Description

About

Townsquare Media (TSQ) is a radio station operator with over 300 radio stations in 66 small- and mid-sized markets. It has local scale, national reach, low overhead, and is reasonably levered at 5.2x. It was formed in 2010 when the current management team and Oaktree Capital took control of Regent Communications out of bankruptcy. Through several acquisitions, its radio station footprint has grown 5x since formation. In June 2014, TSQ had its IPO, which was originally priced to go between a range of $14-16 but due to weak demand priced at $11. OAK holds 46% of the shares (inclusive of warrants) but has majority voting power as a result of a dual-share structure.

In April of this year, TSQ plans to refinance its 9% senior notes due 2019, resulting in ~$12m of savings in annual interest expense. Pro forma FCF for 2015 will be just shy of $2 per share and TSQ's P/FCF multiple under 7x. TSQ has a solid acquisition history, and it has room to grow in existing clusters as well as expand into new markets. The acquisition math is accretive and management has indicated this will be the primary use of cash—the playbook since formation.

The management team is a group of entrepreneurs without radio backgrounds. In 2009/2010, they were looking for an opportunity to invest in media assets that would remain stable and relevant and were led to the local advertising space and specifically radio. They were attracted to local advertising because of its historic stability and the fact that is often overlooked by larger companies who focus on national advertising. Management thought that radio was best positioned in the local advertising space with its inherent segmentation by geography and demographic. I view the fact that management are radio outsiders as a benefit. Fellow radio operators have a real love for radio that can cloud their judgment. TSQ can more easily approach capital allocation decisions rationally, not from the perspective of a deep love of radio and long history with it like many of its competitors.

Operations

An emphasis on smaller markets distinguishes TSQ from its peers. Its largest market is Albany, which Nielsen ranks as the 65th largest market. TSQ operates in clusters in its markets, with typically 4+ stations in each. It also emphasizes live events, and in 2014 it put on over 500 events, including concerts and music festivals as well as trade shows and lifestyle events. The live events business complements the radio stations by building the local brand and strengthening ties with advertisers. Though the live events segment is profitable, it is far lower margin than radio — 7% EBITDA margin compared to a 35% SOI margin for radio.

With 311 stations in 66 markets, TSQ is not overly dependent on one market. Less than 10% of revenue comes from any one market and under 15% from any one state. TSQ strives for local scale in its clusters and has either #1 or #2 market share in 65 of its 66 markets, which helps it strengthen relationships with local and regional advertisers. Another added benefit of focusing on smaller markets is that potential competitors for local ad dollars like Pandora will not be staffing teams to sell advertising in the small markets TSQ operates in.

The terrestrial radio industry is stable: over 90% of Americans listen each week and it still takes the majority of in-car listening time. Total radio ad dollars in 2014 were ~$15bn and are expected to grow around 1% per year. Approximately 75% of radio advertising is local. In 2014, Nielsen and Clear Channel put out a study that stated radio has the highest ROI of any advertising medium, due in large part to its low cost but also to the fact that local radio personalities are trusted and liked and when they promote a product or service, fans of their shows take note. Especially in smaller markets, terrestrial radio offers advertisers an audience that is not readily accessible through other means.

Radio is stable but slow-growing. It is high margin (35-40% station level cash flows) with relatively minor capital requirements (2-3% of revenues). Terrestrial radio certainly faces threats to be unseated as the dominant medium for in-car listening, though this is not a new phenomenon. There have long been alternatives to terrestrial radio in the car — cassettes, CDs, satellite radio, iPod, streaming from the phone, etc. Yet, radio has persisted. Terrestrial radio offers content that Pandora, Sirius and others cannot replicate, whether that is the local morning show on the drive into work or the local/regional sports call-in show.

The thesis here boils down to this: with TSQ you get a business with stable and leverageable cash flows and a management team that knows how to get deals done in an industry with room for further consolidation, and it trades at a mid-single digit multiple of free cash flow.

Financials

2014 free cash flow per share was $1.40. TSQ is calling its $411m of 9% notes on 4/1/15 for a price of 106.75 plus unpaid interest. It is replacing these notes with $300m of 6.5% senior notes due 2023 and borrowings under a new senior secured facility. Estimated annual interest expense, assuming borrowings under the new facility will be at 4%, will be reduced by $12m. Pro forma free cash flow for 2015 is $1.95 assuming EBITDA stays steady year-over-year and WE Fest contributes $2.5m.

TSQ does not expect to be a cash tax payer for several years due to over $60m of NOL carryforwards and tax shields in its intangibles. The thesis on TSQ is dependent on its doing further deals. Acquisition math is presented below, and assumes deals are done at a 7.5x SOI multiple with equity contributing 33% toward the purchase price and a weighted average interest rate of 6%. Note that TSQ’s term loans include a requirement for mandatory prepayments of 50% of TSQ free cash flow.

If TSQ acquires festival rights or other non-radio properties like the 2014 purchase of XXL, these will not be as accretive as radio acquisitions. Insofar as these absorb a greater portion of the M&A budget, free cash flow will not grow as much and returns on M&A will be lower.

Conclusion

TSQ is a well-run business with high cash flow margins and a management team eager to put that cash to work in accretive M&A. It trades for a low valuation under 7x pro forma FCF. At multiple of cash flow you are paying, it is basically a bet that radio is not in fast, terminal decline and that acquisition economics make sense and opportunities can be found. TSQ trades like a cigar butt, but it is a solid business that can grow through further consolidation of the radio industry.

Catalyst

• Accretive M&A
• Ongoing stabilization of radio industry