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June 10, 2005

Disney Selling Radio?

Following comments on the last quarterly conference from Bob Iger, speculation has increased that Disney (DIS) may be looking to sell its radio stations and the ABC Radio Network. Recent articles in trade magazines and The Wall Street Journal leave the impression that the division is being shopped, or at least it is being made known that bids would be considered. My original thesis for buying DIS shares noted many catalysts but the sale of company's Radio division was not inlcuded. If a sale were to occur, I think Wall Street would approve and bull case for DIS over the next twelve months would have another pillar of support....

....According to a new research report by CSFB analyst Bill Drewery, the DIS radio properties should generate about $215 million in EBITDA (operating cash flow) in 2005. Trailing four-quarter EBITA for all of DIS is almost $4.7 billion, so while a sizable business, radio is not a core business.

Sale Price Would Be Favorable

DIS owns 25 major market radio stations, many of which are highly rated. Given the scarcity of major market stations for sale, I think the sale of the station group would take place at a solid multiple despite all the pessimism and recent slow growth for radio. With many publicly traded radio companies fetching 11 to 12 times EBITDA, I think the DIS radio operations could go for near 15 times EBITDA, or $3 billion.

According to research and articles I've read, DIS has owned these assets for many decades and the cost basis is close to zero. Therefore, taxes will take a big bite out of the proceeds, possibly leaving DIS with only around $2 billion in after-tax proceeds.

Major Acquisition Seems Unlikely

DIS seems unlikely to undertake a major acquisition unless cable networks are for sale. Cablevision's (CMCSA, CMCSK) AMC, IFC, and Women's Entertainment come to mind. I've always thought that a DIS acquisition of E.W. Scripps (SSP) was very logical given the overlap in Scripps ABC TV stations and the nice fit for Scripps cable networks with the DIS image (Food Network, HGTV). However, SSP would cost north of $10 billion.

Any swap of radio for cable networks would be slightly dilutive due to the higher valuation placed on cable networks but would be accretive to the corporate growth rate. One or more major market television stations offer DIS more synergy than radio but swaps one slow-growth asset for another. I suppose an Internet acquisition could make strategic sense, and there have been lots of mid-size Internet deals of late but I can't think of anything logical for DIS to acquire in the Internet industry.

Proceeds Could Go to a Share Buyback

I think the most likely use of proceeds if radio is sold would be for share repurchase. At the end of the last quarter, DIS had net debt to EBITDA of just two times, so adding a little leverage by swapping radio for the repurchase of 65 million to 70 million shares seems like a plausible scenario. This scenario would be dilutive to EPS by about three cents against trailing 12-month earnings of $1.21. However, dropping the slow-growth radio business would probably be viewed favorably by Wall Street despite the slight dilution.

The bottom line is that sale of radio by DIS would reinforce the bullish setup for DIS shares given great operating momentum and identifiable catalysts like the ABC turnaround, expanding theme park margins, and the opening of Hong Kong Disneyland in September. As an owner of DIS shares, I am not clamoring for the sale of radio but I'll have no complaints if the rumors become reality. DIS has upside to the low to mid-$30s and remains the best big-cap media stock to own.

Posted by Steve Birenberg at June 10, 2005 10:42 AM