Saturday, August 29, 1998

Chancellor merges with Capstar to create nation's largest radio network

BY DAVID KOENIG

Associated Press

DALLAS -- A merger of two Texas-based broadcast companies, announced Thursday, will create the nation's largest radio-station group.

Chancellor Media Corp. will buy Capstar Broadcasting for $2.2 billion in stock. The combined company, to be controlled by Tom Hicks' Dallas investment firm, will own 463 radio stations in 105 markets, plus interests in television, billboards and advertising sales.

Hicks, Muse, Tate & Furst, is the largest shareholder of both Chancellor and Capstar and will own 25 percent of the combined company.

"This has been a vision and a strategic point of view we've been trying to accomplish for more than a year now," Hicks said in an interview. "We started in early 1994 with two stations in Sacramento (Calif.), and now we'll be the largest radio station group in the country."

Together, Chancellor and Capstar last year had radio revenue of about $1.6 billion, more than that of industry leader CBS Corp., at $1.5 billion.

After the announcement, Chancellor shares fell $2 to $42.75 on the Nasdaq Stock Market, while Capstar shares dropped $1.18-1/4 to $19.31-1/4 on the NYSE.

Analysts said the two companies will make a good fit because Chancellor operates stations in big cities while Capstar has learned to profitably run stations in smaller markets.

Leland Westerfield of PaineWebber predicted that station-by-station revenue in the new company will grow nearly 20 percent a year and Chancellor will quickly work off the debt it used to buy Capstar.

Westerfield called the price "a square deal," but some analysts thought Capstar could have sold for more.

"It's a fair price but not a premium price," said P. Gordon Hodge of NationsBank Montgomery Securities in San Francisco. He said the price, at 15.5 times Capstar's broadcast cash flow, is less than three recent purchases of groups with Capstar's type of growth potential.

At least seven investment-banking firms examined the deal, which analysts took as evidence that Hicks Muse was worried it might be accused of paying too little to Capstar in a deal that involved Hicks Muse on both ends.

In another development, CBS announced Thursday that it will spin its radio stations and billboards into a new company, Infinity Broadcasting, which prompted speculation that either the TV or radio stations might be sold.

Hicks said he is not interested in the CBS stations, but he confirmed he is interested in buying another large radio group, financier Sam Zell's Jacor Communiciations, if the price is right.

James Marsh, a Prudential analyst, said Jacor's medium-sized stations would be a perfect fit for a still acquisition-minded Chancellor.

Jeffrey Marcus, Chancellor's president and chief executive officer, said the new Chancellor will be more attractive to advertisers who can buy radio, TV and billboard ads from one company.

Chancellor also plans to develop Internet advertising and link it to its radio, TV and billboard operations, Marcus said.

Chancellor, based in Dallas, already owns 108 radio stations in 22 of the nation's biggest markets, including New York, Los Angeles, Chicago and Dallas, 12 network-affiliated TV stations, a billboard company and an advertising sales division.

Capstar, based in Austin, Texas, owns and operates 355 stations in 83 smaller markets. It has moved aggressively to link advertising and programming at its stations, which analysts said has been a ratings and revenue hit.

In addition to Hicks Muse's 25 percent stake, 66 percent of the new company's stock will be held by other Chancellor shareholders and 9 percent by other Capstar shareholders.

The deal has been approved by directors of Chancellor and Capstar, but it must still be approved by shareholders and government regulators. The companies expect to complete the deal next year.

Capstar shareholders will get about 0.48 shares of Chancellor stock for each of their shares. At Wednesday's closing price for Chancellor, that would give Capstar shareholders stock worth about $21.50 for each of their shares.