Rising Values

Terry Jacobs is a pleasant enough man, but he has an acquisition strategy that would drive you crazy -- with envy, that is. Simple though his approach may be, it has produced spectacular results for Jacobs and his company, Jacor Communications Inc., of which he is founder, chief executive officer, and largest single stockholder. For 1986, its sixth year of operation, Jacor projects $24.3 million in revenues from its portfolio of 11 radio stations. With 5.9 million shares of common selling at about $8 in early March, investors gave Jacor a market value of $47 million.

That's not bad for a business founded on a modest personal nest egg. It's not bad for a company whose net equity value at the end of 1985 came to slightly less than $1 a share. And it's not bad for a company whose strategy has tended toward the cautious and conservative.

Cautious? With 10 acquisitions and 1,028% revenue growth since 1983? Sure. If being an actuary for 19 years taught Terry Jacobs anything, it was how to figure odds. Now, in the radio business, he's not taking any chances. The Jacor strategy for building a broadcast empire is mainly interesting for the things it doesn't do.

Acquisitions can be a trickly game. In a strong market, the temptation is to start viewing the companies you acquire as properties, pure and simple. That's more or less what's happening in radio these days. "Everybody's looking at broadcast like it's real estate," says Bruce Mittman, formerly general sales manager at WRKO-AM in Boston, now trying to revive WICE-AM, a station in Providence he bought last October, with a new, all-oldies format.

In radio as in real estate, you can buy a property with as little money down as possible, leveraging the rest. Depreciation charges against revenues might put the bottom line in the red, but who cares so long as cash flow covers debt service? You clean up the expense side, boost sales if you can, pray for some market appreciation, and then, after a few years, sell it or borrow against its new, higher value. Either way, you leverage into another, larger building -- or radio station -- and do it all again.

What are the risks? That somebody will flood the market with new radio stations? That can't happen so long as the Federal Communications Commission keeps a lid on licenses. That the market will suffer a recession? Maybe, but radio industry revenues from advertising have gone up every year but one since the end of World War II, including 1971, when on-air cigarette ads were banned. That you'll get caught in an interest-rate squeeze when rates go up? Not if, like Jacor, you take on mostly fixed-rate debt.

So what else is there to worry about? "Jacobs," says Richie Balsbaugh, CEO of Pyramid Broadcasting in Boston, "has no operating experience at all." Ah, operations. That's where broadcasting, and most other businesses, get a lot different from real estate. A building is steel and stone, but a company is mostly people."Jacor is probably making smarter deals than most buyers," says Balsbaugh, a veteran station manager, "but once you close the deal, you've got to make it work."

This posed a significant challenge for Jacobs, who came to broadcasting as an operational novice. What he did have going for him was an understanding of the financial opportunities the industry offered, having been a senior executive at American Financial Corp. in Cincinnati, a financial-services company with investments in media. In particular, he had noted how the value of AFC's Metromedia Inc. stock rose from less than $5 a share to more than $500 in just a few years. "I became fascinated," he remembers. Who wouldn't?

So it was only natural that the broadcasting industry came to mind a few years later, when he began thinking about starting a company of his own. Focusing on the radio business, Jacobs found that there were three ways to grow in the industry, all of them related to the fact that radio stations are bought and sold on the basis of their cash flows. Cash flow in broadcasting means operating income before deductions for depreciation or amortization, taxes, or debt service. Recently, stations have been fetching from 7 to 10 times their broadcast cash flow, depending mostly on the market they are in. (Stations in growth markets command a higher multiple.) So the way to get the price of a station up once you've bought it is to increase the cash flow. The question is: how?

One way is to fire a lot of people. After all, salaries are the biggest part of almost any station's expenses, and it's technically possible to automate the entire operation, so that all you need is a sales force. "Our savings are not in people," says Jacor vice-president and controller Jon Berry, "and we don't want that kind of reputation." That's probably wise, since -- more often than not -- the savings from automation soon evaporate, along with audience and advertising revenue.

Another way is to look for turnaround situations -- stations with little or no market share and no immediate prospects. That approach has worked for Malrite Communications Group Inc., and $83.3-million (1985 revenues) broadcasting company based in Cleveland, which bought a down-at-the-heels New Jersey station, moved its transmitter to the top of the Empire State Building, and, in less than a year, turned Z-100 (WHTZ-FM) into the hottest rocker in metropolitan New York. To pull off such a turnaround, however, you need to have enough money to carry through the process and enough operating talent to make it work. Jacobs had neither.