Adoption and continuation of policies that incorporate a maximum of forward thinking should be the most vital single consideration of all executives. – Charles Presbrey
I remember reading once about the founder and former owner of BET, Robert L. Johnson telling of a friend of his who made a joke that if African Americans owned all the largest corporations in America there would be no need for the Securities & Exchanges Commission. The mission of the the S.E.C. as it is more aptly known is to per their website, “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” A large part of that job is oversee companies involved in mergers and acquisitions. The reason Johnson’s friend said there would be no need for the S.E.C. if African Americans owned/ran America’s largest corporations is because they would never merge. In other words, everyone wants to be the chief and nobody wants to be the Indian. We would rather be the CEO of a small company than scale up and become part of the executive team of a much larger company. The big fish in the little pond mentality if you will. The rumor mill has it that at one time Bob Johnson approached Cathy Hughes about a potential merger between BET and Radio One, but was rebuffed because it would take Ms. Hughes and her son out of the Chairman/CEO roles of the new, larger, and stronger company. This mentality often explains why you will see twenty storefront churches on one block in African American neighborhoods, but I digress.
Radio One is your classic African American entrepreneur story. Founded in 1980, by then husband and wife team Dewey and Cathy Hughes, they were rejected by 32 banks (I wonder if any were African American owned banks) before being able to secure funding to buy their first radio station. After the couple divorced, Cathy Hughes would go on to build the company into the most valuable African American owned public company, valued today at almost $80 million and now run by her son, Alfred Liggins III. According to Yahoo Finance, as of December 31, 2013, Radio One owned and operated 54 broadcast stations located in 16 urban markets. However, the $80 million valuation today is a bit misleading though because fifteen years ago at its apex Radio One was actually valued at $1.5 billion when its stock price would summit just seven months after its IPO at $97.50 per share. A feat virtually unheard of among African American private or public owned companies. So what happen? How did the company lose almost 95 percent of its value over the past fifteen years?
The company has had three major headwinds working against it since its apex. First, the dotcom bubble of 2000 really dealt a blow to the company that it honestly never recovered from. After their 3:1 stock split in June 2000, the stock would see its prices tumble 82 percent over the next few months before making a healthy recovery over the next few months. A few years into the recovery the stock price would reach back into the mid-twenties briefly, but it would then begin on its precipitous decline and over the next five years as the second wave of the internet boom took off. Tech companies like Pandora and other music sharing sites began to take off pushing radio companies against a wall. This would be the second headwind that started to push against Radio One. While the company was a player in the urban radio sector, it was by no means large enough or revenue diverse enough to withstand the onslaught that happen in that second tech wave. With new kids on the block companies like Pandora, Spotify, and the colossal of clout Apple’s Itunes on the scene and playing impetuously in radio’s sandbox, it then became harder and harder for radio to keep listeners. Mike Stern in an article from Medialife Magazine noted that, “Back in 2000, time spend was: radio at 2:43, TV at 2:37 and internet at :59. In 2010 it was internet first at 2:53, then TV at 2:47, with radio third at 1:24, according to the study. The culprit, no surprise, is all the other media options out there that didn’t exist a decade ago or were in their infancy. With yet more media options becoming available, presumably those declines will continue.” It also did not help that most radio companies response was to slash and try to hold the fort as oppose to consolidate and expand. Neil Rubin of The Detroit Times says, “Radio doesn’t help itself when it cost-cuts to the point of irrelevance. Rounds of layoffs by corporate-owned stations, Jacobs says, leave too many time slots with voices from afar that don’t know Taylor from Taylor Swift, so what’s the incentive to listen to their music instead of your own?” So not only were people spending less time listening to radio because of more options, but they were also dispassionate about what radio was offering, which only compounded the problem. Lastly, Radio One’s attempt to diversify its revenues arguably was a mixture of too late and a poor strategic partner. In an attempt to create a rival to BET they announced TVOne, a joint venture deal with NBCUniversal, a company who at the time was in the process of being a joint venture itself between General Electric and Comcast, with the latter eventually almost a decade later owning NBCUniversal outright. While it may have been called a joint venture on paper, when an $80 million