Description

Description

Entercom Communications Corp. (“ETM” or the “Company”) is the second largest radio broadcasting company in the United States by revenue, with a nationwide footprint of stations including in all of the top 16 markets and 22 of the top 25 markets.

I recommend buying ETM’s stock.  Down nearly 50% over the past month on fears related to COVID-19 and a potential slowdown in ad spending, the stock is substantially oversold in my opinion.  Notwithstanding the cyclical and secular challenges of radio, the Company is well positioned to weather even a significant downturn given its maturity runway, cash flow profile and liquidity.  If, as I believe is likely, the Company avoids bankruptcy, its stock is incredibly cheap on a normalized basis.

I recognize that radio and ETM in particular have their detractors.  Further, shorting ETM at $8.15 per JSTC’s 07/23/18 write-up would have worked out well.  However, over the past month, ETM and its peers are trading no better than airlines, which are in the eye of the COVID-19 storm and in the midst of an unprecedented demand shock.  To me, at least, this does not make much sense. 

And for those who nonetheless still cannot get comfortable with radio at any price, consider shorting ETM’s unsecured bonds against its equity.  If, as the equity market seems to be increasingly implying, the Company is headed for a restructuring, its 7.25% notes due 2024 (currently wrapped around par) should be substantially lower and indeed, may recover close to nothing in a bankruptcy.

Capital Structure

Below is ETM’s capital structure, with 2020 estimates reflecting (i) what it would have generated absent COVID-19 and a potential demand downturn (“2020E Base”) and (ii) what it may generate in a downturn (“2020E Bear”).  The former essentially represents management’s guidance issued in late February, which, while less than a month ago, might as well have been a year ago. The latter assumes a 2007-2009 style downturn, though, as discussed below, there is reason to believe that this downturn will be less severe for ETM and its peers.

Clearly, on 2020E Bear assumptions, ETM’s capital structure cannot be refinanced since even in better times, it would not be able to raise debt exceeding 6.0x net leverage.  However, with its revolver recently extended in substantial part, ETM is more than four years away from needing to refinance anything since it has no major maturities until August 2024, and it does not have any junior debt coming due until November 2024.  Moreover, as discussed below, until then, I believe that ETM can generate cash flow even on bearish assumptions.

Business Overview and Background

ETM owns over 235 news, sports and music radio stations across the country and alongside iHeartMedia, Inc., is one of only two radio companies with national scale and a presence in most major U.S. markets.  ETM has a particularly strong position in sports and news, with the most listened to sports station, coverage of more than 40 professional sports teams and seven of the eight most listened to news stations in the United States.

Beyond traditional radio, ETM, like its peers, has been increasingly focused on digital opportunities.  In this regard, it has built up its Radio.com platform to become the fastest growing digital audio app in the country in 2019.  Further, in 2019, it completed two acquisitions in the podcasting space, becoming one of the nation’s top three podcasting companies, with annual downloads surpassing 2 billion at the current run-rate.

ETM came into being through the November 2017 merger of legacy Entercom and CBS Radio Inc. (“CBSR”), a company with more than three times legacy Entercom’s EBITDA.  Suffice it to say that essentially from the moment of signing, the merger did not go as planned. When the deal was announced in early February 2017, ETM’s stock was at $14.10 per share, implying a combined enterprise value of approximately $3,931 million (approximately double the current enterprise value) on combined LTM EBITDA of $443 million or $468 million with $25 million of expected synergies.  By the time the deal closed in November 2017, ETM’s stock was at $11.45 and 2017E pre-synergy EBITDA had fallen to $368 million, with the company upping its expected synergies to $100 million to make up for the shortfall to the original $468 million figure. And after closing, matters worsened, with the Company printing 2018 EBITDA of $310 million, more than $40 million less than CBSR standalone preceding the merger’s announcement.  While the Company attributed the weakness to a variety of issues, I suspect at bottom that CBSR, which had been atrophying under former parent CBS Corporation’s watch, proved to be more challenging than ETM management had envisioned.

