November 26, 2015

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First Mediaworks

Executive Of The Year: Cumulus Media's Lew Dickey [1/6/03]
It was a unanimous decision.

When Radio Ink’s editorial board sat down last fall to select the magazine’s Executive of the Year, Lew Dickey quickly emerged as our hands-down favorite. That’s not to say that there aren’t a number of phenomenal broadcasters in the radio business who have worked diligently and creatively over the past twelve months to survive a prolonged economic downturn, but Dickey’s task was immeasurably more difficult because his company had been teetering on the brink of disaster just two short years ago.

What Dickey and his team at Cumulus (he insists they’re all in this together) have pulled off is a near-miraculous job of turning around a radio group fraught with operational problems and loaded with debt. In a dramatic turnaround, the company has reduced its debt load significantly while still acquiring assets that are critical to its operational strategy. “We are progressing quickly from a company that was choking on leverage to one that has basically a pristine balance sheet,” Dickey observes. “We were just upgraded by Moody’s and Standard & Poors in both our bank and bond ratings, and we’re working very hard to restructure our balance sheet by removing some inefficiencies in our capital structure.”

At 41 Dickey is one of the youngest corporate chairmen/CEOs in the radio industry. He grew up in the business—his father ran some stations in Toledo—and Dickey was bitten by the bug early on. But when he graduated from Stanford with both a bachelor’s and master’s degree in English Literature, he knew he wanted to work in the business—just not at his dad’s stations. Instead, he founded Stratford Research and began providing “strategy consulting” for a growing number of stations that included, in the early years, the Liggett Group and Taft Broadcasting.

“I worked for well over 100 different markets,” Dickey recalls. “I would see a lot of money being made by stations we’d provide strategy consulting for, and they’d be sold, and people would turn them around and make a lot of money. I realized that I really wanted to capitalize on the equity and not just the fees for doing this, so it was at that stage that I decided I wanted to participate in this as an owner-operator.”

Lacking a background in finance, Dickey returned to school and earned his MBA from Harvard. “When I got out in 1990 the economy really hit the skids,” he remembers. “Those were tough times and I had to stay with Stratford Research. Then we {the Dickey family] picked up WALR and WCNN in Atlanta in bankruptcy, and I moved everything down here because we had to look after those properties. We paid $6.5 million for them and they were losing a lot of money at the time, so they required a lot of attention.” Not long after that, Dickey—doing business as DBBC (Dickey Brothers Broadcasting Company)—picked up WQQK/FM and WVOL/AM in Nashville. And then deregulation hit.

“The idea for Cumulus germinated in the middle of 1996, after the Telecom Act was signed,” Dickey says. “At that point the horse was out of the barn. Most of the large players were already moving quickly in the top 50 markets.” Capstar already was beginning to consolidate stations in the secondary markets—those ranging in size from 50 to 250—and Dickey saw an opportunity to assemble efficient operations in similar markets. “Ultimately we felt that those concentrated positions would be a way to shift share from the newspaper, which was a dominant local advertising force in these markets,” he explains. “That’s still our business model today.”

But the early years of consolidation were not altogether kind to Cumulus. In the first half of 2000 serious operational problems and financial irregularities began to surface, and critics throughout the radio industry began to question whether the company could survive. Cumulus took a beating in both the trade press and the general media, and the stock sank from a high of $53 to a low of $3. The company’s debt-to-EBITDA ratio was over 14, and the pending acquisition of Connoisseur Communications was threatening to destroy the company. “If we didn’t make our deadline we would have lost $82 million in cash flow,” Dickey told Radio Ink in an interview published in July 2002. “The banks could have called our notes, and we would have been history.”

