Coming off an eventful day of spinoff announcements, Entercom unleashed some surprising news during its third-quarter earnings call Thursday: The merger with CBS Radio will deliver more than four times the amount of cost savings than first expected. Instead of wringing out $25 million in “net cost synergies,” the number will be well north of $100 million. That’s good news for investors, which the company is trying to win over with the merger now on the one-yard line toward what CEO David Field called a “most likely” Nov. 17 closing.
So where is all the extra savings coming from? Responding to that question from Wells Fargo Securities senior analyst Marci Ryvicker, executive VP and chief financial officer Richard Schmaeling said it would mostly come from eliminating corporate overlap with CBS Radio and CBS corporate allocations for services that Entercom can replace with its own capabilities. Other savings will come from axing redundant positions in the eight markets where the two companies overlap: Atlanta and Miami, where it’s not required to sell off any stations; and Boston, Los Angeles, Sacramento, San Diego, San Francisco and Seattle where it is. Plus “a whole host of other areas where we see an opportunity to consolidate services to gain greater cost efficiency and scale,” Schmaeling explained.
Schmaeling, who joined the company in March with a history of mergers and integrations, spent four-and-a-half months working with 24 joint Entercom-CBS Radio teams and consultants drilling down into operations and how to run more efficiently. The effort paid off with what he called “clear implementation action plans” that are expected to be revealed in the weeks ahead.
Entercom says it expects to realize the cost savings within 18 months after closing and will reinvest a big chunk of the money in the company to fuel growth.
Third-quarter revenues grew to $122.3 million, up 1% from $121.6 million in Q3 of 2016. On a same station basis, revenues dipped 1% after removing political dollars from the comparison. Local and national were both down while events and digital were up. As expected political was down about $2 million. Best performing categories were drug stores, home furnishings and improvement and TV/cable. Atlanta, Boston and Charlotte turned in the strongest results while Denver was “particularly weak.” (Two weeks ago the company removed its longtime Denver market manager and is recruiting for a replacement.)
Field also said there was “softness” in three overlap markets impacted by the uncertainty of spinoffs—L.A., San Francisco and Sacramento. Remove those markets from the picture and same station revenues would have been up 2% for the quarter. “It’s the karma of going to work every day knowing that there has to be significant changes,” Field explained to an analyst on Thursday’s call. “Knowing that stations are going to be sold, not knowing to whom.” That caused issues for account execs selling to clients with questions about who will own the station. But Field said the dynamic was broader than just being confined to account execs.
Fourth-quarter pacings are up 2% without political on a same station basis, excluding the stations Entercom is divesting.
The pending merger, which took a giant leap forward Wednesday with Justice Department approval, took its toll on Entercom’s operating income, which fell to $13.5 million from $25.7 million one year earlier. The decline was due to $8.8 million in merger costs Entercom racked up in Q3 alone, most of which were for legal and consulting services. Excluding deal-related costs same station expenses were up just 1%. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA, a measure of cash flow) decreased 12% to $26.7 million.
In a report, Ryvicker wrote, “We think ETM is well positioned given the extremely attractive free cash flow generation, manageable leverage, capital returns and pending CBS Radio transaction.”
Entercom is upping its annual dividend to $0.36 per share, beginning with a quarterly dividend of $0.09 per share to be paid on Dec. 15.
And the company’s board has OK’d a $100 million share repurchase program with plans to buy back about $30 million in Class A stock by the end of 2018. This news was warmly received by investors on the call who asked if Entercom would buy back stock before the marriage with CBS Radio is consummated. That could help drive up the price of Entercom stock which is trading substantially below where it was when the merger was first announced. Schmaeling explained that terms of the merger agreement prohibit that but the company intends to start buying back stock “as soon as the gun goes off.” Investors encouraged Entercom to “be aggressive” with stock buybacks as soon as possible.
Entercom also revealed that the spinoffs announced Wednesday represented a 9.8X “net cash multiple.”