Activist Lance Laifer has taken a 6.6% position in a bankruptcy case and is making a stand for shareholders.
On March 1st, Regent Communications filed for restructuring through a Chapter 11 bankruptcy with its lenders for a financial restructuring. Under the agreement, senior lenders will be given new equity, and all current shareholders will be given 12.8 cents per share.
This restructuring transfers ownership to the debt holders, and wipes out all current shareholders. The analysis for this decision, without shareholder approval, came from Oppenheimer. Their analysis begins with 8 comparable companies and then selects 5 for their valuation purposes. Using Oppenheimer’s valuation, common shareholders are not in the money, and the 12.8 cents per share is categorized as a “gift,” likely to help push this bankruptcy through quickly.
Resilient argues that these 3 companies should be included, and this causes common shareholders to be in the money, entitled to something other than what is currently being offered. This bankruptcy case, which will be in court on Friday, April 9th, 2010, has many factors involved, however the valuation rests upon the companies chosen as being suitable.
Oppenheimer utilized 3 methodologies for this valuation:
1. 40% - Comparable Company Analysis
2. 20% - Precedent Transactions
3. 40% - Discounted Cash Flow
Comparable Company Analysis
Oppenheimer started with 8 companies in the comparable analysis:
Oppenheimer chose to use Cumulus, Entercom, Radio One, Saga, and Salem in their EBITDA based valuation for comparable companies. They rejected Beasley, Emmis, and Spanish, based on reasons outlined in Docket #0193, which can be found here: http://www.kccllc.net/documents/1010632/1010632100402000000000004.pdf
Their peer group, with the 5 companies listed above, resulted in a median enterprise value of 8.5x 2010 EBITDA. This results in an implied EV range of $143-$163 Million. For a shareholder to receive anything more, a plan would have to present more than $219.3M in value, $213 of secured, administrative and unsecured claims, plus an additional $5.5 million for the 12.8-cents per equity share payout.
In Docket #0191, Resilient argues that if you factor in the 3 rejected companies, you will get an enterprise value greater than the amount owed. Resilient claims that $34.77M remains for common shareholders, or about 83 cents per share, versus the 13.5 cents it trades at. Their EBITDA multiple with these 3 companies factored in is 11.02.
Oppenheimer responded to this and gave reasoning as to why those 3 companies were eliminated:
1. Beasley Broadcast Group – small float and low volume on a dollar basis.
2. Emmis Communications – 61% of its revenue is derived from domestic radio operations, 25% from publishing and 14% from international radio
3. Spanish Broadcasting – Niched focus results in a higher premium and has historically traded at a higher valuation
Looking at the facts, this is why Oppenheimer might have difficulty in defending these points:
1. Beasley has about a 20% float, which is more than the 14% float that Saga has, which was factored into their valuation. They are correct that on a dollar basis, there is lower volume, however this simply indicates lower volume rather and potentially increased volatility rather than necessarily an incorrect equity valuation.
2. While their percentages of revenue for Emmis are correct, the point of this valuation exercise is to establish an EBITDA multiple, and publishing contributes only 7M of gross profit compared to 70M from the radio advertising. Gross profit is before SG&A and corporate expenses, and so the effect from publishing is far less than the revenue percentages would indicate.
With 40% of the overall valuation resting on an EBITDA multiple, eliminating 3 companies from the report, which conveniently lower the valuation, leaves current shareholders out of the money. While Spanish Broadcasting may be appropriate to eliminate, this encourages cherry picking of the companies to include in the valuation.
The second portion of their analysis rests upon a precedent transaction analysis, where they cite Citadel Broadcasting. The issue with this is that the Citadel Chapter 11 Bankruptcy has not been completed, and until it has been completed, it should not be used. Using the word precedent means that you’re using a similar situation from a previous time, however because it has not been completed, it is not yet a precedent case.
The final portion of their analysis discusses the cash flow. Resilient made a mistake here by not including Capital Expenditures, about a $6M/year cost. This does impact the results, however if you use different discount rates, the valuation changes by 10-20M for every 1.5 points. The reason you should consider this is that Oppenheimer used 11-13%, however in a similar case that is going on now regarding Citadel (CTDBQ.PK), Lazard Freres & Company used a 9.5-11% DCF rate. Resilient’s cash flow models were filed under seal and this did not allow us to do a further analysis.
Changes in the cash flow valuation only make minor impacts in the valuation because there is no EBITDA multiple. When using an EBITDA multiple, any change in earnings significantly impacts the valuation. If Regent Communications believes that the DCF rate should be strongly debated, then something else to look at is corporate overhead. The following is a table of corporate overhead of their comparable companies.
