Chancellor Media Corporation
Chancellor Media Corporation
433 E. Las Colinas Blvd., Ste. 1130
Irving, Texas 75039
Fax: (972) 869-3671
Sales: $663.8 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: AMFM
SICs: 4832 Radio Broadcasting Stations; 6719 Offices of Holding Companies, Not Elsewhere Classified
Consolidation of radio station ownership accelerated dramatically following the passage of the Telecommunications Act of 1996 in February of that year. The 1996 Act amended the Communications Act of 1934, which established the Federal Communications Commission (FCC) and set forth the FCC’s authority. Among other things, the 1996 Act significantly changed the rules of station ownership. It eliminated national ownership caps, which under the 1934 Act limited national ownership to 20 FM stations and 20 AM stations.
The 1996 Act-also increased local ownership limits. Prior to the 1996 Act, a single owner was limited to owning two FM and two AM stations in a single large radio market. In smaller markets single ownership was limited to three stations. The 1996 Act increased local ownership limits significantly: in markets with 45 or more stations, ownership was limited to eight stations, no more than five of which could be in the same service (FM or AM); in markets with 30 to 44 stations, ownership was limited to seven stations, with no more than four in the same service; in markets with 15 to 29 stations, ownership was limited to six stations, with no more than four in the same service; and in markets with 14 or fewer stations, ownership was limited to no more than half of the market’s total with no more than three stations in the same service.
As a result of these relaxed federal regulations on station ownership, the radio industry experienced an intense period of mergers and acquisitions in 1996 and 1997. The largest collection of radio stations was formed in December 1996, when Westinghouse Electric Corporation paid $5 billion for Infinity Broadcasting Corporation to become the United States’ largest broadcast company. That was just a little more than a year after Westinghouse acquired CBS Inc. The Infinity acquisition made Westinghouse the number one radio group in terms both of number of stations and annual station revenue.
The second largest radio group in terms of annual station revenue was formed in 1997 when Evergreen Media Corporation merged with the Chancellor Broadcasting Company to form Chancellor Media Corporation. The merger, announced in February and completed in September, was valued at $2.0 billion. At the same time, it was announced that the new Chancellor Media Corporation would acquire the Viacom Radio Group from Viacom Inc. for $1.075 billion.
Chancellor Broadcasting Company Formed in 1993
Chancellor Broadcasting was formed in Dallas, Texas, in August 1993 by radio veteran Steven Dinetz with financial backing from investment firm Hicks, Muse, Tate & Furst, Inc. Hicks, Muse was one of the most active investment firms in the United States. During the period 1990-95 it completed or had pending 39 acquisitions with an aggregate value of approximately $5 billion. Dinetz was chosen to build Chancellor Broadcasting into a major force in the radio industry. His first purchase involved two Sacramento radio stations (KFBK and KGBY: Y92) from Group W Broadcasting, a unit of the Westinghouse Electric Corporation, for $48 million.
Chancellor Broadcasting grew through a series of acquisitions targeting the top 40 radio markets in the United States. In 1994 the company acquired 11 radio stations of the American Media Station Group, owned by MBD Broadcasting of Dallas, including a third station in Sacramento (KHYL: Cool 101), for $150 million. For 1994 Chancellor Broadcasting, a privately held company, reported a double-digit growth in broadcast cash flow and revenue. The company’s stations generated broadcast cash flow of $22.7 million in 1994, compared with $16.8 million in 1993. Net revenues increased 13.3 percent from $49.1 million in 1993 to $55.7 million in 1994. The company’s 13 stations were located in Minneapolis-St. Paul, Cincinnati, Long Island, Riverside-San Bernardino, and Sacramento. Approximately 90 percent of the company was owned by investment firm Hicks, Muse, Tate & Furst.
