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Module Code IB9Y30

Module Title Mergers and Acquisitions and Corporate Control

Submission Deadline 24-Feb-2025 09:00:00 AM

Date Submitted 19-Feb-2025 19:08:16 PM

Word Count 5493

Number of Pages 26

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Mergers and Acquisition and Corporate Control:
Radio One Inc. Case Study
Harvard Business School Case Study

Professor
Jana R. Fidrmuc

Submitted by
5666019
5664839
5634282
5673936
5672309

February 2025
Term 2
Table of Contents

List of Figures II
1. Radio One Inc. Introduction 1
2. Deal Rationale 1
3. Valuation Analysis 5
3.1 DCF 5
3.1.1 WACC 5
3.1.2 DCF Combined – Walkthrough 7
3.1.3 DCF results (combined & stand-alone) 12
3.1.4 Bullish Scenario (DCF adjustable) 15
3.2 Sensitivity Analysis 17
3.3 Comparable Company/Transaction Analysis 19
4. Acquisition Price Suggestion 21
Bibliography III

I
List of Figures

Figure 1 Power ratio development 3

Figure 2 WACC calculation 6

Figure 3 Gross Revenue projection (in $k) 7

Figure 4 Direct Expenses projection (in $k) 8

Figure 5 Operating expenses projection (in $k) 9

Figure 6 Corporate expenses estimation (in $k) 10

Figure 7 D&A and CapEx estimation (in $k) 11

Figure 8 NWC estimation (in $k) 12

Figure 9 DCF results (in $k) 13

Figure 10 DCF combined overview (in $k) 14

Figure 11 DCF stand-alone overview (in $k) 15

Figure 12 Sensitivity: revenue growth and GGM (BCF multiple) 16

Figure 13 DCF adjustable overview (in $k) 17

Figure 14 Sensitivity: beta and corporate bond rate (WACC) 17

Figure 15 Sensitivity: WACC and GGM rate (BCF multiple) 18

Figure 16 Sensitivity: WACC and BCF exit multiple (BCF multiple) 18

Figure 17 Sensitivity: WACC and EBITDA exit multiple (BCF multiple) 18

Figure 18 CCA peer multiples 19

Figure 19 CCA results (in $k) 20

Figure 20 Football field 21

Figure 21 Optimal price range (BCF multiple) 22

Figure 22 BCF multiple price conversion overview 23

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1. Radio Once Inc. Introduction

Radio One, founded in 1980, is one of the largest radio broadcasting companies in the United States
that primarily targets African-American and urban listeners. The firm currently operates 26
broadcasting stations in 9 markets. In greater detail, the stations consist of 7 AM and 19 FM stations.
In 2000, Radio One achieved pro-forma gross revenues of $130m which was substantially achieved by
selling local and national advertising packages. However, the business model itself bases on converting
prior acquired underperforming radio stations to urban formats. Thereby, expanding the audience share
of African-American listeners in each market and transforming these audience share ratings to
advertising revenues while controlling for operating expenses across stations.

In October 1999, Radio One faced a unique business opportunity to rapidly expand their services across
the States due to the proposed takeover of the second-largest station group AMFM Inc. by the nation’s
largest radio station operator, Clear Channel. As Clear Channel would become the largest radio
company globally in terms of revenue, the market expected regulators to force Clear Channel to sell
around 100 overlapping stations in order to preserve a competitive market environment. Such forced
divestitures represented a lucrative acquisition opportunity for Radio One by entering new markets and
applying their current operating strategy. Out of the 100 potential targets, twelve stations were
especially aligning with Radio One’s needs being in urban formats and partially located in the top 50
African-American markets including Los Angeles, the fourth largest African-American market in the
United States. Moreover, the firm was already negotiating the acquisition of nine other stations from
Davis Broadcasting, Shirk Inc., and IBL LLC.

The following document discusses i) the rationale of the 21 acquisitions ii) the optimal acquisition price
for all 21 stations based on DCF and Multiple valuation methods.

2. Deal Rationale

To adequately evaluate the strategic decision, this section of the study examines Radio One’s rationale
for acquiring additional urban radio stations, evaluates the potential revenue and cost synergies, and
considers both the opportunities for market expansion and the risks involved in the takeover process.

