Why Citadel went public with the Cumulus bid


RBR-TVBR analysis
The short answer: Because it had to. As RBR-TVBR first reported last month, Citadel Broadcasting is in the midst of selling $500 million in new senior notes as part of a refinancing of the $762.5 million of debt it has on its books since emerging from Chapter 11. Only qualified institutional investors can buy the new bonds, but in updating the Preliminary Offering Memorandum to those potential investors, which went out Monday, Citadel’s legal advisors determined that the rejected takeover bid had to be disclosed in that document and made public in an SEC filing, since the company’s stock is publicly traded.

Citadel was not required to disclose the identity of the spurned suitor, but we and everyone else immediately guessed that it was Lew Dickey’s Cumulus Radio Investors (CRI), which Cumulus Media formed last April with Crestview Partners. Nor was Citadel required to disclose anything about the proposed terms, except that its board of directors didn’t find the offer attractive and said no to Dickey.

In case you missed it the first time, here is the entire statement that Citadel filed Monday with the SEC:

“In early November 2010, Citadel Broadcasting Corporation (the “Company”) received an unsolicited letter from a third party proposing a merger transaction with the Company. This proposal was rejected by the Company’s board of directors after it determined that the proposal was not in the best interests of the Company’s shareholders. On November 29, 2010, the Company received a second unsolicited letter from this third party that improved the terms of its prior proposal, and after consultation with its financial and legal advisors, the board of directors of the Company also rejected this proposal as not being in the best interests of the Company’s shareholders.”

RBR-TVBR observation: Lew Dickey has been kicking the tires of every major market radio vehicle which has been offered for sale or might possibly become available, but so far he has not made a single deal for CRI. That’s not because CRI doesn’t have cash. It has plenty, since Crestview has committed to invest up to $500 million, which could be leveraged to make acquisitions past $1 billion.

The issue is pricing. Lew is sticking firmly to his valuation formula, which he has pegged at 7-8 times broadcast cash flow. That may be what the market will bear today, but that’s very low for major market properties on an historical basis. No one, it seems, wants to be the first to part with major market radio assets at that level. Certainly the board of Citadel isn’t in any rush to sell a company that has emerged from a painful reorganization with good cash flow and is able to improve its credit ratings with its current refinancing moves. It’s not just about CEO Farid Suleman wanting to save his job.

On the other hand, no other well-funded buyer is running around saying Lew is too cheap, so I’ll pay one or two multiple points higher. Eventually someone (likely a private equity investor) will get tired of waiting for the market to improve and sell to CRI, or to someone else with a similar bottom-feeder offer. That will set a new floor for transaction multiples. With any luck, the market will move up from there. Where that floor is established may well determine whether M&A activity picks up significantly or stays very slow for years to come.