Attempted to Acquire SFX Broadcasting Inc., 1995
In March 1995 Chancellor Broadcasting failed in its attempt to buy SFX Broadcasting Inc., which was based in Austin, Texas, and owned 12 radio stations. At the time Chancellor owned 13 stations and was in the process of acquiring its 14th station. On March 15, Chancellor offered $160 million to acquire all of the publicly owned SFX Broadcasting’s outstanding common stock. But the next day, SFX’s board of directors rejected the offer, noting that it had recently received a similar offer from another interested party and that the company was not for sale.
Acquired Shamrock Broadcasting Inc. in 1995
Chancellor Broadcasting acquired Shamrock Broadcasting Inc. in August 1995 for $395 million. The acquisition added 19 radio stations to Chancellor’s portfolio. Shamrock was a private company owned by Roy Disney, nephew of Walt Disney, that had been in business since 1979. The purchase was billed as the largest radio transaction in history, according to the Los Angeles Times. However, it would soon be overshadowed by Walt Disney Co.’s acquisition of Capital Cities/ABC Inc. and Westing-house Electric Corporations’ purchase of CBS Inc., both of which were announced at the same time.
The Shamrock acquisition was financed with $145 million of bank debt, a $100 million equity contribution by Hicks, Muse, and the remainder through corporate bonds sold to the public. Most of Shamrock’s stations were located west of the Mississippi River and included two Los Angeles stations, KZLA-FM (country) and KLAC-AM (oldies), which broadcast the Los Angeles Lakers’ basketball games. Shamrock’s headquarters were in Burbank, California.
Dinetz and Thomas O. Hicks, chairman and CEO of Hicks, Muse, told the Los Angeles Times they anticipated few layoffs, since the Shamrock stations were “not overstaffed.” Dinetz said, “If anything, we’ll probably increase the size of the advertising sales staff.” Chancellor had been successful in boosting the profitability of its stations by focusing on local ad sales.
Consolidation in the radio industry was being fueled by a strong advertising market, the prospect of relaxed federal regulations regarding station ownership, and the economies of scale that came with size. As a result, radio stations were selling for historically high prices. According to the Los Angeles Times, “The key to making a deal work is controlling costs and pumping up ad sales—all in the service of higher profit margins.” Clifford Miller, managing director of Shamrock Broadcasting, said of radio acquisitions in general, “I think at least in the radio market, the cycle is either peaking or has peaked.”
The $395 million price tag on Shamrock was calculated to be 11 times the cash flow of the stations purchased. Tom Taylor, editor of Inside Radio, told the Sacramento Business Journal that similar deals in the past year had ranged from seven to 11 times cash flow. “Now we’re clearly pushing that toward 12.” At this time federal regulations established limits on multiple-station ownership in each market. For a market the size of Sacramento, one company could not own more than two AM and two FM stations, provided that they did not collectively account for more than 25 percent of the market’s radio listeners.
Chancellor’s acquisition of Shamrock’s 19 radio stations prompted speculation that the privately owned Chancellor would soon go public. The purchase increased Chancellor’s holdings to 33 radio stations with a combined revenue of $165 million based on 1994 figures. That made Chancellor the third largest radio-only media company in the United States. Although there were no plans to take Chancellor public after the Shamrock deal was approved, Dinetz told the Sacramento Business Journal, “With the group of assets [and] the type of cash flows we expect in the coming two years, it certainly makes sense for us to tap into public markets if the window remains open.” From mid-1993 to mid-1995, Chancellor had grown from zero to $700 million worth of investments in radio properties.
The Shamrock acquisition gave Chancellor at least three stations in each of six markets and dual AM/FM combinations in four markets. In California, Chancellor would now have four San Francisco stations, plus two in Los Angeles. It also owned three Sacramento stations and had an AM/FM combination in Riverside.
Outside of California, the Shamrock acquisition added 13 stations in markets such as New York, Detroit, Houston, Atlanta, Minneapolis, Pittsburgh, Phoenix, and Denver. These would be added to the family of Chancellor stations in Long Island, New York, Minneapolis, Cincinnati, and Orlando.
The Company’s strategy is to secure leading clusters of radio stations in the largest markets in the United States.