Radio One’s plan to acquire the twelve urban stations from Clear Channel Communications, along with
the nine additional stations in Charlotte, Augusta, and Indianapolis, aligns with the company’s current
strategy of focusing on the African-American market and urban audiences. Between 1987 and 1999,
Radio One successfully acquired and converted underperforming stations into urban-oriented format
targeting African-American listeners. The targeted demographic was projected to experience a 60%

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higher population growth rate between 1995 and 2010 and a 150% faster income growth rate than the
general population between 1980 and 1995, while also exhibiting 24% greater radio listening duration
on average. Radio One, by applying its programming, marketing and operating skills, was able to
increase the power ratios of most of its stations, demonstrating to advertisers that African-American
consumers, despite their lower average income, purchased more of certain goods and services than the
general population. In that sense, the acquisition of additional stations in the top 50 markets directly fits
the Radio One’s growth strategy of expanding its national presence, thereby increasing its ability to
generate greater advertising revenue.

In terms of market expansion, the targeted twelve stations are located in large African-American
markets, including Los Angeles which is the fourth largest such market in the country and where Radio
One has a strong incentive to establish a footprint. Additional nine stations are located as well in top 50
markets by African-American population, namely Charlotte, Augusta and Indianapolis. These
acquisitions would help Radio One to reach major urban centers and diversify its revenue base by
reducing its dependence on any single city. In addition, based on top 52 African-American Radio data
(Radio One 10-k, 2001), African-Americans account for large shares of the overall population in these
areas, indicating that each new station has the potential to increase the company’s reach to a larger
listener base – one of the key drivers of Radio One’s revenue and profitability.

These acquisitions introduce substantial revenue synergies. Radio One’s existing strategy includes
packages that involve the sale of advertising inventory across its “network” of stations. This approach
allowed advertisers to transfer advertisements from one station to another which ensured that each ad
fully uses its advertising capacity, making these packages more attractive to advertisers. By acquiring
21 additional stations across several markets, Radio One would broaden the scope of these bundled
advertising packages and secure higher pricing from national advertisers. This expansion of packaged
sales aligns with the upward trend in power ratios which measures a station’s share of radio advertising
revenue relative to its audience share. As reflected in Figure 1 below, the urban-format stations have
progressively captured a greater portion of total advertising dollars compared to their percentage of
listeners. This growth in power ratios underlines Radio One’s success in demonstrating the effective
buying power of African-Americans to advertisers who had previously undervalued this demographic.
Consequently, through its planned acquisitions, Radio One would generate revenue growth in new
markets and further strengthen its dominance in African-American broadcasting.

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 0.9
0.84 0.85
0.85 0.82
0.8 0.81
0.8 0.77 0.78
0.76
0.73 0.74
0.75
0.71 0.7
0.7

0.65

0.6
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Figure 1 Power ratio development

Additionally, cost synergies arise from Radio One’s centralised management and operating structure.
The company typically integrates newly acquired stations into a single operating structure for finance,
management, marketing, and sales, rather than letting each property operate independently. Using this
centralised approach, Radio One eliminates redundant management, unifies promotional efforts and
benefits from economies of scale in engineering, production, and other operational aspects.
Furthermore, cost savings occur from programming syndication and purchasing from vendors, the
reduction of duplicate staffing, and the creation of national representation agreements. While each new
station requires some capital expenditures for maintenance or reformatting, Radio One’s historical
performance indicates that centralising functions generates meaningful cost savings over time.

Overall, Radio One’s operating strategy focuses on maximising African-American audience share,
converting ratings to higher advertising revenue, and controlling costs through centralisation. By using
market research to identify the specific preferences and needs of African-American communities, Radio
One has historically been able to tailor its programming and promotions for each local market, leading
to stronger listener loyalty and higher ratings. This approach has been reinforced by the company’s
emphasis on strong local management with performance-based incentives, which ensures that general
managers, sales directors, and on-air talent are motivated to exceed broadcast cash flow and ratings
targets (Radio One 10-k, 2001). Together with strategic sales efforts, including bundling advertising
across multiple stations, Radio One can rapidly convert increased audience engagement into higher net
broadcast revenue and improved broadcast cash flow.