Never one to shirk from a challenge, especially when his name and reputation are at stake, Dickey took it upon himself to reorganize the management structure at Cumulus, as well as make sure that the Connoisseur deal closed on time. In the eighteen months that have followed, Team Dickey has slowly but surely climbed out of the black hole that was threatening to swallow the company whole. A new corporate culture of communication and mutual respect has been installed throughout the company’s 260 stations in 54 markets, and Cumulus has been able to produce enough cash flow to reduce its debt ratio to 5.1. Additionally, the company’s stock has been trading in recent weeks at the $17.00 level, considerably above it’s low mark two years ago.

All this, of course, happened during the most turbulent economic period in a decade. Following almost ten years of growth the dot-com bubble burst, the national economy hit a slowdown from which it has yet to emerge, and radio revenues hit the skids. Yet Cumulus emerged from 2001 as the Number One-performing radio company in EBITDA growth, and as December came to a close it was tied for the lead through three quarters of 2002. “We’ve taken a company that was at the bottom of the barrel and made it the best performing group in the industry,” Dickey says. “I tell our guys our goal is to be the best-run company in radio, and it looks like we’re on our way in 2002.”

Congratulations, Lew Dickey, on being named Radio Ink’s Radio Executive of the Year.

INK: What is Cumulus’ financial picture as you head into 2003? How successful have you been at restructuring your debt?
LD: We are very focused on reducing our leverage, and we have been very successful in doing so. Shortly after taking over in June of 2000, it was at 14 times [total debt/EBITDA] and now it’s down to 5.4. By the end of the year we expect it to be 5.1. Furthermore, we expect it to be into the low 4s by the end of 2003, which would be some of lowest leverage in the industry. We are progressing quickly from a company that was choking on leverage to one that has basically a pristine balance sheet.

How have the financial market’s reacted to these moves?
We were just upgraded by Moody’s and Standard & Poors in both our bank and bond ratings, and that’s a very positive development for our company. We’re also working very hard to restructure our balance sheet by removing some inefficiencies in our capital structure. We have a couple of securities that are very expensive and thus serve to increase our cost of capital and reduce our free cash flow. For example, six months ago, we had $134 million of 13.75 percent Pik Preferred, and today we have that down to about $15 million. We will take the rest out on the first call date, which is July ’03. We also have $160,000,000 of Senior Sub Notes which we will also refinance at a much lower interest rate on their first call date which is also July ’03. Our leverage is coming down so quickly, that we could probably refinance them with bank debt and we have the capacity under our existing Credit Agreement.

How will this improve the Cumulus balance sheet in the months and years to come?
The net effect of these moves is that they dramatically reduce interest costs, which translates into another powerful lever to improve free cash flow in addition to growing our EBIDTA. For 2003 we’re looking at free cash flow between $65-70 million on a pro forma basis; on an actual basis, however, free cash flow will more than double in 2003 over 2002—from $25 million to approximately $55 million in 2003. On a run-rate basis we are getting to the point where we will be converting 70 percent of our EBIDTA into free cash flow, and that is tremendous because it will continue to give our company enormous buying power in the years to come.

Still, you reported an eight-cent per-share loss for Q3 2002. When do you foresee turning this loss into a positive?
We really are positive. The loss has to do with repurchasing the Pik. The fact that we’re buying the Pik back—the call premium on the Pik is 6-7/8 percent, while the coupon for the Pik is 13-3/4 percent. So, if we had to keep the math round, $100 million, and we were paying every four quarters we were paying $13 and 7/8 million of that on a coupon, then at the end we’d have to take it out of the $106 million roughly, so you have to accrete all of those dividends and then add that to the call premium. So what we’ve been doing is buying the Pik back between 110 and 114 per share. So the difference between the par value and the premium at which we’re paying to buy it back, we have to take as a loss. But it’s a one-time event. Once we buy it back it’s gone. We’ll have retired the security. So other than those extraordinary items—repurchasing a debt security—the company has positive earnings.

