M&A

Three Ways to Cope with Slipping Stock

Why the turbulent market threatens acquisitions.
Ed ZwirnMarch 16, 2001

“What if I agreed to acquire a radio station, and the market went south?” Scott Royster asks rhetorically.

Royster, the CFO and executive vice president of aggressively acquisitive Radio One, reveals that his greatest professional worry is that a general downturn would dilute stock issued by his firm to fund a deal.

It’s a fear likely to recur often for him in the current plummeting market. With 63 radio stations in 22 states, the Lanham, Md.-based firm is making an acquisition “almost monthly,” he notes.

These acquisitions, including the February commitment Radio One made to buy Blue Chip Broadcasting for $190 million in cash and stock, have gone off largely without a hitch.

But it would be a nightmare for Royster if the firm’s stock fell off a cliff and its leverage structure couldn’t accommodate the full load of debt needed to fund a deal already inked.

How would he cope? Royster sees three fundraising options other than debt:

  • “One would be to sell stock at some price, which would obviously be a depressed price,” he says, noting that the disadvantage of going this route would be the “dilutive effect.”

“If there’s a fixed amount of money you have to raise, you’d have to sell more stock,” he said.

  • Another option would be to tap the private-equity market through some of its major players, such as J.P. Morgan Chase Capital Partners, Forstmann Little, or Kohlberg Kravis and Roberts. This would also entail some dilution, as well as the transaction costs.
  • Finally, if all acceptable funding alternatives fail, Radio One could also decide “not to do the deal.”

The penalty here would be forfeiture of the deposit made at the time of commitment, he says. This would typically cost 5 percent to 15 percent of the purchase price.

For Radio One, that’s not small change. The price tag on the firm’s acquisition of 12 stations from Clear Channel Communications last August came to $1.3 billion.

The firm’s latest commitment, the $190 million purchase of Blue Chip Broadcasting, is being funded by a “bank facility in place” for about half that amount and an agreement by the seller to take 7.5 million Radio One shares at a stated value of $14 per share.

Radio One stock was quoted at $16.75 on Thursday afternoon.

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