The acquisition of new stations would strengthen Radio One’s strategic position by expanding its
presence in key urban markets and increasing its bargaining power in negotiations with advertisers.
Radio One would become the single largest radio broadcaster targeting African-Americans and would
cover more African-American households than any other media vehicle targeting that audience. Infinity
Broadcasting’s recent purchase from Clear Channel of 18 similar quality stations at 21.5x 2000 BCF
and Cox Radio’s acquisition of 7 stations from Clear Channel at 18.4x 2000 BCF indicate that rival

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media groups are actively expanding as well. These deals highlight that if Radio One hesitates to
complete the transaction, competitors may acquire the stations, potentially weakening Radio One’s
market position. In contrast, by pursuing this transaction at a multiple of at least 20x BCF, Radio One
can maintain its competitive advantage, dominance in the market and secure the takeover with
confidence.

Despite the clear strategic rationale behind the acquisition of new radio stations, Radio One faces
several significant risks that could undermine the anticipated benefits. One of the major concerns is
overbidding (Fortier, 1995), particularly given that Infinity Broadcasting and Cox Radio recently paid
higher multiples of broadcast cash flow for acquisitions from Clear Channel. These high valuation
benchmarks increase the risk that Radio One may place an excessively high bid, potentially
undermining expected returns. Even if the acquisition price remains reasonable, there is a possibility
that projected synergies may not fully materialise, especially if key people in the company’s
programming and marketing teams leave following the takeover.

Furthermore, post-merger integration poses a significant challenge as described by Fortier (1995). For
radio stations, the complexities lie in unifying operations, aligning programming strategies, and
ensuring operational efficiency. However, given Radio One’s track record of successful acquisitions,
the company has a well-established approach to addressing these challenges, which likely includes a
fast, structured integration process and close collaboration with the management of acquired stations.

Additionally, shifts in advertiser preferences or an unexpected slowdown in the growth of the African-
American population, and consequently, the radio market could weaken Radio One’s overall strategy
and limit the profitability of its newly acquired stations.

In conclusion, the planned acquisition of the radio stations offers a strong opportunity for Radio One to
expand its national footprint, strengthen its position in key African-American markets, and increase
advertising revenue through enhanced bundling and cost efficiencies. By implementing its current
growth strategy, centralised operating model, and in-depth understanding of preferences and needs of
African-American audiences, Radio One has the potential to successfully integrate the new stations.
Nonetheless, the company must address several risks that could undermine the benefits of the
transaction, including overpaying, unrealised anticipated synergies, and shifts in advertiser preferences
or demographic trends that might weaken the African-American radio market.

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3. Valuation Analysis
Following the decision to acquire the targeted stations, the optimal acquisition price must be estimated.
The optimal price shall reflect the value of the targeted stations, synergies as well as a premium to
confidently secure the proposed deal as competitors face the same growth opportunity. By applying a
discounted cash flow valuation technique and a comparable trading analysis, a floor price is established
which serves as the basis for further considerations such as more bullish projections and a control
premium. Nonetheless, since Radio One is acquiring only a small portion of Clear Channel, a control
premium might be negligible.

3.1 DCF

The DCF valuation was conducted using the following methodology. As the case study provided
projections for the combined firm, including synergies, the first step involved constructing a DCF based
on these projections (hereafter referred to as DCF Combined). Next, a second DCF was created using
similar assumptions to determine the stand-alone value of Radio One (DCF Stand-alone). This was
done by utilizing the provided revenue projections along with historical financial statement ratios. The
difference between these two valuations represents the implied price of the 21 targeted stations.

Subsequently, a third, flexible DCF model (DCF Adjustable) was developed using the combined firm's
projections. This model allows for adjustments to key assumptions, such as revenue growth rates and
net working capital (NWC), to analyze potential price variations under different scenarios and estimate
potential premiums to be paid.

All three DCF models were based on the calculation of unlevered free cash flows (FCFF) from 2001
to 2004, which were used to derive the respective enterprise values. Additionally, a detailed FCFF
forecast for the 2005 financial year was developed to calculate the terminal value, applying both the
Gordon Growth Method and Exit Multiples for a comprehensive valuation.