Has this financial restructuring forced you to delay additional merger activity, at least for the time being?
In the last year, we’ve probably done more deals than anybody else. We bought Aurora, which was a quarter of a billion dollar deal, we did Nashville, which was about $86 million, we did Ft. Walton Beach, which was a $30 million, and we did Macon, which was $35 million. But we’ve done all these deals in such a way that they were all accretive. And where we used our stock as currency—Aurora and Nashville—they were also de-leveraging, which was excellent for the company. Right now we’re working on half a dozen strategic fill-in acquisitions, and we will be using our stock to make those deals self-financing. When we can use our currency as consideration in the acquisition game, it helps us to make these deals de-leveraging as well as accretive.

Do you anticipate another wave of consolidation coming once the economic picture begins to brighten?
I firmly believe there will be some large transactions that will take place about 12-24 months from now. We will see some large merger transactions in our industry starting in the late second half of next year and continuing on throughout 2004. It will be another wave of consolidation that will ultimately define who the survivors are going to be. We’re working hard to put ourselves in the position to do those deals—in other words, to be the acquirer.

How is Cumulus poised to take advantage of this next stage?
You’ll see more of what you’ve seen from us in the past. Our sweet spot is markets 50 to 250, and we want to buy or assemble completed clusters in those markets. Cumulus is the most concentrated group in terms of its presence in each of its respective markets. We have 42 percent average in-market revenue share across 54 markets. That’s the most highly concentrated average position of any radio group out there by about ten percentage points.

You’re not the only players going after properties in those markets, however…
No. There is always going to be competition. But at the end of the day, in our space, Cumulus by far has the lowest cost of capital and therefore has the advantage in purchasing stations in our space. Cumulus also has been a big beneficiary of the relationships I’ve been fortunate to build up with broadcasters over the last 15 years. A lot of people understand the core values we have as a company, and they know this is a large company with a very personalized small company feel. They see that we treat our people with respect, and let them work in a very positive working environment that is competitive and rewards them personally as well as professionally. A lot of sellers have owned their stations for a long time and they have a deep affection for the people who have worked with them every day, and many of them are concerned with how their people are going to be treated.

If cross-ownership rules are relaxed, might we expect to see Cumulus pursue other media opportunities?
Right now we do one thing and we’re trying to do it very well. To become unfocused would potentially distract us from our core mission. We’ve only consolidated 25 percent of our space, in markets 50-250, and our goal is to assemble as many markets as we can, and consolidate as much of that space as we can and run them properly. Still, we’re in the business of local advertising, and however else we can serve our customers represents a potential business opportunity for us. And if that means serving them through other media, then eventually that may be the way it goes. But for the time being we will remain focused on consolidate as much of this space as we can.

When you buy a new cluster, how difficult is it to bring it in under the Cumulus operating system?
The enculturation process may require learning some different work habits, business practices, and procedures, but we haven’t found anyone yet who looks askance at anything we lay out. In our company we have a very homogenous operating culture. However, that being said, if you’re joining our company and you have a better way of doing something, we all learn from it, we all benefit from it, and we all use it. It’s not rigid. We’re always looking for ways to improve and refine what we’re doing.

Has the fast track of consolidation negatively affected the people aspect of the radio business?
Definitely there are fewer jobs today. The 10,700 radio stations today are being run by fewer people than they were pre-1996. However, talent invariably rises to the top, and the business is much more interesting for an awful lot of people today. They have more responsibilities, and it’s a much more professional industry than it was 10, 15, 20 years ago. The benefit to us in our markets is that we now see a lot of top talent that would have been in the top 50 markets, but because there are fewer jobs in those markets now, we’re able to find very talented and experienced people to work at our stations.

Do you think there is more or less format diversity today than there was prior to consolidation?
If you take a look at the format charts today you’ll see that there are a lot more formats out there than there were 10 years ago. There are many different types of AC stations today, or Urban stations, or oldies stations, or country, or Hispanic. You didn’t see any of that 10, 15, 20 years ago. There’s definitely a greater diversity of choice, and the overall product quality is better because of that. Plus, there’s no empirical data to say that more minority ownership means more minority formats. The statistic is that there are more formats targeting the Hispanic and African American population in this country today than there were pre-consolidation.

