NM -8.8% 74.3% 29.6% 14.3% -5.7% 17.0% 5.6% 2.3% PF Adj. EBITDA Margin 57.3% 21.2% 16.9% 27.5% 25.7% 25.7% 24.3% 25.0% 25.2%
Adj. EBITDA $112 $310 $52 $106 $99 $105 $363 $383 $392 + interest adjustments $1 $0 $0 $0 $0 $0 $0 $0 $0 - Net interest expense ($33) ($101) ($25) ($25) ($25) ($24) ($99) ($97) ($95) - capex ($21) ($42) ($20) ($20) ($11) ($11) ($60) ($35) ($31) - Cash income taxes ($2) ($18) ($1) ($13) ($12) ($13) ($40) ($47) ($50) +/- other ($1) $3 $0 $0 $0 $0 $0 $0 $0 Adj. Free Cash Flow $57 $152 $6 $49 $52 $57 $165 $205 $216 Y/Y % chg. -24.0% 165.0% 997.5% 75.6% -5.6% -16.6% 8.2% 24.5% 5.6% FCF % of AEBITDA 51.0% 49.0% 11.9% 46.5% 52.7% 54.0% 45.3% 53.5% 55.2%
Free Cash Flow/shr $1.08 $1.10 $0.04 $0.36 $0.38 $0.41 $1.18 $1.46 $1.56 Y/Y % chg -43.1% 1.5% 999.4% 75.9% -5.7% -17.5% 7.4% 23.6% 7.0% Proprietary to B. Riley FBR, Inc. April 17, 2019 Zack Silver, CFA . 703-312-1804 . [email protected] Source: B. Riley FBR Research and company reports
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Balance Sheet—Entercom Communications Corp. (ETM) $ in millions
Period 2017 2018A 1Q19E 2Q19E 3Q19E 4Q19E 2019E 2020E 2021E Cash and cash equivalents $34 $123 $156 $107 $206 $194 $194 $325 $446 Restricted cash $0 $69 $0 $0 $0 $0 $0 $0 $0 Accounts receivable, net $342 $343 $282 $315 $324 $340 $340 $356 $356 Prepaid and other current assets $24 $25 $27 $41 $23 $25 $25 $26 $26 Total current assets $401 $560 $465 $463 $554 $560 $560 $707 $828
Investments $10 $11 $11 $11 $11 $11 $11 $11 $11 Property and equipment, net $347 $317 $322 $328 $324 $321 $321 $301 $283 Radio broadcasting licenses $2,650 $2,517 $2,517 $2,517 $2,517 $2,517 $2,517 $2,517 $2,517 Goodwill $862 $539 $539 $539 $539 $539 $539 $539 $539 Assets held for sale $212 $20 $0 $0 $0 $0 $0 $0 $0 Other non-current assets $58 $56 $56 $56 $56 $56 $56 $56 $56 Total Assets $4,539 $4,020 $3,911 $3,914 $4,001 $4,004 $4,004 $4,132 $4,235
Accounts payable $1 $2 $2 $2 $2 $2 $2 $2 $2 Accrued expenses $77 $58 $70 $60 $56 $59 $59 $60 $60 Current debt portion $13 $0 $0 $0 $0 $0 $0 $0 $0 Other current liabilities $108 $118 $110 $99 $153 $120 $120 $122 $122 Total current liabilities $198 $179 $182 $161 $211 $181 $181 $184 $184
Long-term debt, net $1,859 $1,872 $1,749 $1,746 $1,742 $1,739 $1,739 $1,726 $1,712 Deferred tax liabilities $610 $546 $547 $552 $557 $563 $563 $572 $581 Other non-current liabilities $108 $89 $103 $91 $95 $90 $90 $92 $92 Total Liabilities $2,775 $2,686 $2,580 $2,549 $2,606 $2,573 $2,573 $2,574 $2,570
Total Shareholders' equity $1,764 $1,334 $1,330 $1,365 $1,395 $1,432 $1,432 $1,558 $1,665 Total Liabilities & Shareholders' Equity $4,539 $4,020 $3,911 $3,914 $4,001 $4,004 $4,004 $4,132 $4,235 Proprietary to B. Riley FBR, Inc. April 17, 2019 Zack Silver, CFA . 703-312-1804 . [email protected] Source: B. Riley FBR Research and company reports
|11100 Santa Monica Blvd., Ste. 800 Los Angeles, CA 90025 |www.brileyfbr.com | 29 Consumer: Media & Entertainment
Statement of Cash Flows—Entercom Communications Corp. (ETM) $ in millions
Period 2017 2018A 1Q19E 2Q19E 3Q19E 4Q19E 2019E 2020E 2021E Net income (loss) $234 ($361) $5 $43 $39 $45 $132 $166 $180 Depreciation and amortization $16 $44 $14 $14 $14 $14 $56 $55 $48 Amortization of deferred financing, net $1 $0 $0 $0 $0 $0 $0 $0 $0 Deferred taxes (benefit) and other, net ($264) ($62) $1 $6 $5 $6 $17 $9 $10 Provision for bad debts $4 $9 $3 $3 $3 $3 $10 $10 $10 Net (gain) loss on sale of assets $12 ($12) $0 $0 $0 $0 $0 $0 $0 Non-cash stock-based compensation $10 $15 $2 $2 $2 $2 $9 $9 $9 Deferred rent $0 $5 $0 $0 $0 $0 $0 $0 $0 Deferred compensation $4 ($1) $0 $0 $0 $0 $0 $0 $0 Impairment Loss $1 $494 $0 $0 $0 $0 $0 $0 $0 Other CFO adjustments $6 $0 $0 $0 $0 $0 ($0) $0 $0 Working Capital $6 ($29) $76 ($80) $63 ($54) $5 ($11) $0 CFO $29 $102 $100 ($12) $126 $15 $229 $239 $257