3.1.1 WACC

As the FCFF reflects the cash flows available to both equity and debt holders, the Weighted Average
Cost of Capital (WACC) serves as an appropriate discount rate. The cost of equity was determined
using the proposed risk-free rate of 6.28% and a market risk premium of 7%. Additionally, an average
beta of 0.75 was applied, as the targeted stations represent a combination of two distinct firms, Davis
Broadcasting and Clear Channel. Since beta is affected by a company's capital structure, using an
industry average beta is a reasonable approach. Nonetheless, the sensitivity analysis incorporates
potential beta changes and includes results in the calculation of acquisition prices. The calculation was
conducted using the traditional Capital Asset Pricing Model (CAPM).

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For the cost of debt, a corporate tax rate of 34% and a corporate bond rate of 7.7% were applied. The
corporate bond rate of 7.7%, representing a BBB rating, was selected to model a relatively conservative
case within the investment grade horizon. Potential price impacts by choosing a higher rate are
performed in the sensitivity analysis section. As generally BCF multiple ranges are conducted, such
changes are incorporated, which relativizes initial inputs. When computing the WACC, the proposed
capital structure—comprising 85% equity and 15% debt—was utilized, which closely aligns with the
provided balance sheet figures. This calculation resulted in a WACC of 10.56%. A sensitivity analysis
illustrating how variations in beta and cost of debt impact the target price will be presented later in the
analysis.

Figure 2 WACC calculation

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 3.1.2 DCF Combined – Walkthrough

Gross revenue: The DCF Combined begins with gross revenue derived from both existing and new
markets. The projected gross revenue growth for each station was analysed and extended to 2005 based
on the three-year average growth rate. It is important to note that gross revenue growth in the existing
markets remained flat, whereas growth in the new markets exhibited significant variation depending on
the location.

Figure 3 Gross Revenue projection (in $k)

Direct expenses: The direct expenses for each station were modeled, and unlike the gross revenue
growth, these expenses remained constant as a percentage of sales throughout the projection period,
typically ranging between 12% and 14% of each station's revenue. As a result, forecasting direct
expenses was a relatively straightforward process.

7
Figure 4 Direct Expenses projection (in $k)

Net revenue: (Gross revenue - Direct Expenses)

Operating Expenses: The operating expenses for each station gradually decreased as a percentage of
net revenue, reflecting Radio One's efficient operational strategy. In all cases, this percentage exhibited
a consistent downward trend over time, which was projected into 2005 by applying the three-year
average negative growth rate to the net revenue percentage.

8
Figure 5 Operating expenses projection (in $k)

Broadcast CF: (Net Revenue – Operating Expenses) The BCF margin increased over time for both
existing markets (from 47.7% in 2001 to 56.3% in 2005) and new markets (from 59.6% in 2001 to
67.2% in 2005). This growth highlights Radio One's value-adding capabilities, as well as the realized
synergies through decreasing operating expenses as a percentage of net revenue and rising revenues.

Corporate Expenses: Corporate expenses were primarily provided; however, the three-year average
percentage of sales was applied to project the 2005 expenses, which showed a slight upward trend over
time (2.8% of sales for 2005).

9
Figure 6 Corporate expenses estimation (in $k)

EBITDA: (BCF - Corporate Expenses) Similar to the BCF margin, the EBITDA margin increased over
time, rising from 44.2% in 2001 to 51.1% in 2005.

Non-cash compensations: non-cash compensations were zero during the projected horizon

D&A: Depreciation and Amortization remained flat during the projected horizon at $107,500 and were
continued into 2005 as they’re expected to remain until 2015

EBIT: (EBITDA – Non-cash compensations – D&A) The EBIT margin also showed an upward trend,
increasing more rapidly from 7.4% in 2001 to 26.5% in 2005, driven by the flat depreciation and
amortization projections. The flat D&A assumption will later play a key role in the capital expenditure
(CapEx) forecasts.

Taxes: 34% (given)

NOPLAT: (EBIT - Taxes) NOPLAT is an artificial (artificial due to its non-accounting origin) valuation
figure needed to estimate the unlevered free cash flow. Here, interest expenses are not subtracted before
considering taxes as the cash flow to debt and equity holders is calculated. The “lost” tax shield due to
this action is being considered in the WACC formula as the cost of debt is adjusted to an after-tax basis.