This means that Regent is spending 26% more on corporate overhead than their peers. They are 7.6% higher than the nearest company (Cumulus) and 44% greater than Entercom, again, as a percentage of revenue. With annual revenues between 84M-98M, 1.79% of difference results in a $1.5M-$1.75M expense. Using the 11.02 EBITDA multiple from all 8 companies being included in the valuation, this is $16.5M-$19.3M lost in the valuation. If Regent was to lower this below industry averages, then the valuation would increase even more than that.
Finally, it is interesting to note that William Stakelin and Anthony Vasconcellos, CEO and CFO, respectfully, own 2.61% of the company with out of the money options removed. After this plan, they will have 8% of the newly formed company with $86M of less debt. In addition, they get the current portion cashed out with 3% of the $5.5M allocated for shareholders.
This case becomes even more interesting when you realize that under docket #0051, the company requires a 30-day notice before significant holders make changes to their ownership. With such a short bankruptcy, this does not leave a reasonable time frame for anyone to take a position and pursue legal action. For the activist in this case, it could very well mean that without an increased position, he cannot justify certain legal expenses that he would otherwise be interested in hiring. It also means that any new activists will also be severely restricted. Ask yourself this – if Regent’s team believes their valuation is correct, why would they put restrictions on ownership of the security?
Overall, with a restriction on buying shares, executives getting large portions of the new company, and all current shareholders losing equity, this case is far from clear. The companies chosen in the valuation have not been fairly chosen, and in fact, support the debt holders owning the entirety of the new equity. I did attempt to contact Regent Communications for a comment on this story, however I was told that both the CEO and CFO were not available. Without their input, I was only able to analyze their legal filings and not get their feedback on these points.
On March 1st, Regent Communications filed for restructuring through a Chapter 11 bankruptcy with its lenders for a financial restructuring. Under the agreement, senior lenders will be given new equity, and all current shareholders will be given 12.8 cents per share.
This restructuring transfers ownership to the debt holders, and wipes out all current shareholders. The analysis for this decision, without shareholder approval, came from Oppenheimer. Their analysis begins with 8 comparable companies and then selects 5 for their valuation purposes. Using Oppenheimer’s valuation, common shareholders are not in the money, and the 12.8 cents per share is categorized as a “gift,” likely to help push this bankruptcy through quickly.
Resilient argues that these 3 companies should be included, and this causes common shareholders to be in the money, entitled to something other than what is currently being offered. This bankruptcy case, which will be in court on Friday, April 9th, 2010, has many factors involved, however the valuation rests upon the companies chosen as being suitable.
Oppenheimer utilized 3 methodologies for this valuation:
1. 40% - Comparable Company Analysis
2. 20% - Precedent Transactions
3. 40% - Discounted Cash Flow
Comparable Company Analysis
Oppenheimer started with 8 companies in the comparable analysis:
| Float % | Enterprise Value (Millions) | Radio Revenue % | |
| Beasley Broadcast Group (BBGI) | 20% | $239 | 100% |
| Cumulus Media (CMLS) | 34% | $748 | 100% |
| Emmis Comm. (EMMS) | 42% | $561 | 75.1% |
| Entercom Comm. (ETM) | 26% | $1,121 | 100% |
| Radio One (ROIAK) | 39% | $832 | 94.8% |
| Saga Comm. (SGA) | 14% | $175 | 86.5% |
| Salem Comm. (SALM) | 55% | $434 | 86.4% |
| Spanish Broadcasting System (SBSA) | 62% | $440 | 88.8% |
Oppenheimer chose to use Cumulus, Entercom, Radio One, Saga, and Salem in their EBITDA based valuation for comparable companies. They rejected Beasley, Emmis, and Spanish, based on reasons outlined in Docket #0193, which can be found here: http://www.kccllc.net/documents/1010632/1010632100402000000000004.pdf
Their peer group, with the 5 companies listed above, resulted in a median enterprise value of 8.5x 2010 EBITDA. This results in an implied EV range of $143-$163 Million. For a shareholder to receive anything more, a plan would have to present more than $219.3M in value, $213 of secured, administrative and unsecured claims, plus an additional $5.5 million for the 12.8-cents per equity share payout.
In Docket #0191, Resilient argues that if you factor in the 3 rejected companies, you will get an enterprise value greater than the amount owed. Resilient claims that $34.77M remains for common shareholders, or about 83 cents per share, versus the 13.5 cents it trades at. Their EBITDA multiple with these 3 companies factored in is 11.02.