Capex ($21) ($30) ($23) ($23) ($12) ($12) ($70) ($35) ($31) % of sales -3.5% -2.0% -7.3% -5.9% -3.2% -3.0% -4.7% -2.3% -2.0%
Proceeds from sale of PP&E $61 $186 $20 $0 $0 $0 $20 $0 $0 Proceeds from sale of PP&E, restricted cash $0 $70 $0 $0 $0 $0 $0 $0 $0 Purchases of radio stations ($12) ($71) $0 $0 $0 $0 $0 $0 $0 Additions to amortizable intangible assets ($1) ($12) $0 $0 $0 $0 $0 $0 $0 Other CFI ($10) ($1) $3 $3 $2 $2 $10 $0 $0 CFI $17 $141 $0 ($20) ($11) ($11) ($40) ($35) ($31)
Borrowings under revolving senior debt $701 $80 $0 $0 $0 $0 $0 $0 $0 Payments of long-term debt ($686) ($81) ($123) ($3) ($3) ($3) ($133) ($13) ($13) Payment of dividends on common stock ($29) ($50) ($14) ($14) ($14) ($14) ($55) ($61) ($63) Repurchase of common stock ($10) ($30) $0 $0 $0 $0 $0 $0 ($30) Payment of dividends on preferred stock ($3) $0 $0 $0 $0 $0 $0 $0 $0 Other CFF ($32) ($4) $0 $0 $0 $0 $2 $2 $2 CFF ($59) ($86) ($137) ($17) ($17) ($17) ($187) ($73) ($105)
Change in Cash ($13) $158 ($36) ($49) $99 ($12) $2 $131 $121 Proprietary to B. Riley FBR, Inc. April 17, 2019 Zack Silver, CFA . 703-312-1804 . [email protected] Source: B. Riley FBR Research and company reports
|11100 Santa Monica Blvd., Ste. 800 Los Angeles, CA 90025 |www.brileyfbr.com | 30 Consumer: Media & Entertainment
Valuation Our $7.75 price target is the probability-weighted sum of ETM's per share equity value in three different scenarios playing out between now and 2025: a moderate recession (80% chance), no recession (10% chance), and a "Global Financial Crisis 2.0" (10% chance). Our price target equates to 7x 2019E/2020E blended AEBITDA. ETM also pays an annual dividend currently yielding 6%. Risks Significant exposure to advertising. ETM generates virtually all of its revenues from advertising. In the event of an economic downturn, ETM's revenues would likely be negatively affected. Competition is growing. AM/FM radio has experienced increased competition from the rise of on-demand music streaming services and other Internet/satellite radio offerings. While we believe some of the AM/FM radio operators offer content that is differentiated enough to coexist with competitors, we expect competition in the audio space to continue to intensify. Relatively high leverage. ETM's current net leverage, excluding unrealized synergies from the CBS Radio transaction, is over 5x. Entercom is currently in compliance with covenants but could breach these covenants if synergies are not realized and/or operating results deteriorate meaningfully. Risk to our price target. If our estimates and/or assumptions prove overly optimistic, our price target will not likely be achieved.
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*Closing price of last trading day immediately prior to the date of this publication unless otherwise indicated. Important Information This report is prepared by B. Riley FBR, Inc. (“B. Riley FBR” or the “Firm”) and may be distributed by B. Riley Wealth Management, Inc. (BRWM) as a third-party research report under FINRA Rule 2241. B. Riley FBR and BRWM are broker-dealers registered with the SEC and are members of FINRA, SIPC, and the NASDAQ Stock Market. The principal business address of each of B. Riley FBR and BRWM is: 11100 Santa Monica Blvd., Suite 800, Los Angeles, CA 90025 40 S. Main Street, Suite 1800, Memphis, TN 38103 B. Riley FBR and BRWM are affiliated companies. The relationship between B. Riley FBR and BRWM is a factor considered by BRWM when deciding to distribute each other’s research.
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Rating and Price Target History for: Entercom Communications Corp. (ETM) as of 04-16-2019
18 16 14 12 10 8 6 4 Q1 Q2 Q3 2017 Q1 Q2 Q3 2018 Q1 Q2 Q3 2019 Q1 Q2
Created by: BlueMatrix
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