D&A: same projections as before

CapEx: The case assumes a capital expenditure of $100k per new station per year, which was
categorized as maintenance rather than expansion due to its consistent, flat nature. Consequently, it was
inferred that Radio One would apply the same maintenance approach to its existing stations, resulting
in a total annual CapEx of $4,700k for all 47 stations (21 new and 26 existing). This assumption is
supported by the flat depreciation and amortization figures. If the CapEx were expansionary, property,
plant, and equipment (PP&E) would increase, leading to higher D&A over time. However, since D&A
remains unchanged, the classification of the CapEx as maintenance rather than expansion appears
reasonable.

10
Figure 7 D&A and CapEx estimation (in $k)

NWC: (calculated as Accounts Receivable - Accounts Payable, as no Inventory is present) The case
indicates that Radio One must allocate NWC for all newly acquired stations. As a result, NWC was
analyzed and modeled based on historical financial data for the existing stations. For forecasting
purposes, the days sales outstanding (DSO) metric was applied for accounts receivables, while days
payables outstanding (DPO) was used for accounts payables.

Once the NWC was projected over the forecast horizon, the percentage of sales for receivables and
payables were integrated into the DCF Combined. During this process, it was observed that both DSO
and COGS, program and technical, (as percentage of sales) exhibited a consistent downward trend. This
insight was subsequently used to develop a more optimistic, bullish NWC scenario. For the DCF
Combined, the DSO and DPO from 2000 were held constant to project the NWC under the neutral case.

The bullish case assumes that DSO decreases at the historic negative growth rate and COGS decreases
as a percentage of sales. The rationale for such a case is the potential increased negotiation power with
clients and suppliers due to a higher market share through the acquisition. Such developments represent
a cash gain for Radio One as the net change in NWC compared to the neutral case decreases (showcased
as a percentage of sales). This case is being considered when developing a more bullish scenario under
the DCF adjustable.

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Figure 8 NWC estimation (in $k)

FCFF (NOPLAT - D&A - CapEx – change in NWC)

After calculating the Free Cash Flow to the Firm (FCFF), the terminal value must be determined. Both
the Gordon Growth Model (GGM) and median 2001E BCF and EBITDA exit multiples were applied.
The GGM assumes that Radio One will grow perpetually at a specific rate, with 3% selected due to
(REASON). Under this model, the 2005 FCFF was divided by the difference between the WACC and
the growth rate, while the exit multiples were applied to the corresponding 2005 figures.

The sensitivity of both methods will be presented later. However, it is important to note that using
2001E multiples for 2005 figures implies the assumption that the market will value such companies
similarly in four years, which is an unlikely scenario. Nevertheless, this approach is a common practice
in valuation and provides additional insights into the potential valuation range.

Finally, all projected FCFF values and the terminal value were discounted to their present value and
then summed to calculate the enterprise value. The same methodology and assumptions were
consistently applied to the DCF Stand-alone to ensure comparable results. Each accompanying table
contains the relevant calculations also for the existing markets only.

3.1.3 DCF results (combined & stand-alone)

Using the Gordon Growth Model (GGM), the calculated value of the combined company is
approximately $1.93 billion, while the stand-alone company is valued at $526 million. This results in
an estimated acquisition price of around $1.4 billion, implying a BCF multiple of 18.3x. For the GGM,
a long-term growth rate of 3% was applied due to the following reasons: i) the US economic growth
rate averaged around 4% from Q4 1992 to Q2 2000 (Trading Economics, 2025) and ii) radio station ad
revenues, as part of the broadcasting industry, were expected to increase drastically due to increasing

12
broader digitalization efforts (Statista, 2025). Further, Radio One targets an above-average growing as
well as spending community, which justifies the relatively high growth rate. Nonetheless, sensitivity
analyses capture varying valuation prices due to the long-term growth rate changes and are included in
the final acquisition price range.

When applying the exit multiple approaches, the terminal values for both DCFs increase significantly,
with the combined firm showing higher growth due to its stronger projected performance. Based on the
EBITDA exit multiple, the estimated acquisition price is approximately $1.66 billion, corresponding to
an implied BCF multiple of 21.79x. Meanwhile, the BCF exit multiple yields a slightly lower
acquisition price of $1.62 billion, implying a BCF multiple of 21.21x.

