Cumulus Media Inc.

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Cumulus Media Inc.

111 East Kilbourn Avenue, Suite 2700
Milwaukee, Wisconsin 53202
U.S.A.
Telephone: (414) 615-2800
Fax: (414) 615-2880
Web site: http://www.cumulus.com

Public Company
Incorporated: 1997
Employees: 4,000
Sales: $180 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: CMLS
NAIC: 513112 Radio Stations

Since it was established in 1997, Cumulus Media Inc. has focused on acquiring clusters of radio stations in small and medium-size markets. In its brief history it once owned or had pending more than 300 radio stations. However, a series of events in early 2000 depressed the company’s stock price and made it difficult for Cumulus to finance all of its pending acquisitions. It restructured some acquisitions, swapping stations where necessary, which left it with 271 stations in 54 markets at last count. That made it the second largest radio company behind Clear Channel Communications, Inc. in terms of number of stations owned, and seventh in terms of revenue.

Acquiring Radio Stations: 1997

Following the passage of the Telecommunications Act of 1996, which changed radio stations ownership rules among other things, Cumulus Media, Inc. was founded in 1997 in Milwaukee by Lew Dickey, Jr., and Richard Weening. They received financial backing from a group of institutional investors that included the State of Wisconsin Investment Board, NationsBank Capital Corporation, Heller Equity Capital Corporation, and Quaestus Management Corporation. Northwestern Mutual Life Insurance Co. subsequently joined the investor group. The company was established for the purpose of acquiring and developing radio station clusters in medium-size and smaller cities across the United States. Operations commenced on May 22, 1997.

Prior to co-founding Cumulus, Dickey had started the Strat-ford Research Co., Inc., a consulting and market research firm for radio and television broadcasters. He was a nationally known consultant on radio strategy and the author of the 1994 book, The Franchise: Building Radio Brands, which was published by the National Association of Broadcasters. From 1996 to 1998 Dickey served as president and CEO of Midwestern Broadcasting Inc., which operated two radio stations in Toledo, Ohio, that were subsequently acquired by Cumulus. He would serve as Cumulus’s vice-chairman.

Weening, on the other hand, helped establish Cumulus through Quaestus, a private equity investment and advisory firm of which he was chairman and CEO. He had prior experience as a CEO and investor in book and magazine publishing, radio broadcasting, online services, and electronic commerce software and services. Before launching Quaestus in 1989, he had established two successful information and publishing companies. In March 1998 he assumed the role of executive chairman at Cumulus, with Dickey as vice-chairman.

Going Public and Aggressive Acquisitions: 1998–99

Cumulus became a public company with an initial public offering (IPO) on June 26, 1998. The company sold 7.6 million shares at an opening price of $14. Cumulus also sold $125 million of preferred stock and $160 million of senior subordinated bonds, raising a total of $391 million. Some $280 million of the proceeds were earmarked to cover the cost of pending acquisitions and to reduce outstanding debt.

At the time it went public, Cumulus owned or was in the process of buying 167 radio stations, including 119 FM and 48 AM stations. The company’s acquisition strategy had been to build station clusters in small to mid-size markets, mainly in the Midwest, Southeast, Southwest, and Northeast. In July 1998 Cumulus acquired its first radio stations on the East Coast, when it acquired WQCB-FM and WBZN-FM in Bangor, Maine, for $6.4 million from Castle Broadcasting. The same month it acquired its sixth station in Myrtle Beach, South Carolina, WSEA-FM, for $1.3 million.

In its first 17 months, Cumulus acquired 207 stations, creating the first small-market-only radio conglomerate. Following the company’s IPO, its stock fell from $14 to less than $5 on October 9,1998, then rebounded to around $10 at the beginning of November. The firm’s long-term debt had reached $422 million. Some radio executives familiar with small markets thought that Cumulus was overpaying to buy top stations in markets that did not have a great upside potential. As of November 1998 its biggest market was Toledo, which was ranked 76th. The company’s strategy was to acquire four FM and two AM stations in each market. It preferred to buy two of the top four performing stations in a market, then two of the next four, all with mainstream formats. As Cumulus consolidated its stations and improved ad sales and on-air quality, it hoped to attract national advertisers. It also planned to improve the operating profit margins of its stations, and in 1998 raised them from around 10-20 percent to more than 30 percent. For 1998 Cumulus reported revenue of $98.8 million, with broadcast cash flow of $26.6 million. Its cash-flow margin reached 27 percent.