Oppenheimer responded to this and gave reasoning as to why those 3 companies were eliminated:
1. Beasley Broadcast Group – small float and low volume on a dollar basis.
2. Emmis Communications – 61% of its revenue is derived from domestic radio operations, 25% from publishing and 14% from international radio
3. Spanish Broadcasting – Niched focus results in a higher premium and has historically traded at a higher valuation
Looking at the facts, this is why Oppenheimer might have difficulty in defending these points:
1. Beasley has about a 20% float, which is more than the 14% float that Saga has, which was factored into their valuation. They are correct that on a dollar basis, there is lower volume, however this simply indicates lower volume rather and potentially increased volatility rather than necessarily an incorrect equity valuation.
2. While their percentages of revenue for Emmis are correct, the point of this valuation exercise is to establish an EBITDA multiple, and publishing contributes only 7M of gross profit compared to 70M from the radio advertising. Gross profit is before SG&A and corporate expenses, and so the effect from publishing is far less than the revenue percentages would indicate.
With 40% of the overall valuation resting on an EBITDA multiple, eliminating 3 companies from the report, which conveniently lower the valuation, leaves current shareholders out of the money. While Spanish Broadcasting may be appropriate to eliminate, this encourages cherry picking of the companies to include in the valuation.
The second portion of their analysis rests upon a precedent transaction analysis, where they cite Citadel Broadcasting. The issue with this is that the Citadel Chapter 11 Bankruptcy has not been completed, and until it has been completed, it should not be used. Using the word precedent means that you’re using a similar situation from a previous time, however because it has not been completed, it is not yet a precedent case.
The final portion of their analysis discusses the cash flow. Resilient made a mistake here by not including Capital Expenditures, about a $6M/year cost. This does impact the results, however if you use different discount rates, the valuation changes by 10-20M for every 1.5 points. The reason you should consider this is that Oppenheimer used 11-13%, however in a similar case that is going on now regarding Citadel (CTDBQ.PK), Lazard Freres & Company used a 9.5-11% DCF rate. Resilient’s cash flow models were filed under seal and this did not allow us to do a further analysis.
Changes in the cash flow valuation only make minor impacts in the valuation because there is no EBITDA multiple. When using an EBITDA multiple, any change in earnings significantly impacts the valuation. If Regent Communications believes that the DCF rate should be strongly debated, then something else to look at is corporate overhead. The following is a table of corporate overhead of their comparable companies.
| Corporate Overhead, as a percentage of revenue | |
| Beasley Broadcast Group (BBGI) | 7.88% |
| Cumulus Media (CMLS) | 8.08% |
| Emmis Comm. (EMMS) | 5.62% |
| Entercom Comm. (ETM) | 6.05% |
| Radio One (ROIAK) | 7.1% |
| Saga Comm. (SGA) | 6.58% |
| Salem Comm. (SALM) | 7.03% |
| Spanish Broadcasting System (SBSA) | 6.95% |
| Group Average: 6.91% | |
| Regent’s Corporate Overhead: 8.7% | |
This means that Regent is spending 26% more on corporate overhead than their peers. They are 7.6% higher than the nearest company (Cumulus) and 44% greater than Entercom, again, as a percentage of revenue. With annual revenues between 84M-98M, 1.79% of difference results in a $1.5M-$1.75M expense. Using the 11.02 EBITDA multiple from all 8 companies being included in the valuation, this is $16.5M-$19.3M lost in the valuation. If Regent was to lower this below industry averages, then the valuation would increase even more than that.
Finally, it is interesting to note that William Stakelin and Anthony Vasconcellos, CEO and CFO, respectfully, own 2.61% of the company with out of the money options removed. After this plan, they will have 8% of the newly formed company with $86M of less debt. In addition, they get the current portion cashed out with 3% of the $5.5M allocated for shareholders.
This case becomes even more interesting when you realize that under docket #0051, the company requires a 30-day notice before significant holders make changes to their ownership. With such a short bankruptcy, this does not leave a reasonable time frame for anyone to take a position and pursue legal action. For the activist in this case, it could very well mean that without an increased position, he cannot justify certain legal expenses that he would otherwise be interested in hiring. It also means that any new activists will also be severely restricted. Ask yourself this – if Regent’s team believes their valuation is correct, why would they put restrictions on ownership of the security?
Overall, with a restriction on buying shares, executives getting large portions of the new company, and all current shareholders losing equity, this case is far from clear. The companies chosen in the valuation have not been fairly chosen, and in fact, support the debt holders owning the entirety of the new equity. I did attempt to contact Regent Communications for a comment on this story, however I was told that both the CEO and CFO were not available. Without their input, I was only able to analyze their legal filings and not get their feedback on these points.