Other Stations Acquired in 1996 as Radio Industry Consolidated Ownership
In another acquisition deal, Chancellor acquired 12 more radio stations, including three in the Washington, D.C., area, for $365 million from Washington’s Rales family in mid-1996. In July the company acquired two more radio stations on Long Island, New York, from SFX Broadcasting. Chancellor already owned WALK-AM/FM, the top-rated station, there. To its top-rated station it added WBAB, the number two station, and the number three station, WBLI. As part of the deal Chancellor also took control of WGBB-AM and WHFM, which simulcast the WBAB signal. In exchange, Chancellor gave up two stations in Jacksonville, Florida, and $11 million in cash to SFX Broadcasting.
At the time the deal was announced, rumors were flying that the Walt Disney Co. was negotiating to acquire Chancellor. Disney had just become the fifth largest operator of radio stations with its 1995 acquisition of Cap Cities/ABC. If Disney were to acquire Chancellor’s 33 radio stations, it would become the United States’ second largest radio operator.
Indicative of the rapid rate of change in the radio industry was the fact that Chancellor did not yet have full ownership of the two Jacksonville radio stations it traded to SFX Broadcasting. Chancellor was in the process of acquiring the stations from the Los Angeles-based OmniAmerica Communications Co. In another deal, Chancellor acquired its fourth Sacramento radio station when it purchased KSTE-AM from Boston-based American Radio Systems Corporation.
Consolidation in the radio industry was continuing to occur, fueled by federal legislation passed earlier in 1996 that allowed companies to own as many as eight radio stations in major markets, but no more than five FM or five AM stations. In December 1996, just a little more than a year after it acquired CBS Inc., Westinghouse Electric Corporation paid $5 billion for Infinity Broadcasting Corporation to become the United States’ largest broadcast company.
Chancellor Media Corporation Formed in 1997
Then, in February 1997, Chancellor, Evergreen Media Corporation, and Viacom Inc. entered into a three-way deal that created the nation’s second largest radio empire. With simultaneous announcements, Evergreen Media said it would pay $1.5 billion in debt and stock to acquire Chancellor, merging with it to form a new company to be called Chancellor Media Corporation. The new company would then purchase the Viacom Radio Group from Viacom Inc. for $1.075 billion. As a result, Chancellor Media Corporation would then own 103 stations, including 10 previously owned by Viacom, 51 owned by Chancellor Broadcasting, and 42 owned by Evergreen. However, some of the stations would likely have to be divested to comply with current federal regulations governing multiple-station ownership.
Chancellor Media’s 103 stations would operate in 21 markets and have an estimated annual revenue of $810 million, or about twice as much as the revenue of the nation’s second largest radio group, Jacor Communications Inc. However, Jacor would retain its number two ranking in terms of number of stations, since it owned 122 stations in 26 markets, most of them medium-sized. Westinghouse, with its recent acquisition of Infinity, would remain the number one radio group in terms both of number of stations and annual station revenue.
According to the Cincinnati Enquirer, Evergreen paid about 11 times Chancellor’s estimated 1998 broadcast cash flow of $130 million and about 15 times the cash flow of Viacom’s stations. Viacom said that it sold its radio group to strengthen its balance sheet and focus on its core business units, which included Blockbuster, MTV Networks, Paramount Parks, Paramount Pictures, Showtime Networks, Simon & Schuster, and other entertainment and publishing properties. Viacom’s 10 radio stations operated in five major markets and included FM duopolies in New York, Los Angeles, and Washington, D.C.
Chancellor Media would be headed by Scott Ginsburg, Evergreen’s chairman and chief executive officer, and Thomas Hicks, chairman of Chancellor Broadcasting and of Hicks, Muse, Tate & Furst. Ginsburg became Chancellor’s CEO and president while Hicks was named chairman. After the merger, Evergreen’s shareholders would own about two-thirds of Chancellor Media’s shares, while Chancellor Broadcasting shareholders would own the other one-third.