For the first quarter of 1999, Cumulus reported a 216 percent increase in broadcast cash flow compared to the same quarter in 1998 and a 155 percent increase in net broadcast revenue. However, the company’s quarterly loss increased from $5.3 million in the first quarter of 1998 to $10.1 million in the first quarter of 1999. With 232 stations in 44 markets, Cumulus claimed to be the third largest radio company in the United States in terms of number of stations owned.

In November 1999 Cumulus paid $26.5 million to Duke Broadcasting for three radio stations in Jonesboro, Arkansas, including the market’s two largest FM stations and a full-service news/talk AM station. Jonesboro, located near Memphis, Tennessee, was a newly ranked market at 271st in the United States. The acquisition also included Duke’s Southern Outdoor Advertising, marking Cumulus’s first venture in out-door advertising.

Before the end of the month Cumulus made a $242 million deal with Connoisseur Communications of Greenwich, Connecticut, for 35 radio stations. The stations were located in Canton and Youngstown, Ohio; Flint, Saginaw-Bay City, and Muskegon, Michigan; Rockford and the Quad Cities, Illinois; Evansville, Indiana; and Waterloo-Cedar Falls, Iowa. With 299 stations owned or pending, Cumulus ranked second to Clear Channel Communications, Inc. in terms of number of stations owned. Following the acquisition, Cumulus would have stations in 58 markets. In November the company’s stock rose above $40 a share, more than three times the IPO price.

In December Cumulus spent $51 million to acquire eight Oregon and California radio stations from McDonald Media Group and another station in Santa Barbara, California, from Pacific Coast Communications. It was the company’s first acquisition of stations on the West Coast. Meanwhile, back in Wisconsin it was announced that football team Green Bay Packers radio network would switch affiliations in some markets to stations owned by Milwaukee-based Cumulus. For 1999 Cumulus reported $180 million in revenue and $46.7 million broadcast cash flow.

Financial Challenges in 2000

In January 2000 the Federal Communications Commission (FCC) announced it had flagged for public comment Cumulus’s pending acquisition of Connoisseur Communications. The agency was especially concerned with markets in Waterloo-Cedar Falls, Iowa; Flint, Michigan; Evansville, Indiana; the Quad Cities; and Rockford, Illinois. In March Cumulus acquired The Advisory Board, Inc., which conducted sales training programs for the radio industry under the name The Lytle Organization.

In the biggest radio industry consolidation to date, Clear Channel Communications acquired AMFM Inc. for $23 billion. As part of the deal, Clear Channel was required to sell 72 of its radio stations. Cumulus announced it would purchase a group of those stations, including four stations in Harrisburg, Pennsylvania; three stations in Cedar Rapids, Iowa; three stations in Shreveport, Louisiana; and one station in Melbourne, Florida. Cumulus expected to pay about $159 million for the 11 Clear Channel stations.

However, Cumulus’s stock took a tumble in the first quarter of 2000, losing about two-thirds of its value. Affecting the stock price were rumors of accounting improprieties over the company’s annual audit after it restated its earnings for the first three quarters of 1999. As a result, class-action lawsuits were filed against Cumulus charging the company with artificially inflating revenue and profit in 1999. In March vice-chairman Lew Dickey took over the job of president of Cumulus Broadcasting, the company’s primary operating subsidiary, from William Bungeroth. It was also disclosed that chief financial officer Richard Bonick, Jr., had left the company in January 2000.

Cumulus needed to raise nearly $300 million to finance pending acquisitions, a task made more difficult by the company’s sagging stock price. The company announced it would restructure other pending acquisitions and sell some non-core businesses to reduce its debt load. The company had debt of $285 million, which could increase to as much as $650 million to pay for all of the pending acquisitions. The company had yet to close on acquisitions totaling $584 million in 36 markets, including 11 stations from Clear Channel and 35 stations from Connoisseur Communications.

