The buzzards aren’t hovering over the glass and steel offices of Cumulus Media Inc. But if they haven’t already caught the scent of distress, they must certainly be aware of the stunning drop in fortunes at the nation’s third-largest owner of radio stations.
Having grown from nothing to more than 300 stations in less than three years, Cumulus now represents the perilous flip side of media empire-building. The broadcasting neophyte is the most prominent example of the risks of trying to capitalize on the government’s deregulation of broadcasting: Cumulus bought too much too fast in an investor-fueled gold rush frenzy and lost business control of its burgeoning collection of radio stations.
Since admitting accounting errors over nine months of earnings reports, officials at the Milwaukee-based broadcaster have scrambled to restore investor confidence and control the damage from the exits of two top-level executives, the resignation of the company’s independent auditor and an 80 percent plunge in its stock price. Heavily in debt and short of cash to pay for previously announced deals, Cumulus has negotiated a delay in closing dates. It is also preparing to unload $150 million of assets, including stations, to preserve its bond rating and help finance $458 million in pending acquisitions.
On top of all that, a dozen shareholder lawsuits against the company are about to be consolidated into one, alleging company officials made false and misleading statements when they issued earning statements covering the first three quarters of last year.
“We grew too fast,” Richard Weening, the founder and executive chairman of Cumulus, conceded in an interview last week. “These are the growing pains of a company that came together very quickly.”
Growing fast has been the hallmark of radio since 1996. In the four years since Congress removed most of the ownership restrictions on radio–previously, the most one company could own was 40 stations–giant conglomerates have emerged to transform what used to be a competitive mom-and-pop-dominated industry. Clear Channel Communications Inc., by virtue of its pending merger with AMFM Inc., the nation’s second-largest station owner, is about to own more than 800 radio stations, making Cumulus No. 2. Infinity Broadcasting Corp. owns more than 160 stations.
The goal in all this government-sanctioned consolidation is simple: Shop around the country and buy as many as eight stations in a single market. Streamline station operations, capture the prized audience demographics that advertisers want and reap profit margins of 30 to 50 percent.
Cumulus, founded three years ago this week, jumped into the acquisition race. Unlike Clear Channel and others, though, it focused on markets no larger than Toledo, Ohio, and as small as Boothbay Harbor, Maine, and Smiths, Ala. And unlike Clear Channel’s chief executive, Lowry Mays, and Infinity Chairman Mel Karmazin, Weening, 54, does not have a deep broadcast background having a varied media experience in book publishing, electronic commerce and broadcasting in the Caribbean.
Radio industry analysts and observers are split on the Cumulus strategy of trying to build radio fiefdoms in smaller markets, where Wal-Marts and outlying strip malls have undermined many of the downtown businesses that traditionally advertise on radio. The debate on this strategy has been longstanding, but it did not dampen investor enthusiasm for a hard-charging company that came out of nowhere to dominate dozens of markets, primarily in the eastern half of the United States.
Investors bet on the promise, much as they have on tech stocks.
By December, Cumulus had made more than 120 deals and acquired or announced acquisitions of 321 stations in 64 markets. Despite mounting debt, red ink and paltry operating profit margin figures that lagged behind industry averages, the company’s stock price topped $55 a share on the Nasdaq stock market, a sixfold increase since the previous March.
Then the dam burst. Fourth-quarter financial performance was softer than expected. In January, Richard Bonick, the company’s chief financial officer, resigned. Cumulus stock, like most traditional media stocks this year, began to slip. In early March, whispers of massive accounting irregularities at Cumulus circulated in the historically rumor-hungry radio industry. On March 16, Cumulus President William Bungeroth resigned and Weening announced the company would restate nine months’ of 1999 revenue and broadcast cash flow, key indicators of a broadcaster’s physical condition.
Cumulus blamed the cause of the restatement on inadequate reporting and monitoring of revenue from the sale of commercials.
