2023-06-25 23:57:31 ET
Summary
- Cumulus is priced for bankruptcy, but can comfortably service its debt and refinance.
- Cumulus could liquidate its assets at 35% discount to par and still distribute $9/share to shareholders.
- Cumulus holds extremely high value assets in Dallas-Fort Worth reasonably valued at $123 million - leading to liquidation distribution of $19/share to shareholders.
- Cumulus is aggressively repurchasing shares - recently wiping out 10% of the float.
Cumulus ( CMLS ) operates in three business areas: terrestrial radio, podcast publishing, and digital advertising. Admittedly, CMLS is outside of my typical circle of competence of Aerospace & Defense - however, I believe the radio business falls under the proverb of my investing north star, Peter Lynch:
Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it. - Peter Lynch, "One Up on Wall Street"
This is not to say that CEO Mary Berner is an idiot - far from it, I believe she has been fantastic given the hand she was dealt - but more to underline that the investment case for Cumulus Media does not require an outstretched imagination, industry specialization, or technology prognostication to appreciate the disconnected valuation of the business. That being said, Cumulus absolutely falls under the Peter Lynch category of "the turnaround," but I also argue that it should also be included in "the asset play." Finally, one should also note that the Cumulus Media of today under cost-cutting, cash-flow-optimizing Mary Berner is a vastly different business than the legacy Cumulus Media under the empire-building, debt-ballooning Dickey Brothers disaster.
This article will focus on the debt and underlying assets of Cumulus - for a more holistic overview of the business, see articles from Seeking Alpha peers here and here .
Why does this opportunity exist?
The bear argument for Cumulus Media involves one company-specific and one industry-wide argument:
- Company-specific: CMLS holds $708 million in debt against $649 million of tangible assets. CMLS has negative tangible book value and another bankruptcy is imminent.
- Industry-wide: CMLS operates in a deteriorating business, degrading the earnings power of the company and its ability to service its debt, leading to the company-specific bearish argument.
Mr. Market, understandably, notes that rising interest rates have slammed debt markets shut, and refinancing terms will be more punitive than two years ago. Unable to service its debt nor refinance come term loan maturation in 2026, Mr. Market has depressed the value of CMLS to heavily skew towards bankruptcy. This perspective has dropped CMLS equity valuation so significantly in the past year that CMLS was even booted out of the Russell 3000 index .
Why is the market wrong?
Servicing the Debt
CMLS has $708 million in debt (as of the most recent quarter), structured as:
- Term Loan due 2026 (8.58% rate as of March 31, 2023) : $335 million
- 6.75% Senior Notes due 2026 : $378 million
Rising interest rates from the central bank have made acquiring new debt expensive, but the other side of that story is that existing debt is discounted to par value. In the most recent 10-Q, CMLS notes Level 2 fair value of their debt structure as 91.50% and 76.25% of par, respectively. This implies that the debt could be repurchased for $595 million - not $708 million.
Additionally, CMLS carries $119 million in cash, bringing the net debt at fair value to a total of $495 million. This is against an FY22 adjusted EBITDA of $165 million, or about 3x leverage ratio (the "adjusted" considerations are non-recurring, one-time expenses). Being an even year, CMLS was the beneficiary of political revenue; management is transparent with the political advertising tailwinds and indicated FY22 ex-political adjusted EBITDA as $149 million, or 3.3x leverage ratio.
FY23 is expected to have lower EBITDA due to nation-wide advertising pressure and macroeconomics; however, I would stress that even in FY20, the direst of operating climates when the national economy quite literally stopped and vehicular traffic was at its lowest point, CMLS still pulled $82 million in adjusted EBITDA and remained cash flow positive with $20 million in free cash flow. This point is to underline management's aptitude for cost control and cash flow optimization, both of which are critical for deleverage. Looking a bit further, FY24 is expected to be a record-breaking GOP political advertising climate , a climate in which radio operators do particularly well with their conservative-leaning base. The investment case is not dependent on the political revenue, but it serves as a counterweight to the FY23 trough year.
Assigning a worst-case FY20 cash flow to FY23's advertising meltdown and a solid FY24 cash flow aided from strong political tailwinds, CMLS should accumulate between $70 - $100 million in free cash flow between FY23 - FY24. Using FY22 adjusted EBITDA as the average in this time period, the leverage ratio to net debt at fair value falls to 2.4x - 2.6x by the end of FY24. Recall that the debt structure is due in 2026, meaning that CMLS has another two years (and FY26 political cycle) of cash flow to further pay down debt.