Stations Sold to Comply with Federal Regulations
Following the merger, Chancellor owned eight stations in Detroit; seven FM and three AM stations in San Francisco; six FM and five AM stations in Washington, D.C.; seven FM and two AM stations in Chicago; one AM and six FM stations in Philadelphia; and four FM stations in New York City. In some of these cities Chancellor would have to sell off some stations to comply with federal regulations that permitted ownership of a maximum of eight stations in the largest markets, but no more than five FM or five AM stations.
In April 1997, Chancellor Media sold stations in some of those markets for $418 million, including stations in Chicago, Philadelphia, and San Francisco. WDRQ-FM in Detroit and WJZW-FM in Washington, D.C., were sold to The Walt Disney Company for $105 million in cash. WDRQ and WJZW were previously owned by Viacom. Three smaller stations in Washington, D.C., and San Francisco were sold in May by Evergreen to a small private company called Douglas Broadcasting/Personal Achievement Radio for $18 million. Following the sell-offs, Chancellor Media owned 96 stations.
Katz Acquisition Announced in July 1997
With the merger between Evergreen Media and Chancellor Broadcasting still pending, the two companies, along with investment firm Hicks, Muse, Tate & Furst, Inc., announced they would acquire Katz Media Group Inc. for approximately $373 million. Katz Media, with a sales force of some 1,500 people, was the only full-service media representation firm in the United States that served several types of electronic media, including radio and television stations, cable television systems, and Internet media outlets. It was a recognized leader in the industry and allowed its clients, of which Chancellor Media was the largest, access to a growing base of national advertisers.
Battle with Westinghouse for Top Spot in New York City
By late 1997, Chancellor Media owned five radio stations in New York City, three of which ranked among the city’s top ten radio stations. Its main competitor was Westinghouse, which owned six stations in New York City and took in nearly twice as much advertising revenue as Chancellor. To improve its stations’ ratings and advertising revenues, Chancellor did its research and changed its stations’ formats as needed.
Chancellor’s biggest success in the New York market was WYNY-FM, which it transformed from a country music station ranked 21st in the market into a reborn WKTU-FM, a dance station that quickly rose to the number four spot. Cross-dressing personality RuPaul was brought in as a morning host to give the station an identity, and special promotions were held, including reopening Studio 54 for a night. Chancellor expected the station’s revenue to grow to $35 million in 1997, up from $19 million in 1996.
In another move, Chancellor acquired New York’s 105.1 FM (The Buzz) when that station attempted to challenge Chancellor’s 106.7 Lite FM, the number one station in the market, by changing from a modern rock format to an easy listening format. Chancellor remade 105.1 into Big 105 FM and brought in Danny Bonaduce to host the station’s morning show. Bonaduce, a child star of “Partridge Family” fame, had made a name for himself as a radio personality in Chicago and Detroit before coming to New York. To attract attention, the station held an open casting call at Caroline’s Comedy Nation for the on-air roles of Sidekick, News Anchor, Traffic Person, Weather Person, and a “Make Your Own Job” position. It attracted 1,000 candidates, from which nine New York area residents were selected for additional consideration.
U.S. Justice Department Challenged Acquisition of Two Long Island Radio Stations, 1997
In an unprecedented move, the U.S. Justice Department challenged Chancellor’s acquisition of WBAB-FM and WBLI-FM from SFX Broadcasting. It was the first time the agency had gone to court to challenge a radio industry merger since the new communications act was passed in February 1996. According to the Justice Department, the acquisition, which also included WHFM-FM in Southampton and WGBB-AM in Freeport, would give Chancellor more than 65 percent of radio advertising sales in Suffolk County. According to one statement issued by the Justice Department, “Allowing Chancellor to buy a dominant position in this concentrated market will result in higher radio advertising prices for Suffolk County businesses that rely on radio to sell their products and services.” Pending Justice Department approval of the acquisition, Chancellor had been operating the stations under an agreement with SFX Broadcasting.
