Two borrowers will receive financing under one deal to back Cumulus Media Partner's $1.2 billion acquisition of Susquehanna Radio. Although not common, the financing structure allows communication companies to separate collateral and manage leverage numbers. This acquisition could be the start of more consolidation in the radio sector, Cumulus Media CEO and ChairmanLew Dickey predicts.
Deutsche Bank, Merrill Lynch, Goldman Sachs and UBS are leading the syndication of the financing, which launched last week.CMP Susquehanna, a partnership formed between Cumulus Media, Bain Capital, The BlackStone Group and Thomas H. Lee, is taking out a $100 million revolver and a $650 million term loan. Price talk is LIBOR plus 2 1/4% on both tranches. CMP is also expected to receive $275 million in senior sub notes. STICK, LLC is taking out a $26 million revolver and a $72 million term loan. Pricing is LIBOR plus 4% on both tranches.
Pricing is different because the borrowers are backed by different assets. The STICK value, often the second borrower, takes into account the signal and the license and the value of the station and what a buyer would pay for that signal, rather than EBITDA multiples or cash flow evaluation.
Moody's Investors Service says the senior secured credit facilities are guaranteed by substantially all the direct and indirect subsidiaries of the company. It assigned a B1 rating to CMP's revolver and term loan "B." It assigned a Caa1 rating to both STICK's revolver and term loan, which are guaranteed by the radio stations Cumulus is chipping into the venture.
One banker said the decision to carve out the STICK portion may have been made to ensure certain ratings for CMP. "There is a lot of debt in aggregate, which is going to make interest coverage pretty tight," he said. Total leverage on the company is nine times pro forma debt to EBITDA. Because of those levels, some speculated the risk-reward relationship may not be there for pricing at 225.
Last April, when Susquehanna Pfaltzgraff Co. said it intended to explore the sale of its major subsidiary, Susquehanna Media Co., Dickey quickly determined he needed to buy the company. With Susquehanna and Disney's radio assets up for sale, Dickey reasoned that if his company didn't buy one of the assets, Cumulus would soon be on the chopping block. "That was the conventional wisdom; you would become a target," he said. "If you couldn't get one or two of these you would become increasingly less relevant."
He decided that based on leverage, he needed to do this off the balance sheet and bring in private equity groups. Cumulus interviewed 12 private equity funds before partnering with the trio. In conjunction with that formation, Cumulus agreed to contribute its four radio stations, including related licenses and assets, in the Houston, Texas and Kansas City, Kan., markets. Cumulus will initially own about 25% of Cumulus Media Partners, with performance incentives that can increase up to about 40%. Following the investment, Cumulus will own or operate 345 radio stations in 67 U.S. media markets. The deal is expected to close May 5.
Dickey said Susquehanna is a good fit because there is overlap in existing portfolios and the company has stations in four of the top 10 markets.
Deutsche Bank advised Cumulus on the transaction and Merrill was a lead player on the bond financing. UBS has an ongoing relationship with the company and has worked in an advisory capacity. Goldman was brought on due to its sponsor relationships. A Thomas H. Lee spokeswoman declined comment. Calls to Blackstone and Bain spokeswomen were not returned, nor were calls to officials at Susquehanna.