Cumulus Media (NASDAQ: CMLS) is a land-based radio broadcasting company that operates FM and AM radio stations in small to mid-size media markets throughout the U.S. and the Caribbean. In total, Cumulus owns and operates 336 stations in 64 markets as of December 2007, making Cumulus the second largest land-based radio operator in the U.S. in terms of number of stations owned. In terms of revenue, it is the eighth largest.
Cumulus generates the bulk of its revenue from the sale of local, regional and national advertising for broadcast on its radio stations. In 2007, it received 88% of its revenue of about $324 million from local and regional advertising. As a result of the high exposure to the volume of advertisement runs it can sell and the spot price it can charge, competition between radio and newer media such as the Internet for advertisers, and downturns in the local economy leading to businesses cutting ad spending, have put downward pressure on Cumulus' revenues. As of December 2007, Cumulus carries a long-term debt of $722 million.
Cumulus has grown primarily by a clustering strategy that takes advantage of the fragmented ownership in the small and mid-size radio markets, where stations are mostly owned by small independent operators. The strategy involves acquiring multiple radio stations within each market, forming groups of radio stations to streamline their ad sales and share back-office operations and studio facilities, thereby decreasing Cumulus' overall operating costs through efficiency. As of December 31, 2007, 303 out of 336 radio stations Cumulus owned were in 56 different mid-sized U.S. media markets. The remaining 33 stations operate in 8 large-size markets (Atlanta, San Francisco, Dallas, Houston, Indianapolis, Cincinnati, Kansas City, and York, PA). Cumulus owns the stations in large-size markets indirectly through its investment in a private equity partnership, Cumulus Media Partners, formed in October 2005 between Cumulus, the Blackstone Group, Thomas H. Lee Partners and Bain Capital. Cumulus Media Partners settled its first acquisition for $1.2 billion in May 2006, absorbing Susquehanna Pfaltzgraff Co., then the largest private radio broadcasting company and the 11th largest radio station operator by revenue in the US.
Cumulus Media has also been subjected to a buyout deal in July 2007, by an investor group led by Cumulus’ chief executive and Merrill Lynch Global Private Equity for $1.3 billion at $11.75 a share, then a 40% premium. The deal fell through in the May of 2008, however, as financing the leveraged buyout became increasingly difficult after the subprime crisis had disrupted the credit and equity markets.
Cumulus’ revenues, which have remained above $320 million since 2005, exceed the radio broadcasting industry average of about $227 million. It has, however, had no substantial growth since 2005, despite the expansion into the large-size markets with the formation of Cumulus Media Partners. Its 2007 advertising revenue is in fact about 2.2% lower than that of 2006, comparable to the 2% decline in advertising revenue for the U.S. radio industry in the same period. Advertising revenues continued to fall in 2008, with a year-on-year decline of 4% in the second quarter and 5% in the third quarter.  Cumulus’ third-quarter year-on-year revenue drop of 5% is relatively less severe than that of its two main competitors: also in 2007, third quarter revenue for US’s third largest radio company, Citadel Broadcasting, dropped by 10.9%, and that of Clear Channel Communications, US’s largest radio company, fell by 7%.
The lack of business growth and downward pressure on advertising revenues can be attributed to the increasingly difficult business environment for the radio broadcasting industry in face of other newer media competing for the same ad dollars, and the decreasing pool of those ad dollars due to downturn in ads spends during economic downturns. While its revenue growth has stalled, however, its expenses have grown since 2003 such that Cumulus has come from earning a net income of around $30 million in 2004 to making a net loss of around $224 million in 2007. Expenses have been burdened by Cumulus’ many aggressive acquisitions between 1998 and 2007, and bidding for land-based radio frequencies when the Federal Communications Commission (FCC) makes FM frequencies available for acquisition through auction processes. In 2006, Cumulus paid the FCC $1.6 million for one such frequency.
Unlike satellite radio, whose revenue primarily comes from subscription fees from its audience, land-based radio’s revenues are based entirely on advertising. In 2006 and 2007, sales of advertising time on its radio broadcasts to local and regional spot advertisers accounted for approximately 88% of Cumulus’ net revenue, and 89% in 2005. Cumulus’ ads come from mostly from automobile dealers, home furnishings, banking and mortgage, telecommunications, food and beverage services, general merchandise retail, amusement and recreation, arts and entertainment, and healthcare services. Cumulus’ advertising revenue accounts for a higher proportion of its total revenue compared to the industry average of 80% of total revenue.
The remaining proportion of Cumulus’ revenue comes from the sale of advertising time to national advertisers, and its other services such as providing sales and marketing services for a management and consulting fee to one radio station, and running a new online job search and career service site, Cumulus Jobs. Cumulus generates no revenue from radio subscriptions.