company (Radio One) and a $150 billion company (Comcast) do a joint venture, it is hard to know exactly what “joint” means, because it sure does not have to mean equal. The Daily Beast reports Radio One’s ownership originally was 36.8 percent while Comcast held 34 percent, but there is no mention of who owned the remaining 29.2 percent. Making the matter even more perplexing is that also in that 2011 article, the Daily Beast reported, “Comcast acknowledged in an email to The Daily Beast that it facilitated this stock acquisition, though it said the terms of the deal were “confidential.” allowing Radio One to increase its ownership stake from 36.8 to 50.8 percent in TVOne. It never states that Comcast decreased (or increased) its ownership, so who or whatever mystery investor held that 29.2 percent may have been exiting their investment. Also, it stands to reason that just because Radio One has majority ownership does not necessarily put it in control of TVOne. Hello, dual class stock ownerships. The joint venture only speaks of the ownership stake and not the voting stock, which can be two completely separate situations. However, if Radio One is in it for the revenue, then this could be in their favor long-term or they could have more ownership of a joint venture classified in the mystery investor’s portfolio under Titanic given that since the Daily Beast article in July 2011 until now the stock price is virtually unchanged despite this increased ownership. In the early parts of 2014, there have been some forays in the five dollar price range only to see the stock tumble back down the rabbit hole. Simply put, in hindsight Radio One needed a dance partner and it chose the wrong one when it came to television.
Re-enter the “what could have been” scenario in a merger between BET and Radio One. It would have created a much deeper entrenchment of a company that would have been the epicenter of African American entertainment media. A virtual monopoly if you will on their core demographic segment. You could even make the argument that with TV and radio under its belt the new company then could have gone after print, say for instance acquiring Black Enterprise, Essence, or perhaps some of the larger African American newspapers around the country. At this point we are easily talking a multi-billion dollar company, again with a monopoly on its demographic. All that needed was for egos to be set aside. A task that I understand is easier said than done at times. The problem is not finding a way at all now sees both Essence and BET in the hands of other communities and Radio One teetering on the brink of financial distress.
The company’s current financial situation is a puzzlement to the eye as it has two and half times the EBITDA and almost twice the revenue (pictured above) that Salem Communications, but has a negative net income of almost $66 million versus Salem’s positive net income of almost $11 million. This positive net income allows Salem Communications to offer a dividend making it even more attractive to investors in this low interest/yield environment and therefore creating more demand on the stock, which may explain why Salem with less revenue and EBITDA has a market cap of two and half times of Radio One. However, maybe Radio One has started to follow the advice of Dick Kernen of the Specs Howard School of Media Arts in Southfield and get laser focused. Kernen said in the Rubin article that, “If you’d come into a (television) station 25 years ago pitching an idea for 24 hours of weather,” he says, “they’d have called security. But the Weather Channel has flourished, along with endless others. Meanwhile, the fastest-growing radio format is Christian, with an audience advertisers can depend on to be loyal.” The latter part may explain Salem Communication’s oversized success for its size, since it is a Christiancentric multimedia format that includes radio.
Radio One maybe getting the message though. Recently, its Houston 92.1 station got some of that laser focus switching from a 24 hour news format in favor of 80s and 90s hip-hop, which was more suited to its urban clientele. It has been nothing short of a smashing hit and with the 30-45 year old demographic who tend to be job stable and many have families in one of the country’s hottest economies. One could argue that 92.1 is in an advertising sweet spot. This is just one station in one market, but it also is 92.1’s third format since I have lived back in Houston since 2010, which tells me Radio One’s team is willing to tinker until it blows up or they get it right. They also recently completed the acquisition through their Interactive One subsidiary of a very popular digital publication founded by Russell Simmons called Globalgrind.com, which has entrenched itself among the millennial demographic. You wonder though if the company would ever have the heart to part with its leadership if this current run does not work, but for now it seems the board and Ms. Hughes are going to continue to have faith in her son to run the show. So maybe what we are seeing is not a company on the verge of bankruptcy, but a company sharpening its vision for the future. The stock is still going in the wrong direction, but maybe the company is going in the right direction. Value stock, anyone?