ETM released its third quarter results yesterday. The results were predictable and much as I expected them to be. After the release, the company held the regular earnings conference call.
ETM's earnings conference calls are in listening mode only, for some odd reason, and questions for the call are sent by email. I've sent questions as a managing partner in Eden, and my questions were answered during the conference call. Here is the email I sent:
My name is Assaf and I work for Eden partnerships, a private investment fund.Here are Eden's questions for today's conference call, ordered by importance.
For Stephen:1. As the senior debt facility approaches maturity on June 30 next year, when does the company expect to issue a new facility or extend the current, and are the facility terms expected to change materially?2. What is the target debt level of the company ?For David:1. Are any more acquisitions like KFOX planned for the foreseeable future?2. Going into 2012, could you please estimate if station expenses will decrease, as deployment of new equipment and content will be completed?3. Could you please, on next the purchases, disclose more financial information regarding the deals – like expected station revenue, EBITDA, expenses, etc? In particular it would be interesting to hear how KFOX is doing under ETM.
I urge you to listen carefully.
We learn from the call many things, some I already said in the past:
- Station expenses are up because of upgrades to equipment, content and systems deployment. It was predictable and the company stated expenses will be elevated through 2011. We can expect lower expenses in 2012. I already talked about this. Since we are comparing to 2010 Q3, it is obvious we shall see a decline in operating profit as station expenses are up.
- Political revenue is down. Political revenue is different from other kinds of revenue because it does not depend on the economy status but on the political cycle. To compare quarters and years one must adjust the revenue and remove the political revenue – so he can compare apples to apples.
- If adjusting for San-Francisco and Boston, two markets with major changes, and adjusting for political campaigns as I mentioned, ETM's revenue is up 3% from last year.
- Refinancing is not a question of "if" but a question of "under what terms", no risk is seen here.
Applicable Interest Rates. At the Company’s option, loans may be maintained as (x) base rate loans, which shall bear interest at the base rate (or, in the case of term loans only, if greater at any time, the base rate floor plus the applicable margin (as defined below) or (y) LIBOR loans, which shall bear interest at LIBOR (or, in the case of term loans only, if greater at any time, the LIBOR Floor ),plus the applicable margin. The “applicable margin” is a percentage per annum equal to (i) in the case of term loans (A) maintained as base rate loans, 5.00% and (B) maintained as LIBOR loans, 6.00%; (ii) in the case of revolving loans (A) maintained as base rate loans, 4.50%, and (B) maintained as LIBOR Loans, 5.50%. The base rate is the highest of (x) the prime lending rate announced by the Administrative Agent from time to time and (y) 1/2 of 1% in excess of the overnight federal funds rate and (z) LIBOR for an interest period of one month plus 1.00%. The base rate floor and LIBOR floor are 2.50% and 1.50% per annum, respectively.
LIBOR 1 month rate is 0.25%, FED rate is 0.25%, so the maximum interest rate Radio-One pays on the worst part of its debt is 7.5% (minimal base interest of 2.5% plus margin of 5% = 7.5%; or minimal LIBOR of 1.5% plus margin of 6% = 7.5%).
This case represents:
- The highest possible interest rate of ROIAK (Radio One) on the worst part of their bank debt (other loans will bear lower interest)
- A company that is in VERY bad shape comparing to ETM
- We assumed 7.5% interest rate when refinancing, a rate a much worse company got on its worst loan
- We assumed debt level stays at 606$ million for the next 3 quarters, although on the last 3 quarters the company repaid 44.5$ million
- We assumed yearly FCF for ETM by linear extrapolation from 53.6$ million on the first 3 quarters, although first quarter FCF is significantly lower then Q2 and Q3
- We ignored that 2011 is a year characterized by an elevated rate of expenses due to many changes the company is doing
- We ignored presidential elections next year that can easily contribute another 9$ million to revenue (that will go almost straight to the bottom line)
- We ignored that 2011 is a BAD year for most businesses, especially in media, and next year can be better