More Acquisitions, Public Offering Slated for 1998
SFX Broadcasting, meanwhile, was in the process of being acquired by Capstar Broadcasting, which was based in Austin, Texas, for $2.1 billion. In February 1998 Chancellor and Cap-star reached an agreement whereby Chancellor would give Capstar an undisclosed number of stations in smaller markets in exchange for 11 SFX stations in four major markets. Capstar, the third largest radio group in terms of revenue, specialized in medium and small markets, while Chancellor was focused on major markets. Among the stations involved in the swap were two stations in the Dallas-Forth Worth area, which would give Chancellor a total of six stations in that market. The other stations involved in the trade were located in Houston, Pittsburgh, and San Diego. Hicks, Muse, a substantial shareholder in Chancellor, also controlled Capstar, and certain of Chancellor’s directors were also directors and/or executive officers of Cap-star and/or Hicks, Muse.
Also in February, Chancellor announced it would acquire two Washington, D.C., radio stations, WWDC-FM and WWDC-AM, from Capitol Broadcasting Comply for $72 million. The acquisition gave Chancellor five FM and three AM stations in Washington, D.C., the nation’s eighth largest radio revenue market. According to Scott Ginsburg, Chancellor’s president and CEO, “Chancellor Media Corporation will be established as the leading radio station group in Washington, D.C., ranked first in both audience and revenue share in the market. Additionally, we will own a full complement of radio stations in the nation’s capitol—five FM and three AM radio stations—as specified in the Telecom Act of 1996.” He went on to note that Chancellor ranked first or second in revenues in eight of the nation’s top ten radio revenue markets. He said, “We intend to pursue additional acquisitions that will further strengthen our position in the nation’s largest radio markets.”
The AMFM Radio Networks Was Formed in September 1997
With such a broad listener base, it was logical that Chancellor would become involved in programming and product development. It launched a new division, The AMFM Radio Networks, in September 1997, and in March 1998 the company announced it had signed radio and television veteran Casey Kasem. Kasem’s well-known popular music countdown show would be syndicated over The AMFM Radio Networks as part of his multiyear contract. In making the announcement, Ginsburg also indicated that The AMFM Radio Networks would be announcing new products throughout the year.
To provide additional financing and help with its balance sheet, Chancellor announced in January 1998 that it would make a public offering of 16 million shares of common stock. The company expected to use the proceeds from the sale to reduce borrowings under its senior credit facility. However, it also noted that it could reborrow those funds for general corporate purposes, including further acquisitions and the repurchase of the company’s preferred stock.
Chancellor Media Poised to Maintain Its Active Acquisitions Program
In 1997 Chancellor Media completed its merger with Evergreen Media, which added 52 radio stations to the company’s portfolio, for approximately $2 billion. It also acquired 23 radio stations for a net purchase price of approximately $1.5 billion. It exchanged seven stations for five stations and $6 million in cash, and it sold or otherwise disposed of 10 radio stations for $269.3 million in cash and a promissory note for $18 million. It also acquired Katz Media Group for approximately $379.1 million. Chancellor also had pending agreements to purchase an additional 13 radio stations in exchange for two stations and $656.5 million in cash and, in another transaction, to swap three of its stations and $60.0 million in cash for three other stations.
With its senior management team having extensive experience in acquiring and operating large market radio station groups, Chancellor Media will continue to pursue its business strategy of assembling and operating radio station clusters in order to maximize broadcast cash flow. As part of this strategy, Chancellor Media will seek to own and operate the leading superduopoly in the largest markets in the United States while maximizing their revenue growth and expense savings. Superduopolies became permissible with the passage of the Telecommunications Act of 1996.
In terms of station operation, Chancellor Media’s strategy called for establishing strong listener loyalty and maintaining strict cost controls. During the period 1995-97, the company was able to achieve broadcast cash flow margins of 40 percent or more as a result of its cost control measures.
Finally, Chancellor Media expected to leverage its radio expertise by expanding into related industries and complementary media businesses. As part of this strategy it acquired Katz Media Group, a full-service media representation firm, and formed a national radio network, The AMFM Radio Networks.
The AMFM Radio Networks; Katz Media Group Inc.; 97 radio stations.
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