In April the company issued revised annual reports for 1998 and 1999. Its net loss for 1999 was revised from $20.8 million to $13.6 million. Its net loss for 1998 was restated from $13.7 million to $8 million, after the company found a $4.9 million tax benefit that had been underreported.

Company Perspectives:

Cumulus is dedicated to providing choices to both listeners and advertisers. We develop and manage each Cumulus station as its own brand with its own programming content and personality, its own inventory of radio spots, and its own pricing levels. Each station has its own team of on-air talent to serve listeners and its own team of professionals to serve advertisers.

The company’s stock fell below $9 in April. After its accounting firm, PricewaterhouseCoopers, resigned on April 24, Cumulus needed to restore the confidence of Wall Street analysts and investors. The company was also in the process of expanding and training the advertising sales staffs at its more than 300 radio stations. In May it hired a new CFO, Martin Gausvik, as well as a new auditor, KPMG LLP. Gausvik had previous experience as a financial executive at Jacor Communications and Latin Communications Group.

Pending acquisitions involving Clear Channel and Connoisseur Communications were both restructured. Connoisseur agreed to extend the closing of the $242 million deal until the third or fourth quarter of 2000. Clear Channel agreed to renegotiate the sale of 11 stations to Cumulus. The original cash payment of $147.5 million was reduced to about $36.6 million. In addition, Cumulus would swap 20 stations in four markets and a five-station cluster in Chattanooga, Tennessee. Later in the year, though, Cumulus failed to close on four of the stations in Harrisburg, Pennsylvania.

In June 2000 Lew Dickey was named president and CEO of Cumulus Media. His brother, John W. Dickey, was promoted to executive vice-president of Cumulus Media. The management realignment marked the end of the firm’s “acquisition-intensive start-up stage,” according to executive chairman Weening. The company had made more than 100 acquisitions since 1997, resulting in clusters in 60 U.S. markets. Management would now begin to devote “all of our energies toward making Cumulus a premier operating company in the industry,” said Weening.

The company began to implement two restructuring pro-grams. It planned to consolidate its headquarters and finance operations in Atlanta, Georgia, by October 1, 2000. Facilities in Milwaukee and Chicago would be vacated. Some 500 positions throughout the company were eliminated between April and August, some of them through attrition in the sales force and by cutting part-time air staff. The company also discontinued the operations of Cumulus Internet Services. As a result of these changes, the company took a one-time charge of $9.3 million for the second quarter of 2000.

Additional station swaps were made between Cumulus and Clear Channel later in the year. In September 2000 it was announced that Cumulus would swap 45 stations in eight markets for four stations in Harrisburg, Pennsylvania, and $55 million in cash. To this point Cumulus had swapped 105 stations in 18 markets with Clear Channel in exchange for 11 stations in five Clear Channel markets and $222 million in cash. Following these deals Cumulus would own or have under contract 225 radio stations, compared to 321 in March 2000.

As early as May 2000 executive chairman Richard Weening admitted, “We grew too fast. These are the growing pains of a company that came together very quickly.” While analysts agreed that the company’s radio station properties remained quite valuable, it nevertheless faced a number of challenges. With its stock trading at 52-week lows in September 2000 and its Moody’s Investor Service’s rating dropped from stable to negative, Cumulus needed to restore investor confidence. It was felt that this could be accomplished by closing on pending acquisitions and posting two or three quarters of strong cash flow. As it stood, however, the company was heavily in debt and short of cash to pay for previously announced acquisitions.

Principal Subsidiaries

Cumulus Broadcasting, Inc.

Principal Competitors

Clear Channel Communications, Inc.; Cox Radio, Inc.; Infinity Broadcasting Corp.; Citadel Communications Corp.; Emmis Communications Corp.; Saga Communications, Inc.; Radio One, Inc.

Key Dates:

1996:: The Telecommunications Act of 1996 removes ownership restrictions on radio stations.
1997:: Cumulus Media, Inc. is founded in Milwaukee by Lewis W. Dickey, Jr., and Richard Weening, with financial backing from institutional investors.
1998:: Cumulus Media goes public on June 26.