Is it realistic to believe that Radio can grow its share of the total advertising pie beyond the 8 percent it currently has?
You’re going to see the share shift accelerate over the next five years. Radio is really a 12-15 percent medium when it’s all said and done. Consolidation has changed the industry structure, although essentially it’s still in its early stages. Almost everyone listens to radio, and the consumption rate of radio is over 20 hours a week, so it’s the most widely consumed media product. Meanwhile, newspaper circulation continues to decline. Young people—18-34s—don’t read the newspaper. It’s not a relevant medium to them today. Advertisers covet the 18-49 demographic, so each year the newspapers become less relevant to a large percentage to a lot of the 18-49 ad dollars. That’s why the share shift is going to accelerate over the next two to five years, as radio does a better job educating and newspapers become less relevant as their circulation declines.

What do you see as Radio’s greatest competition over the next few years?
The biggest competition for radio is radio. As an industry we have to get our act together and make sure we’re sending a strong, coherent message to advertisers about shifting dollars out of print and into radio. As an industry we have to be very focused on sending that message and repeating it. As we all knows, frequency sells, and we can’t say it enough.

Is radio at risk of losing the younger listener, just as newspaper doesn’t appeal to younger readers?
There are more choices today than ever before, but at the end of the day we’re still going to be the most mass appeal medium to reach young adults. While we may lose some of them, radio is going to be far and away the best choice to reach these people, which is why it’s going to be such a relevant medium going forward. Radio is a true mass medium—always has been and always will be—and it’s the most efficient way to target and reach a mass audience cost effectively.

But as music downloads, Internet audio, MP3 players, and broadband wireless applications gain consumer acceptance, will their popularity affect radio’s position in the marketplace?
The major challenge of any entertainment medium is to continue to stay relevant. This means we have to understand the changing tastes and needs and attitudes of our listeners, and we have to be able to produce product that continues to appeal to them. As an industry we’ve answered that challenge very well, and some groups have done a better job of it than others, and that’s the competitive aspect of our business. The way we answer that challenge is by continuing to attract good people to our medium, looking after them, and providing them the resources to get the job done.

In the face of constant change, what is radio’s greatest strength as an industry?
Our greatest strength is our heritage and the industry structure in which we operate today. Radio is part of Americana, part of our lifestyle. It’s also a business with extremely high barriers to entry, since they aren’t making any more radio stations. It has a very low “cap ex,” which is always good in today’s environment where Wall Street is looking for free cash flow. Radio is an imminently bankable business, and it responds very well to scale. It’s a wonderful investment vehicle for Wall Street because it can easily handle leverage. It has high free cash flow, the ability to service and repay debt, it’s highly scalable, and we’re not facing technical obsolescence. We’ll continue to remain very state-of-the-art in terms of digital delivery, and we’re in excellent shape to move forward. Radio increasingly is going to be a large cap business going forward, as the industry continues to consolidate. Clear Channel clearly is the model for consolidation, and they have set the stage for what’s to come and how the rest of the industry will line up and compete against them.

Who you consider your Number One competitor in the Radio industry?
I always tell my people that we compete against Clear Channel because we’re up against them in 34 of our 54 markets, but that’s only for listeners. When we compete for advertisers, our competition is the newspaper. Since consolidation doesn’t eliminate capacity, somebody still has to manage and run and program and sell all of these stations. We feel the best team is going to be rewarded with the capital and ultimately the assets to build a counter-opposing force to Clear Channel in all these markets. That’s our game plan going forward, and that’s why we’ve worked very hard to become the best-run company out there. We were the Number One-performing radio company in EBITDA growth in 2001, and we are tied for the lead through three quarters of 2002. We’ve taken a company that was at the bottom of the barrel and made it be the best performing group in the industry. I tell our guys our goal is to be the best-run company in radio, and it looks like we’re on our way.

By Reed Bunzel, Editor-in-Chief

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