However, following the difficulties of 2017 and 2018, ETM has stabilized.  Notably, in a non-political year, ETM grew EBITDA in 2019 by 10.0% and grew revenue by nearly 2.0%, reporting five straight quarters of revenue growth through Q4.  Moreover, absent COVID-19 and the demand shock likely to follow, ETM was poised to continue the positive momentum into 2020. Indeed, on its Q4 2019 earnings call on February 25, 2020, with the stock then at around $4.49, management highlighted the Company’s growth prospects and what it considered the undervaluation of its stock:

As a result, we expect to generate solid revenue, EBITDA and free cash flow growth in 2020 and continue to build on our five consecutive quarters of growth.  We are focused on reducing leverage from our current level of 4.8 times by at least half a turn by year-end 2020. We believe the current stock valuation remains disconnected from the strength of our business and the opportunities that we see for growth and value creation. It currently trades at a free cash flow yield of 25%.

Since those comments, ETM’s stock has fallen by 47.7% (vs. a 23.6% decline in the Russell 2000), as fears around COVID-19 and the resulting economic destruction have multiplied.  Amid this carnage, insiders have been buying. Most significantly, the Field family—which founded legacy Entercom, is the largest shareholder of ETM and runs the Company—has purchased more than 800,000 shares over the past few weeks.

Valuation Considerations

While I do not doubt that ETM’s 2020 will prove much worse than originally forecast and acknowledge the substantial uncertainty around COVID-19 and the impact it will have on the economy, I still think that ETM’s sell-off is overdone because (i) ETM will not need to restructure for the three reasons listed below and (ii) on a normalized, going-concern basis, ETM is very cheap.

A.  ETM Will Not Need to Restructure

I do not believe that ETM will need to restructure in light of (i) its maturity runway, (ii) expected cash flow and (iii) liquidity.

First, as noted above, ETM does not have a substantial maturity for more than four years, with its earliest junior maturity not until November 2024.  If ETM had to refinance its unsecured notes within the next year, it might have to file for bankruptcy. But it has the luxury of another 4.5 years.

Second, I think that even in a large downturn, ETM is unlikely to burn cash and can even generate cash given relatively low fixed charges.  From 2007 to 2009, EBITDA across the radio industry fell by 35% to 40% as overall industry revenue fell by approximately 25%. Assuming a similar shock, as the Bear case does per the below, I estimate that ETM would still generate in excess of $50 million of levered free cash flow in 2020.  And this analysis is conservative insofar as ETM’s interest expense should be lower (since the analysis does not incorporate the fall in LIBOR post-12/31/19). More importantly, for a similar size shock, I think that we can expect a smaller percentage EBITDA hit as radio companies in general have improved their cost structures since the global financial crisis and ETM in particular has further cost synergies to realize from the CBSR merger.

Third, ETM has plenty of liquidity.  As of 12/31/19, it had $20.4 million of cash and $127.1 million of revolver availability, yielding reported liquidity of $147.5 million at year end.  Further, subsequent to year end, ETM announced the sale of a non-strategic FM station in western Massachusetts for $10.8 million. In addition, under its credit documents, ETM has the ability to tap a variety of financing baskets, including, most notably, a basket for a $75 million receivables facility, which even in a challenging environment should be easy to raise given ETM’s reported accounts receivable of $378.9 million.  So, per the below, I view ETM’s actual liquidity as closer to $233.3 million.

B. ETM Is Cheap on a Normalized Basis

On a normalized basis, ETM is cheap.  In my view, though legacy Entercom and CBSR were put together at a multiple of around 8.5x pro forma EBITDA, ETM is likely worth 7.0x to 8.0x EBITDA in a stable environment.  Radio bears will suggest that the Company is worth less because it is in terminal decline and EBITDA losses related to COVID-19 will not return. To this, I would note that the business has actually been growing on the back of strong digital performance, which should continue, and the experience following the global financial crisis suggests that at least some, though perhaps not all, of the EBITDA losses should return.

The analysis below sensitizes ETM’s valuation across the 7.0x to 8.0x range based on three levels of EBITDA: (i) a low case representing the Bear 2020E plus 25% of lost EBITDA, (ii) a mid case representing the Bear 2020E plus 50% of lost EBITDA and (iii) a high case representing the Bear 2020E plus 100% of lost EBITDA (i.e., Base 2020E).  While these figures admittedly illustrate a wide range of outcomes, with the exception of the low case, they generally suggest that ETM’s stock should be materially higher than where it is today while still trading at a double-digit free cash flow yield.

Risks

The largest risks to the above are that (i) the economic shock related to COVID-19 proves much more significant in magnitude and duration than expected and (ii) lost EBITDA is not recaptured. 

Catalyst

The most significant positive catalyst is likely to be a decline in the number of COVID-19 new cases per day in the United States.  Until then, ETM’s stock will probably trade as it has over the past month, essentially ~2x the Russell 2000.