Figure 9 DCF results (in $k)

The increased acquisition price from the exit multiples can be explained by the inflated market during
the time period which is reflected by higher multiples. However, both methods are valid and provide a
good range of the expected floor price in a neutral scenario based on the provided projections. Further,
the terminal value dominates the price by making up 79% of the overall price in the combined case and
74% in the stand-alone DCF. Such dependency results from the short projected horizon of only four
years. If one increases the horizon, the terminal value percentage will decrease. For this reason, it is of
utmost importance to perform sensitivity tests on key assumptions like the perpetual growth rate for the
GGM. The following section analyses the acquisition price under more bullish forecasts and highlights
key sensitivities and their implications.

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DCF Combined:

Figure 10 DCF combined overview (in $k)

14
DCF stand-alone:

Figure 11 DCF stand-alone overview (in $k)

3.1.4 Bullish Scenario (DCF adjustable)

To establish a possible premium to confidently secure the bid, more bullish scenarios are analysed to
approximate which price is value-increasing given specific assumptions. First, the bullish NWC case is
incorporated, which yields a price increase of roughly $50m to $1.45bn and an implied BCF multiple
of 19x. Modelling the bullish NWC for exit multiples is neglectable as both BCF and EBITDA do not
incorporate any NWC changes and the terminal value captures the majority of the acquisition price.
Second, the top-line revenue growth can be adjusted more aggressively. The current projections
estimate an average growth rate of ca. 11% from 2001 until 2005. However, the historical revenue
growth was considerably higher at 42.6% in 1998 and 77% in 1999. While those incorporate the added
revenue of the acquired stations, the growth of ca. 11% can be considered neutral. Therefore, a
sensitivity table of top-line revenue growth as well as the GGM perpetuity growth rate is created to
visualize implied BCF multiples when assuming aggressive growth driven by higher packaged
advertising sales, a further increasing power ratio, and greater market power.

15
Figure 12 Sensitivity: revenue growth and GGM (BCF multiple)

When maintaining the 3% long-term growth rate, a maximum revenue growth rate of 16% can be
assumed to stay below the threshold of 30x BCF (28.43x implied BCF multiple), which would dilute
shareholder value. As this case showcases the maximum price given the GGM assumption, it is
reasonable to price in revenue growth between 13-15%, which implies a BCF multiple range of 22.7x
to 26.5x (including the bullish NWC case). The bullish case, therefore, represents a premium compared
to the previously described price ranges under the neutral assumptions. As the 3% long-term growth
rate already includes the strong expected growth of telecommunications and the targeted African-
American market characteristics, the analysis refrains from assuming higher long-term growth rates.
However, if the GGM rate falls to 2.75% or even 2.5%, the bullish case (13-15% revenue growth and
bullish NWC) still assumes a higher combined firm value compared to the prices under neutral
assumptions (21.22x BCF to 24.78x BCF). Notably, operating expenses were not touched as the already
steady negative growth in terms of percentage of sales already reflected aggressive cost synergies
pushing margins. Therefore, a comprehensive bullish analysis is performed.

However, it must be acknowledged that such predictions are primarily vague and mainly help to
understand which acquisition prices would be fair if the revenue growth rate reaches certain levels. The
premium Radio One pays should include such calculations but ultimately also depends on the required
premium and the respective competitiveness of the bid, which will be discussed in the concluding
section.

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DCF Adjustable: with 15% revenue growth rate, 3% GGM rate and the bullish NWC scenario

Figure 13 DCF adjustable overview (in $k)

3.2 Sensitivity Analysis

While the DCF approach is highly regarded for its cash-flow-based methodology and the ability to
project financials in significant detail, it also depends heavily on key assumptions. This reliance makes
the model both powerful and susceptible to potential inaccuracies. Consequently, conducting a
sensitivity analysis of these critical assumptions is essential to assess the model's robustness and
associated risks. The following section is dedicated to illustrating how variations in these assumptions
can influence the estimated acquisition price.

The estimated WACC is based on previously outlined factors but mainly the corporate bond rate as the
pre-tax cost of debt and beta allowed for individual adjustments. Therefore, the following table
showcases the possible WACC range given variations in both factors. The most important
considerations are credit rating shifts and applying a beta of 0.82.