Shareholder lawsuits quickly followed. Cumulus stock fell from nearly $40 to $16. The slide continued into April, dropping to $11, and has done little to recover since, closing Friday at $11.44.
“It’s like they’re treading water and the only thing above water is the nose,” said analyst James Boyle at First Union Securities.
Last week, the company reported a first-quarter net loss of $15.9 million, roughly twice the loss of the previous year’s quarter. Revenue was $47.7 million; long-term debt was $285 million.
The company’s troubles only highlighted the gap separating its performance from those of the established and profitable broadcasting companies like Clear Channel and Infinity.
Weening, 54, said the company “stumbled” in creating a radio station sales culture. “Most of the people in sales at these stations had worked in small mom-and-pop operations,” Weening said. “Life in a publicly traded company is different than in a private company.”
Investor attention was also drawn to a pair of consulting companies–one wholly owned by Weening, the other half-owned by two other high-ranking Cumulus executives–that collected $10 million in consulting fees from Cumulus in the past two years. Weening told Wall Street analysts last week that those relationships would end next month. Cumulus has brought in a new auditor and last week hired a chief financial officer who formerly worked for Jacor Communications, a giant radio chain taken over by Clear Channel in 1998.
At Cumulus’ station level, some will be sold. The company told analysts last week that some “human bodies” will be replaced by syndicated or automated programming.
Although the accounting correction worked out to only about $1.3 million, the credibility damage has been real and the market has been unforgiving.
Tom Walker, president of Madison, Wis.-based Midwest Management Inc., a group of 25 medium-size stations, said he’s not surprised by what happened to Cumulus, nor by the market’s response.
“What’s happened to radio is exactly what happened to the savings and loan industry. [The government] changed the regulations around and all of a sudden folks came in . . . who thought they had a better idea and they damn near bankrupted the industry,” Walker said. “The government allowed more concentration and we concentrated. . . . no one knows if anyone can run companies this size.”
Recently, Weening has been traveling around the country trying to convince his institutional investors to stick with him.
“I saw everyone who would see me and took my flogging and told them what we would do about it,” Weening said in his 26th floor conference room. “I think the genuinely savvy media investor who knows what value is will stay with us. Those guys won’t allow the business to be sold at fire-sale prices.”
The coming months will test the patience of institutional investors like the Wisconsin Investment Board, which looks after the pensions of some 400,000 current and former Wisconsin state employees. The Wisconsin fund owns about 3.2 million shares, according to documents filed with the Securities and Exchange Commission. It was one of the early investors in Cumulus.
“There were inadequate controls and some minor sloppiness, but it could have been worse,” said Jon Vanderploeg, the board’s portfolio manager. “It serves as a wake-up call. These sorts of things are not in any way uncommon in complex businesses. . . . This is nowhere near a fatal problem.”
James Marsh, an analyst who follows Cumulus and other broadcasting companies for Prudential Securities, said the problems at Cumulus do not make a broader statement about radio consolidation. “Clearly management made some mistakes . . . but not enough to justify what’s happened to the stock.”
Fairness is not a hallmark of the stock market, and the coming months will test the patience of Cumulus investors. First Union’s Boyle predicted the company would not be able to ride out investor dissatisfaction. Cumulus, he said, will either be sold or broken up.
Marsh said Cumulus has made some smart moves to try to restore confidence.
“There’s no problem with the radio stations, where the asset value is pretty high, but if there are no changes in the stock price, you’ll hear howls from the investors,” Marsh said. “If it gets to the stage that they can’t manage, they are pragmatic people.”
In his conference room, Weening dismisses rumors that Clear Channel will buy the company. Weening said the company will turn the corner in the third quarter and turn profitable in 2001. He can even laugh–albeit guardedly–about the $4.9 million in personal loans that he and Lewis Dickey, the executive vice chairman, obtained from the company in February to buy Cumulus stock–at $39 a share. The loans are due in 2003.
“We’ll make it,” Weening said. “The bottom line here? This cost us a year.”
Does Cumulus have a year to fix it? “Of course we do,” he said.
