CBS (CBS - Get Report) wanted to sell its radio group, and then when no firm bidder appeared, planned to spin it off as a separately traded stock early this year. It had even chosen a ticker, CBSR, for the listing on the New York Stock Exchange.
But in yet another turn for storied yet stagnant CBS Radio, CEO Leslie Moonves secured a merger with Entercom Communications (ETM - Get Report) to create the second-largest radio station owner in the country by revenue. The new company, which will own 244 stations, including air waves in 23 of the top 25 U.S. markets, will keep the Entercom name and be based in Philadelphia, though offices for CBS will be maintained in New York, according to a Thursday statement.
Entercom shares jumped 13.1% Thursday morning on the news, rising to $16, while CBS stock was off 4 cents to $64.56.
The merger comes as CBS had found it increasingly difficult to rationalize owning a business with few synergies for its broadcast network and streaming platforms, Showtime Anytime and CBS All Access. Revenue at CBS Radio for the first nine months of 2016 totaled $898 million, essentially flat compared with the same period a year earlier. Operating income was $215 million, compared with $195 million for the first nine months of 2015.
CBS is scheduled to report its fourth-quarter earnings on Feb. 15.
Radio once was the heart of the company. CBS began in 1927 as a radio company, owning nearly 200 AM and FM stations at its peak. Its radio group includes many of the best-known stations in the country, including all-news outlet WINS-AM in New York, better known as 1010 WINS. The new Entercom will lean heavily on sports, owning the radio rights to broadcast such high-profile teams as New York Yankees, Chicago Cubs, Boston Red Sox and both of Sunday's Super Bowl teams, the Atlanta Falcons and the New England Patriots.
The transaction will be executed through a so-called reverse Morris Trust, whereby CBS shareholders will have the option of receiving shares in CBS Radio, which they would then trade for shares in the merged company. The companies anticipated the deal would be tax-free and close in the second half of the year.
After the merger is completed, CBS Radio shareholders would receive approximately 105 million Entercom shares -- valued at $1.49 billion at the market price before the deal's announcement, or $1.68 billion Thursday morning -- or 72% of all outstanding shares of the combined company on a fully diluted basis. Existing Entercom shareholders would own the remaining 28% of the combined company.
The new company would have nine directors, including five from Entercom and four nominated by CBS Radio. David Field, Entercom president and CEO, would be chairman, taking over from his father, Joseph, who founded Entercom in 1968.
The companies said they posted pro forma adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda, of nearly $500 million on roughly $1.7 billion in revenue over the past 12 months. They anticipated the combined company would have pro forma leverage of 4 times debt to adjusted Ebitda and a market capitalization of more than $2 billion.
The merger also comes at a difficult time for the terrestrial radio business. Young people are turning to internet streaming services such as Spotify, Apple (AAPL - Get Report) Music and Pandora (P) for curated and on-demand listening. Terrestrial radio also is losing share to Sirius XM (SIRI - Get Report) , which has built a formidable in-car satellite service, while the country's largest radio group, iHeartMedia (IHRT) , formerly Clear Channel Communications, is losing money, teetering on the edge of bankruptcy despite owning some 850 radio stations.
Morgan Stanley and Centerview Partners are Entercom's financial advisers, with Latham & Watkins providing legal counsel. Goldman Sachs is CBS's financial adviser, with Wachtell, Lipton, Rosen & Katz offering legal counsel.