Figure 14 Sensitivity: beta and corporate bond rate (WACC)

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In detail, the sensitivity table showcases the possible WACC range given variations in the applied
corporate bond rate and beta (10.11% - 11.12%). In the following, the DCF-based acquisition price as
BCF multiples will be tested against the obtained WACC range with changing long-term growth rates
(GGM) and exit multiples.

Figure 15 Sensitivity: WACC and GGM rate (BCF multiple)

As expected, the acquisition price as BCF multiple varies greatly depending on both the WACC and
the GGM rate. However, the sensitivity analysis helps in determining the possible valuation in terms of
BCF multiples, pinning down the optimal price range given specified assumption changes.

Figure 16 Sensitivity: WACC and BCF exit multiple (BCF multiple)

Figure 17 Sensitivity: WACC and EBITDA exit multiple (BCF multiple)

Both DCF exit multiple valuations exhibit overall higher price levels due to the previously described
reasons. Nonetheless, a confident implied BCF multiple range can be obtained using such an analysis

18
incorporating possible changes in key assumptions. Therefore, it is possible to obtain precise valuation
ranges regardless of initial inputs. All results and price ranges will be summarized in the last section.

3.3 Comparable Company/Transaction Analysis

Another widely used valuation method is the Comparable Company Analysis (CCA), which values a
target company by benchmarking it against a group of similar firms. Unlike the time-intensive and cash-
flow-focused DCF, the CCA provides a faster, market-based valuation by leveraging the law of one
price. However, the key challenge lies in selecting an appropriate peer group. Traditionally, this group
is defined based on specific characteristics of the target company, such as its business profile (e.g.,
products and services, geographic reach, and customer base) and financial profile (e.g., size, revenue,
profitability, and growth). In this case, suitable peers have already been identified which was confirmed
by another company screening.

The next step involves selecting the most relevant valuation multiples. Enterprise value multiples, such
as EV/EBITDA, allow for meaningful comparisons by neutralizing differences in capital structure,
depreciation and amortization, and tax rates. Additionally, sector-specific multiples like EV/BCF offer
even more precise insights due to their relevance to the target company’s business model. As a result,
both multiples were applied, with the BCF multiple ultimately chosen for presenting acquisition prices,
consistent with the DCF, due to its close link to the business model.

On the other hand, equity multiples, such as the equity value/after-tax cash flow multiple, depend
heavily on factors like capital structure, D&A, and tax rates. These metrics are typically more relevant
for industries such as banking or insurance, where these factors significantly influence performance.
Since radio station operators do not exhibit these characteristics, equity multiples were excluded from
the analysis.

Figure 18 CCA peer multiples

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In order to perform a profound analysis, not only the average and median multiples of the peer group
were being considered but also the 25% and 75% percentile. The multiples were now applied to the
respective company financials in 2001 as the multiples are forward-looking.

Figure 19 CCA results (in $k)

Both multiples resulted in similar valuations of the targeted stations ranging from $1.1bn to $1.47bn.
The results are in line with the valuation range by the DCF GGM results, backing the overall result.
The difference to the DCF Exit Multiple valuation lies primarily that the DCF not only includes four
years of discounted cash-flows but also applies a higher financial metric to the median multiples.

Another valuation approach involves analysing past transaction multiples, reflecting the prices paid in
the market for similar assets. However, a Comparable Transactions Analysis (CTA) has specific
limitations that must be considered. Firstly, while this method provides a market-based perspective, it
does not offer insight into the underlying pricing mechanisms. Key assumptions such as long-term
growth rates, expected synergies, or discount factors are often unobservable. Additionally, it is difficult
to distinguish whether a premium was paid for strategic reasons or if competitive bidding artificially
inflated the price. Another crucial consideration is the time lag in past transactions. Lengthy
negotiations can delay acquisitions, meaning that transaction multiples may no longer align with current
market conditions. Therefore, the given multiples may be in the current CCA range but may be based
on past lower multiples but were adjusted to incorporate named variables. Furthermore, it is unclear
whether the transactions used for comparison involved radio stations with the same African-American
market focus as those targeted by Radio One.

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Given these limitations, the CTA is conducted primarily to validate the results obtained from other
valuation methods and establish a floor price. The report integrates the CTA findings and incorporates
the implied valuation into the overall analysis. Similar to the CCA analysis, both multiples (18.4x and
21.5x) were multiplied by the 2001 BCF new markets forecast.