Cumulus carries a large debt as a result of its acquisitions and level of expenditure in face of stagnated growth in revenues. As of December 2007, Cumulus had accumulated a total long term debt of $722 million. It carried a debt-to-equity ratio of 606% and debt-to-assets ratio of 68%, a deficit of $224 million against a total shareholders’ equity of $119 million. As interest must be paid on most of Cumulus’ debt, Cumulus has a high and increasing interest expense on top of its principal repayment obligations. About 18% of net revenue went to interest expenses in 2007, an increase from around 7% in 2005 and 13% in 2006. Cumulus spends a higher proportion of its income on interest expenses compared to four of its main broadcasting competitors (Clear Channel Communications, Citadel Broadcasting, Entercom Communications, EMMIS Communications), whose interest expenses ranged from 7% to 14% in 2007. As of December 2007, Cumulus also had the highest debt-to-equity ratio amongst four of its direct competitors. With the falling interest rate due to economic conditions, Cumulus’s debts should have been exposed to a lower interest rates in 2008. However, Cumulus does not fully benefit from the falling interest rate, as about 40% of its debt has been hedged against interest rate movement.
With the emergence and increasing popularity of new mediums such as the Internet, Web streaming services, mobile phones, MP3 player, iPods, and other on-demand devices, time spent listening to land-based radio has been declining. On average, people in the US now spend fewer than 19 hours a week listening to radio, down from 20.4 hours in 2005. Advertisers follow the move of listeners away from radio, and devote their ad dollars to newer, more popular audio and visual mediums. Mediums using newer technology can also precisely target and capture useful and valuable audience data for the advertisers—something that land-based radio technology is unable to do. A 2007-to-2008 month-on-month comparison for November shows that traditional local and national radio advertising had decreased 22%. Despite the overall increased in audience for radio (radio had 235 million U.S. listeners in a week in 2008, a 3 million increase from 232 million in 2007), revenue for the radio industry as a whole still decreased by 8% as the demand for radio ad spots from advertisers and hence advertising rates dropped. Even amongst radio types, ad dollars are also moving away from older land-based to satellite radio, whose more versatile technology is able to reach wider audiences.
Some consumer-oriented businesses are land-based radio’s largest advertisers, especially the US auto industry that used to account for 15% of local radio industry’s revenue advertising. With the economic downturn beginning in 2007 and the 2008 Financial Crisis, causing consumers to curb spending, advertising is among the first sectors that suffer from business budget cuts. Television and radio were the two industries that suffered the steepest ad spending declines in 2007 in the US, with 8% and 8.5% drops, respectively. Land-based radio, with advertising as its primary revenue source and already losing advertisers to satellite radio and television, is especially suffering from declining business conditions. As Cumulus has a higher exposure to local and regional advertising revenue changes (around 90% of revenue from advertising, compared to the industry average of 80%), it is especially vulnerable to downturns in local economic conditions, business spending patterns, and hence demand for advertising.
The radio industry is heavily regulated by Federal Communications Commission (FCC), which issues rulings that implement employment policies, restrict the number of radio stations one entity may own, and control the approval process for acquisitions to prevent one entity from monopolizing a local area. As of December 2007, the FCC has increased enforcement on regulations limiting the broadcast of “obscene" and "indecent" material, and Congresses has raised the penalties and threatened station license revocation in the case of violation of these restrictions. FCC rules, along with the Communications Act, also permits all interested parties, including companies using competing new media technologies, other radio companies and members of the public, to file petitions through FCC against other media entities. Although Cumulus has operated within boundaries set by FCC, regulations and third-party petitions limit, delay or even prevent the company from completing deals to expand into certain local markets. Since 2005, Cumulus has a pending petition from Qantum Communications against Cumulus’ pursuit of a swap transaction in which it would exchange two of its FM radio stations in the Florida market for two others owned by [Star Broadcasting|Star Broadcasting, Inc.] As of January 2009, one of the two swaps in question has been completed; the other swap is still subject to appeal. Qantum complained that the swap would result in Culumus gaining an unfair competitive advantage by obtaining stations with a wider audience than the stations it was giving up. As of January 2009, one of the two swaps in question has been closed; the other swap is still subject to appeal.
Rulings also come directly from FCC. On December 30, 2008, the FCC sent out notices of apparent liability (NALs) to several TV and radio broadcasters, including to Cumulus, for alleged Equal Employment Opportunities (EEO) violation. The FCC charged Cumulus $14,000 for this incident.
On top of competition against other advertising media, Cumulus also faces intense competition within the land-based radio broadcasting industry for listeners and advertising revenues directly with stations belonging to the following companies within each market. As of December 2007, there were a total of 13939 radio stations (both AM and FM) in the U.S.
|Revenues (thousands)||Net Income (thousands)||Long-term Debt to Equity Ratio||Interest Expense to Revenue Ratio||# Stations||Market Share|
^Clear Channel is now a subsidiary of CC Media Holdings (OTCBB: CCMO)
^^ Market share uses data from the first half of 2008, over total radio broadcasting industry ad revenue in the first half of 2008 ($8.4 billion)
^^^Other figures from 10k reports as of December 31, 2007