Liberty Media

“Is Radio Attractive Again?” That’s the question posed by Michael Kupinski, Media Equity Research Analyst at Noble Capital Markets, in the investment banking firm’s latest Media Sector Review. Kupinski points to Liberty Media CEO John Malone’s reported interest in increasing his company’s stake in iHeartMedia as a signal that the investment community may be ready to give the industry a second look.

“We believe that the heightened interest in radio by a proven value creator, like John Malone, should provide a reason for radio investors to take notice,” Kupinski writes in Media Sector Review January 2020. “Fundamentals in 2020 appear favorable, which should allow radio broadcasters to aggressively pare down debt. Furthermore, many in the industry have restructured balance sheets, providing more financial flexibility should the economy turn sour.”

The report identifies two major reasons why Malone may be interested in owning a broadcast radio company to pair with Liberty’s existing audio assets of SiriusXM and Pandora. Reach is first, with the medium continuing to connect with 92% of U.S. households. “Furthermore, radio still has a significant amount of engagement with its audience. Consequently, radio is a megaphone that could potentially drive business,” Kupinksi writes. “iHeart has effectively done this,” he observes, using its broadcast radio platform to promote its podcasting business. The theory here is that iHeart’s bullhorn, including 100 million digital users and 200 million social media followers, could be used to drive subscriptions to Pandora or Sirius XM.

The other attraction for Malone is the growing trend of advertisers seeking multi-platform buys that deliver a significant audience. “A combination of Pandora and Sirius XM, with a large terrestrial radio platform, a digital presence, concerts and social media presence, could offer compelling advertising platform opportunities,” Noble report postulates.

Lastly, Kupinski cites Malone’s penchant for businesses with strong cash flows. “The radio industry, in general, and iHeart, in particular, is a cash generating machine,” he says. iHeart is on track to generate $375 million to $400 million in free cash flow in 2019, while paring down debt and reducing its leverage ratio. And should the Justice Department allow Liberty to increase its stake, Kupinksi predicts a "cattle call" for the industry to consolidate to compete with iHeart’s scale. But he adds this caveat: “Radio companies need to consolidate smartly, without significantly levering up balance sheets, especially given the late stage of this economic cycle.”