4. Acquisition Price Suggestion

This section combines prior valuation analyses, recognizes price thresholds, and builds an acquisition
price suggestion including the bullish scenario, a possible premium, and competitive bidding. All prices
are converted to the respective implied BCF multiple and include obtain price ranges from the
sensitivity analyses.

Figure 20 Football field

The analysis sets a median floor price range between 17.1x BCF and 21.6x BCF, excluding the bullish
DCF. Considering the minimum price of 20x BCF, the respective floor price range perfectly sets the
basis for further considerations. Prior transaction comps (CTA) depict a slightly higher price range of
18.4x BCF to 21.5x BCF and already include any premia paid as well as possible competitive bidding.
However, whether those acquisitions were based on similar growth projections and target market
criteria like Radio One’s is not observable.

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Acquisition prices often incorporate a control premium when a majority or controlling stake is
purchased. However, since Radio One is acquiring only a small portion of Clear Channel's radio station
portfolio, any control premium will likely be minimal or even non-existent. However, Clear Channel
might know how valuable the targeted stations are to Radio One and might overcharge. On average
M&A transactions include a 44.96% premium (Cheng and Yang, 2024), the analysis considers an
expected premium in the range of 20% (no control premium but overcharging due to Radio One’s strong
interest). Another relevant factor is Clear Channel's need to sell these assets to proceed with its
acquisition, which might suggest the possibility of a fire-sale discount. In theory, such a discount could
apply if the seller is pressured to divest quickly. However, given the strength of the radio station market
and the high public awareness surrounding these divestitures, there is likely strong demand for the
assets, making a fire-sale discount improbable. Therefore, the optimal acquisition price range will be
derived from the bullish DCF scenario, with the goal of offering a price that confidently secures the
deal without overpaying.

Given the bullish DCF, Radio One can offer up to 26.5x BCF without overpaying for the assets.
Therefore, 26.5x BCF is set as the maximum bid. To price in possible negotiations, a premium, and
competing bids, it is advisable to bid at a lower range to leave room for named events and higher returns.

When adjusting the floor price range of 17.1x BCF (median low floor price) and 21.6x BCF (median
high floor price) for the expected premium of 20%, the suggested bid range is 20.52x BCF to 25.92x
BCF in line with the minimum (20x BCF) and maximum (30x BCF) bid levels as well as the 26.5x
BCF threshold. Therefore, it is advisable that Radio One offers a starting bid of 23.22x BCF (average
floor prices adjusted for the premium). As the starting bid of 23.22x BCF ($1.77bn) exceeds valuations
from CTA, DCF GGM, and CCA and is in the upper range of both DCFs with exit multiples, a
successful acquisition is likely. However, if competition is high, Radio One can dynamically adjust the
offered price up to a maximum of 26.5x BCF ($2bn) without overpaying. However, the effect of higher
competition, especially when common-value assets that are easily replicable are involved, is hardly
predictable. Fidrmuc (2013) showcases a counterintuitive relationship, as high competition for
described assets can even achieve smaller premia. Therefore, the price suggestion refrains from
quantifying possible competition premia and focuses on a competitive starting bid and the maximum
fair bid.

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Figure 21 Optimal price range (BCF multiple)

Figure 22 BCF multiple price conversion overview (price in $k)

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Bibliography

Cheng, C. and Yang, Z. (2024). Your Success Got My Attention: The Impact of Competitors’ M&A
Performance on Firms’ M&A Premiums. Available at SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4812504

Fidrmuc, J. P. (2013). Bidding competition and premiums in M&As. Published by Warwick Business
School. https://warwick.ac.uk/fac/soc/wbs/subjects/finance/events/brownbag/f130906_paper.pdf

Fortier, D. (1995) A note on mergers and acquisitions and valuation. Version A: 2000-02-16. London,
Ontario: Ivey Management Services, Richard Ivey School of Business, The University of Western
Ontario.

Radio One 10-K (2001). https://radioone.gcs-web.com/static-files/fea028cb-4688-4240-8440-

Statista (2025). U.S. Radio Industry – statistics & facts.

Trading Economics (2025). United States GDP Growth Rate. https://tradingeconomics.com/united-

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