Looking for a Buyer, Chancellor Seeks the Valuation It Deserves - TheStreet

Looking for a Buyer, Chancellor Seeks the Valuation It Deserves

A Clear Channel deal would create a radio giant.
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If at first you don't succeed, explore strategic alternatives.

Chancellor Media

(AMFM)

did just that Wednesday, boosting its lagging stock more than 20% with an announcement that it had hired

BT Alex. Brown

to "maximize shareholder value" as "a financial adviser to the company." Translation: Chancellor, the nation's biggest radio company by revenue, is on the block, with

Clear Channel Communications

(CCU) - Get Report

the most likely buyer.

If Clear Channel is interested, and the two companies agree on a price, the deal would create a giant in the industry. The combination would have a market capitalization of more than $35 billion, 700 stations nationwide and around $5 billion in annual revenue, including $3 billion in radio advertising revenue. That's about double the radio revenue of

Infinity Media

(INF) - Get Report

, the industry's No. 2 company, and 10 times the revenue of any competitors.

Chancellor didn't return calls seeking comment on this story; Clear Channel officials were unavailable to comment. Chancellor closed Wednesday up 9 3/16 at 54 3/4. Clear Channel rose 1 1/8 to 64 1/4.

Infinity, a

CBS

(CBS) - Get Report

subsidiary, could also make a run at Chancellor. But federal rules that limit the number of stations a single company can own in one market would make an Infinity bid for Chancellor problematic. Chancellor and Infinity are both heavily concentrated in the top 20 markets and most likely would have to sell lots of stations in New York, Los Angeles and other big cities before regulators would approve a deal. On the other hand, Clear Channel has many more stations in smaller markets like Des Moines, Iowa, El Paso, Texas and Las Vegas, and it has little significant overlap with Chancellor except in Los Angeles.

In addition, Clear Channel trades at a higher multiple of cash flow than Chancellor, so even after Chancellor's run-up Wednesday, an all-stock merger would be accretive to Clear Channel (that is, improve its per-share cash flow).

"It would be a beautiful fit with Clear Channel if Clear Channel decided that it would be an attractive opportunity for them," says Ron Sachs, an analyst at Denver's

Janus Capital

, which owned more than 14 million Chancellor shares on Sept. 30.

Sachs applauded Chancellor's decision to hire BT, saying the announcement would "force people to pay attention" to the strength of the company's stations. "They've got some great assets that are just tremendously valuable and the market is not doing a good job of valuing them," he says.

In fact, Chancellor has been persistently unable to convince investors to value it as highly as its closest competitors. Chancellor's well-regarded chief executive, Scott Ginsburg, quit last year after a power struggle with chairman Tom Hicks. Hicks controls Chancellor through

Hicks Muse Tate & Furst

, his venture capital firm. Investors have also worried about Chancellor's $7 billion debt load.

As a result, Chancellor's stock has trailed Infinity's and Clear Channel's, as well as the broader market. Between March 1998, when Chancellor sold $1 billion in stock in a secondary offering, and yesterday, the company's stock fell about 5%, Clear Channel rose 25% and the

S&P 500

gained 15%.

Even worse, Clear Channel and Infinity both traded at about 22 times their cash flow, or earnings before interest, taxes and noncash charges, while Chancellor traded at only 15 times cash flow. (A

TSC

story at the time of the offering, when Chancellor traded at 48, suggested the company might be overvalued, while a

follow-up story in September, with the company around 30, offered a somewhat more positive outlook.)

The announcement is "bittersweet," says Ken Korngiebel, an analyst at Portland, Ore.-based

Columbia Management

, which owns almost 2 million Chancellor shares.

"We like to see the stock up, but it's unfortunate that the company had to go to such great lengths to unearth the value," Korngiebel says. "There's been concern about leverage, there's been concern about management changeover. I think there is a sense on management's part that they're always trying to catch up a little."

"I'm somewhat surprised by the timing," adds

NationsBanc Montgomery Securities

analyst Gordon Hodge, who rates Chancellor a hold. His firm has participated in underwriting for Chancellor. "This is a company that has announced about $8 billion in acquisitions over the past year and was in the process of putting those various pieces together. ... So from a timing standpoint, I guess it's interesting that they would be looking to realize value for this combination in advance of really cultivating the synergy."

Hodge says he thinks Chancellor could eventually win the same respect from investors as Clear Channel and Infinity "if they put their head down and just operated the business. ... But it would require a lot of work, and unfortunately for them, some time."