Of course, CMLS will not be able to completely delever by 2026, necessitating refinancing. It is entirely plausible that CMLS can bring its leverage ratio down to around 2x by its maturity dates, and with normalized free cash flow generation of ~$40 - $60 million annually, it would be inconceivable that CMLS could not come to terms to refinance its debt. To this point, CMLS was able to refinance in the end of 2019 back when it had $1.3 billion in debt. This thesis doesn't even require that interest rates pause and slowly roll back by this time, which would immediately bury the bearish argument.
Let us posit, in some apocalyptic world, that Cumulus Media could not refinance its debt at a low 2x leverage ratio. What could Mary Berner and her team do? This brings us to the next critical point: Cumulus radio assets.
It's Not Dead - Value of Radio Assets
Radio broadcasting is a capital-light business model that still generates significant cashflow and reaches a broadcast audience of 82% of Americans who tune in weekly. Radio is especially prevalent in small- and mid-market American communities, providing free access to local color, news, weather, personalities, sports, and music tailored specifically to the community demographics. An analogy to the longevity, resiliency, and stickiness of successful local radio would be the resilient Nexstar Media Group ( NXST ), owners and operators of the largest local television programming, who also coincidentally own several radio stations. Considering that Nexstar is the epitome of excellent management and expertise in local programming content, I consider their willingness to hold onto a portfolio of localized radio stations as a stamp of approval. Modern audio platforms like Spotify ( SPOT ) do not provide this hyper-localized content, content that comes with beloved personalities that listeners will actively tune in to.
Moving to the specific case of Cumulus Media, CEO Mary Berner recognizes radio's strengths, and has transitioned CMLS out of large, urban, expensive, and competitive markets and into midwestern states, Rust Belt states, and southern states where radio has a stronger audience base, closer connection to on-air personalities, and value economics that are much more attractive.
What could Cumulus Media get for their radio stations? The company owns 404 radio stations. Four hundred four. All of the money in the world cannot grant you the ability to suddenly set up shop and broadcast over the air your witty talk show to commuters during prime time. The U.S. Federal Communications Commission states :
Filing an application does not guarantee you will receive a broadcast station construction permit. In many areas of the country, no frequencies may be available on which a new station could begin operating without causing interference to existing stations, a violation of FCC rules. - FCC
and furthermore, supply of radio bands is, effectively, completely cut off:
Expansion of the AM or FM radio bands is Unlikely. The FM band is constrained from expanding above 107.9 MHz by the presence of aeronautical operations on 108 MHz to 136 MHz, and is also prevented from expanding below 88.1 MHz by Channel 6 television operations on 82.0 through 88.0 MHz. The AM band was expanded from 1600 to 1700 kHz in the 1990s after years of international negotiations. However, those frequencies are reserved for existing stations that were causing significant interference in the lower part of the band. - FCC
This means there is only one way to own and operate a radio station: purchase one from an existing operator that holds a license. Cumulus holds $918 million in intangible assets - FCC licenses that have extremely limited supply - attributing to CMLS a book value of $21.20/share (7x from current share price). These intangible assets can quickly become tangible cash in sales of the radio stations and their licenses. Herein lies the value of CMLS that is being completely missed by Mr. Market, which could help to service the debt in our Looney Tunes world where CMLS could not refinance by FY26. While some of these values may seem small on an absolute scale, keep in mind that CMLS currently has a $56 million market cap (at time of writing) and presumably around $450 million enterprise value by end of FY24 based on the earlier discussion.
Consider the following recent examples from Mary Berner's team extracting value from their assets:
- 2019: Sale of 6 New York Market stations : $103.5 million
- 2019: Sale of Los Angeles KLOS : $43 million
- 2019: Sale of WABC in New York : $12.5 million
- 2020: Sale of 5 Albany, GA stations : $0.45 million [Smallest CMLS market]
- 2021: Sale of a Topeka, KS station : $0.30 million
- 2022: Sale of WFAS station in New York : $7.25 million
- 2023: Sale of Detroit WDRQ station : $10 million
Assume that Cumulus can liquidate the 404 radio stations at an average of $1.5 million per station - far less than their recent sales in most markets and far less than the book value of these licenses/stations. The proceeds would cover the entire FY24 enterprise value of $450 million and have $9/share of cash left to distribute to shareholders - nearly 3x the current share price of CMLS. This liquidation value far below book is unrealistically conservative, and I'll describe one asset in particular for why this is the case.
