Citadel Broadcasting Corp (CDL)

Despite the increase in size and scale resulting from the merger with ABC Radio, post-merger Citadel still faces the same types of competitive threats as it did in 2004. While Sirius and XM subscribers have grown expo-nentially, both companies are expected to continue to rapidly add to their subscriber bases. Compounding the problemfor terrestrial radio is the fact that satellite companies are capturing primarily affluent adults in urban areas, the very listeners advertisers pay a premium to reach. To strengthen their competitive position, in February of this year Siriusand XM agreed to a merger, a proposal that is being reviewed by the Federal Communications Commission (FCC) and Department of Justice with regard to antitrust issues.Aside from satellite radio, terrestrial radio companies face competitive threats from other media as well, including internet radio, cable and satellite television music channels, and portable music players (e.g., the iPod) which allowconsumers to essentially create their own library of songs. Of course, these competing media sources have gainedpopularity largely as a result of widespread consumer dissatisfaction with terrestrial radio. In their quest for higherprofits, broadcast radio companies have severely diluted their product by inserting 20 minutes or more of commercial messages per hour and sometimes up to eight minutes consecutively. As fewer commercials would generate lowerrevenues, an unattractive option, radio companies have been reluctant to improve the quality of their service by the reduction of advertising time. However, as competing media capture an increasing share of the overall radio market,traditional radio operators such as Citadel may not be well served by trying to increase profitability by further boostingthe amount of advertising per hour. Any increase in advertising could mean listeners would have to endure commer-cials approaching 30 minutes per hour, or 50 percent of the time spent listening to the radio.Although post-merger Citadel faces all of these significant challenges, the shares could be attractive if they were pricedat an egregious discount to estimated fair value. However, this does not appear to be the case. Immediately following the spin-off and merger, Citadel traded at enterprise value-to-sales and enterprise value-to-EBITDA multiples that were much higher than competitors Clear Channel, Cox Radio, Entercom and Radio One. Following a 35 percent decline in the share price from the initial post-transaction price of $6.25, the company is trading at multiples in line with these competitors. Yet this still is not a significant discount that would warrant a purchase recommendation. The multiplesof terrestrial radio competitors are still relatively high compared to the average S&P 500 company and larger mediaconglomerates such as Time Warner and News Corp. Another valuation consideration for Citadel is the ongoing trend of private equity firms performing buyouts of broad-cast radio companies. However, an acquisition will be attractive to a potential private equity buyer only if there is evidence of significant return on invested capital. Therefore, the target share price would have to be low enough, andthe cash flows high enough, that a 20 percent premium would result in a sufficient return. This does not appear to beplausible given the market value of Citadel