For Subscribers

Get the complete article now!

Four analysts and top management from seven sector firms examine the broadcasting sector in this special 57-page Broadcasting Industry issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info531.htm

TWST: Lee, will you begin by talking about the approach that you take to the broadcasters at UBS Warburg and the sectors of the industry that you focus on most closely.

Mr. Westerfield: My approach is to look at three main factors: the impact of technology, the impact of regulation and the impact of the consumer on advertising. My stock selection approach is to evaluate the return on equity that the stock price implies from potential free cash flow. I also look very closely at balance sheets and the opportunities for companies to expand their portfolios, to divest their portfolios, or to merge. I view all media within the broadcasting space as being governed by those three main fundamental factors and their ability to consolidate or deconsolidate to improve return on equity. I look at the radio, television and publishing sectors in my research.

TWST: Lee, how does the performance over the past year look to you? Are there any companies that have been surprisingly strong or have had an unexpectedly weak performance that you would like to highlight?

Mr. Westerfield: It’s not so much the performance over the last 12 months that’s interesting to me, but over the last three months. In the unusual selloff, post 9/11, we saw trading multiples in radio and television lower than they had been since 1995. So the opportunity that arose in the wake of 9/11 was a rare opportunity; most of the advertising-led media names could be bought at near seven-year trading multiple lows. What has happened since is that trading multiples of EBITDA have expanded: in radio (in conjunction with the early budding of an ad revival), in television (with Washington deregulation underway), and in publishing (alongside both those advertising and deregulation factors). At this point, trading multiples have already rebounded to near seven-year highs.

TWST: Lee, what is the rationale behind your recommendation of Clear Channel?

Mr. Westerfield: It’s a three-part thesis. The first hinges on the revival of the national market economy. I think the demand for their breadth of radio platform will be there for marketers to buy both concert tours and local radio, going into a national market recovery this year and next. The second prong is that investors are overly concerned about European outdoor media, which is quite weak today, admittedly, but for which they need a second lift in EBITDA growth for Clear Channel (NYSE:CCU) in 2003 that would not be there for pure US radio operators. The third component has to do with the ability to contract the balance sheet. I suppose it’s controversial, but unlike other radio operators in the United States, even the vertically integrated companies, Clear Channel is in a superior position to be able to control its costs to a larger extent than other vertical companies to attract the capital base over the next three to five years — meaning repay debt by spinning off non-core assets and using proceeds to repay debt, or simply using free cash flow to repay debt. That lowers the risk profile of the company significantly. How this will play out will be choppy over time, because investors are likelier to focus on questions of the day, if you will — either accounting-related or in terms of whether there is equity flotation, or whether there is concern about airport contracts and the outdoor business. But measured over the course of one to three years, I think this company is in a unique position to be able to pare down its risk profile, while also holding the line on costs to deliver disproportionately larger EBITDA growth relative to other companies that size.

This special issue includes:

1) Broadcasting Industry - In an in-depth (11,400 words) Analyst Roundtable, Frank Bonechak, Founder of Edge Capital, James Marsh Jr., Managing Director at Robinson Stephens and Leland Westerfield, Director for the Communications Group at UBS Warburg, examine the outlook for the sector including regulatory outlook, cross-ownership rules and share specific stock recommendations.

2) TWST confidential Off-The-Record survey of management performance of seventeen sector firms asked market insiders about the ability of management teams to create shareholder value.

3) Radio & Spanish Language Broadcasters - In an in-depth (3,900 words) Interview, Alissa Goldwasser, Research Analyst at William Blair & Company, examines the outlook for the sector and shares specific stock recommendations.

4) CEO interviews (average 2,500 words). Top management of seven sector firms examine the outlook for their firm and the sector.