Analysts Enthuse About Entercom — and Reiterate Reach of Radio

Ryvicker and company say Entercom wants to work with iHeart to increase radio’s piece of ad pie
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Read this story if you’re interested in the business outlook not only for Entercom but for U.S. commercial radio in general.

Lots of investors are watching to see how things will go for Entercom given its pending merger with CBS Radio. Well, you can mark Wells Fargo Securities analysts as “really encouraged,” based on what they heard in their investor meetings with CEO David Field and CFO Rich Schmaeling.

But the analysts also had some interesting observations about benefits to the industry at large from the presence of a larger Entercom.

The analysts — Marci Ryvicker and Se H. Kim — reported in a newsletter about recent investor meetings. These “were packed,” which indicates a lot of interest in Entercom, especially for the usually dead time of summer. Their attendees were a mix of CBS shareholders looking to learn more about the radio industry and the new company “as well as small and mid-cap investors who’ve gained organic interest given the current valuation and potential upside.” They said investors are clearly doing work to learn about Entercom and “there seems to be increasing interest on the long side.”

The analysts reiterated their rating of Entercom stock as “outperform.”

They used their newsletter to remind investors — doing so in all capital letters — that “radio is the highest reach media,” yet investors “clearly do not understand this” based on comments in the meetings. They encouraged investors looking at Entercom and at the radio industry in general “to take a look at some of the data,” including the fact that radio reaches 91% of all adults 18–34, and comprises 90% of all audio listenership.

The ad environment itself may be somewhat slow for all traditional media, unsurprising in a sluggish business environment.

But among other things, they wrote, David Field intends to work with competitor iHeart Media to make a bigger pitch for radio in general to win more of that ad pie. Commercial radio, they noted, currently gets about 7% of the ad spend, or $13 billion, but: “With two large scale advocates for radio, there is a real chance that advertisers will start to shift more money into the sector,” the Wells Fargo analysts wrote. “It doesn’t have to be a lot — for example, an incremental 10 basis points of market share equates to an additional $250 million of incremental revenue.”

Further, possible deregulation might be a “nice catalyst for multiple expansion.” They noted that a company right now can only own up to five FMs and three AMs in major markets, eight stations in total; and also that market share is capped by the Justice Department at about 40% of the local radio market. But: “We think BOTH of these issues will ultimately be addressed — especially market share given how outdated the definition is compared to today’s shifting media landscape.”

They also are excited about the potential for smart speakers, saying this consumer electronics thing “could be the sexiest thing to happen to radio.” They urged investors, “Go tell Alexa to ‘play WFAN’ and see what happens. It’s pretty cool right?” They think these speakers could be the biggest driver of incremental audio listening in some time, especially for the home, and that radio will be of the bigger beneficiaries.

Among other highlights from the Wells Fargo summary of Entercom investor meetings:

-The merger deal is still on target to close this year. Entercom, the analysts wrote, “continues to have ‘productive’ discussions” with the Justice Department, particularly about divestiture of stations, and still believes the transaction will close in the fourth quarter.

-There are no “outs” in the CBS Radio deal. “This has been somewhat miscommunicated to the Street for whatever the reason, so we will clarify it here,” they wrote. “CBS Radio and ETM are contractually obligated to get this deal done — regardless as to ETM’s stock price. We stress that both parties are fully committed but we thought it relevant to highlight the contractual obligation as well.”

-A big opportunity for the new company will come from its national platform. Entercom management, the analysts wrote, was asked in several meetings why iHeartMedia comparatively has performed so well in revenue and margins. “David wholeheartedly believes it’s because of [iHeart’s] scale and national footprint, which gives this company a seat at the table with some of the largest U.S. advertisers — Ford, AT&T, GM, etc.” Once merged with CBS Radio, they continued, Entercom “will have that same scale and hence same opportunity to grow revenue and achieve significant margin expansion.”

-Sports will be a huge deal for Entercom once the merger is done, they wrote, the “No. 1 sports provider of just about any company, with close to 50 professional teams, dozens of college teams, and the CBS Sports network.”

-CBS is protected by an “upper limit” that caps the number of radio shares exchanged for CBS shares in case Entercom’s share price drops unexpectedly.

-The analysts expect the new company will realize at least $25 million in expense savings compared to their separate operations, even with planned investments for growth in such areas as programming research, digital and podcasts. “Our sense is that it will take ETM 9–12 months to integrate CBS Radio, capturing some synergies upfront and realizing the rest over time.”

-The only real risk to the CBS Radio deal is from an economic downturn. “After hearing David and Rich, we have no concerns regarding execution.”

-The analysts were impressed by the outlook for the new company’s balance sheet.

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