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Looking for the Silver Lining in Cumulus Media

Is there finally a silver lining in the dark clouds that have hovered over radio operator Cumulus Media (CMLS) for the past year or so?

Bouncing
Cumulus' rise this week.

After months of precipitous declines in its stock price, Cumulus, which owns 224 radio stations in smaller markets around the country, rebounded this week. Helping was the close of its long-gestating deal to buy 35 radio stations from Connoisseur Communications for $257.8 million. Thursday, Cumulus rallied 56 cents to $7, bringing its gain for three days to more than 40%.

But its troubles aren't over. Cumulus still has a lot of fence-mending to do with Wall Street and a legal battle to fight with shareholders, not to mention investors' across-the-board souring on the radio sector.

Averting Disaster

James Boyle, radio analyst at First Union Securities who issued a blistering report on the company in August after it fell well short of analysts' earnings estimates, is no more sanguine now.

"The announcement means they averted disaster," says Boyle. Wall Street's reaction "was not a celebration, but a sigh of relief." That's because the company had put down an unusually hefty down payment to buy the stations -- reportedly some $80 million, or nearly a third of the deal's worth. A more typical down payment for the industry, Boyle says, would be 5%, or around $12 million. If the deal hadn't gone through, Boyle adds, Cumulus would've lost that $80 million.

Feeling Puffy?
Cumulus losing altitude.

Source: BigCharts

Cumulus, which went public in 1998, saw its stock reach $55 last year as the radio sector, buoyed by its strongest growth in years, rose as one. But after reporting disappointing numbers in the first two quarters, Cumulus has plummeted more than 80% since Jan. 3. Radio stocks have endured a bumpy year at best, even as station operators have been pulling in record ad revenues.

"It makes you ask, 'Are these guys in the same business?' " Boyle says of Cumulus. "It's kind of tough to tank when everybody else in the business is having a record year."

Depth Charge

Cumulus ran into trouble because it went on an acquisition spree after going public but lacked the management depth to integrate the new stations, Boyle says. "They bought a lot of stations in a short period of time, and many of those stations were turnarounds."

As a result, Cumulus stock began falling. That decline accelerated when the company disclosed in March that it had reported inflated revenue and earnings numbers for the first three quarters of 1999. In April, its auditor, PricewaterhouseCoopers, resigned. The stock plummeted further as furious investors began suing the company over the drop. Those suits have been consolidated into a single action, now pending, that seeks $100 million in damages. Cumulus didn't immediately return calls seeking comment.

Cumulus has shuffled its senior management team since being forced to restate its numbers, but Wall Street still raises an eyebrow at its credibility.

And in August, Milwaukee-based Cumulus reported a far wider loss for the second quarter than Wall Street had expected, sending its stock deeper into an already deep freeze.

The First Step

The company clearly hopes that Tuesday's announcement will mark the beginning of its journey out of its thicket of legal and financial woes. The deal to acquire Connoisseur's stations, originally announced last November, hinged on Cumulus' ability to come up with the cash. Tuesday, Cumulus said it had received $68.9 million in initial proceeds from its sale of 30 stations to Clear Channel Communications (CCU). Cumulus also will transfer 45 stations in eight markets to Clear Channel in exchange for four stations, generating another $52 million in cash.

"The net cash raised from these transactions will enable us to complete our pending acquisition pipeline without selling key markets and without having to raise highly dilutive equity," Cumulus CEO Lew Dickey says in a statement.

Despite the company's reassurances, First Union's Boyle says the near-term outlook isn't great. "If Q1 and Q2 were tragic, then Q3 and Q4 will be unimpressive," he says. Andrew Marcus, media analyst at Deutsche Banc Alex. Brown, includes Cumulus on his list of media stocks likely to miss third-quarter estimates.

Boyle adds that as fears of an ad slowdown continue to depress media stocks, investors are more likely to invest in a blue-chip name like Clear Channel than they are in a "small-market, troubled company with a small float." (Boyle has a neutral rating on the stock; his firm hasn't done any underwriting for the company.)

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