Cumulus Crown Jewel - Dallas/Fort Worth
Cumulus owns stations in several attractive markets that they are either dominant in or have considerable share in, such as Chicago, IL; Nashville, TN; and Indianapolis, IN. Cumulus is also completely dominant in the Kansas City, MO-KS market with 1.5 million weekly impressions on a population of ~1.8 million.
Unquestionably, the crown jewel for Cumulus is the Dallas-Fort Worth market. Dallas-Fort Worth is the fifth largest radio market with a 6.6 million population. The City of Dallas decided against a sale of their WRR-FM 100K Watt single station for $13.4 million just last year, after pushback from the community against the station going commercial.
Cumulus has 7 stations in the Dallas-Fort Worth market with a cumulative 425K Watts. Three of these stations are among the highest rated with a cumulative ~2 million audience, but one in particular regularly dominates the entire market with an extremely loyal fanbase, and . it's . not . even . close - the massively popular KTCK-AM ( The Ticket ) radio station. The Ticket is the Dallas-Fort Worth equivalent of previous CMLS asset powerhouse KLOS, but the competition in Los Angeles is fierce and KLOS never crushed its competition the way that The Ticket does, hitting all-time highs in share and continuing its 2023 #1 rank streak in the Dallas-Fort Worth market. According to Nielsen, the 7 Dallas stations regularly capture share of 2.4 million Dallas-Forth Worth listeners. The City of Dallas WRR-FM station reaches ~232K listeners. Simply scaling the sale price of WRR-FM by the number of stations owned by Cumulus would be a woeful undervaluation, but even still, would command $93.8 million - demonstrating the low-ball scenario presented earlier where CMLS would only get an average of $1.5 million per station. Given its commanding presence and prime advertising capability to the Dallas-Fort Worth market, The Ticket alone could be worth a similar amount to the KLOS station sold in 2019, implying a $123 million sale price for the Dallas stations bundle - marginally higher than the less attractive New York station sales in 2019.
With a $123 million sale price for Dallas-Fort Worth, and an average of $1.5 million for the remaining 397 stations (still unrealistically conservative), liquidation of Cumulus would see shareholders receive $19.4 per share after repaying creditors.
Aggressive Share Repurchasing
At the risk of burying the lead, Cumulus is also aggressively buying back shares, having just completed a tender offer of $10 million of stock, or 1.7 million shares - 9.8% of the float. The company still has $6.7 million under its current repurchase program and given that management has $118 million in cash sitting in their bank account, it would be no surprise at all to see the repurchase program refilled. Clearly, management believes the company is undervalued, especially since they already own 6.3% collectively as of FY22, have not been sellers (including during the buyout offer run-up in 2022 ), and just increased their ownership nearly 10% due to the tender offer.
Risks and Items to Monitor
Cumulus Media has fallen to microcap status, and such stocks inherently come with more risk. Though I have laid out my case against the debt risk - it bears repeating that the debt burden remains the most important risk factor. Another factor that some investors may or may not deem a risk is the stock volatility, largely due to the low float (16.5 million shares outstanding) and volume that is associated with CMLS. Finally, there is a risk that CMLS may not be able to find a counterparty to liquidate assets to raise cash should they fail to refinance their debt, though the previous discussion highlighted there still exists a healthy market.
Moving forward, I will be monitoring management's capital allocation balance among further deleveraging, share repurchasing, and reinvesting in their newer growing business lines. Management has communicated that less than 3.5x net leverage is their target, but I would be looking for progress toward further deleverage below 3x before FY26. I would also be looking toward further growth in their podcast publishing and digital marketing businesses to add incremental revenue to their flat radio business. Considering that CMLS is trading for under 0.2x book value and 6x EV/EBITDA , the growth requirement is an extremely modest hurdle to overcome. Finally, I would expect their sizeable national broadcasting business to recover due to 1) recovery in national advertising macro environment, and/or 2) return to peak political cycle advertising.
Conclusion
This article did not cover the growing Cumulus podcast publishing business nor its growing digital marketing business - the latter having grown revenue at CAGR of 22% since 2019 to be a meaningful contributor to the top line at $142 million as of FY22. None of this is central to the underlying value of Cumulus but underscores a top line that is not simply eroding into oblivion.
This article concludes with a Strong Buy rating to CMLS stock on the assertion that Cumulus Media will be able to service its debt, grow cashflows with reduced interest rate burden and growing new business revenue streams, and unlock value from its underlying assets to the benefit of shareholders.
For further details see:
Cumulus Media: Market Price Belies Underlying Assets