MOODY'S INVESTORS SERVICE has weighed in on the ENTERCOM/CBS RADIO merger by assigning CBS RADIO's proposed $250 million revolving credit facility a Ba3 rating.
MOODY'S notes, "The transaction is expected to close following the merger between CBS RADIO and ENTERCOM COMMUNICATIONS CORP. that was announced on [THURSDAY], FEBRUARY 2nd, 2017 with ENTERCOM being the surviving entity. CBS shareholders are expected to own 72% of the combined entity with ENTERCOM shareholders owning a 28% position. The debt issued at CBS RADIO, including the new revolver, term loan B-1 and $400 million of senior notes will remain outstanding as the change of control provision will not be triggered by the transaction. The debt will be issued by CBS RADIO and be secured by the assets of both companies. Shortly after the closing of the transaction, we will withdraw all the ratings at CBS RADIO and assign the debt ratings under the surviving entity, ENTERCOM (B1 CFR; stable)."
The details from MOODY'S add that, "The merger will create a substantially larger company with pro-forma LTM revenue of $1.6 billion as of Q3 2017 with 235 stations. The greater scale of the combined company is expected to increase its competitive position and heighten demand from local and national advertisers. While ENTERCOM's management team has a good track record of performance and integrating acquisitions, the merger with a much larger company elevates integration risk which may delay the cost and revenue benefits of the transaction."
Why did MOODY'S make this assessment? "The combined company will have leading market positions in 22 of the top 25 markets. The company benefits from a geographically diversified footprint with strong market clusters in most of the areas it operates which enhances its competitive position," they wote. "A diversified format offering of music, news, and sports are also positives to the rating. Leverage pro-forma for the transaction is approximately 4.5x as of Q3 2017 (including MOODY'S standard lease adjustments) and is expected to decline to 4.4x pro-forma for announced asset sales and approximately $100 million of projected debt repayment in the near term. Modest amounts of capital expenditures are expected to lead to good free cash flow that will be used for dividends, stock buybacks, additional acquisitions or debt repayment. The rating also reflects the secular pressure in the radio industry with an increasing number of digital music offerings and advertising alternatives as well as the cyclicality of the industry. Revenue and EBITDA performance at CBS RADIO have been weak YTD in 2017, although a part of the increase in expenses is due to its prior plan to operate on a standalone basis which will not be recurring post the closing of the merger. CBS Radio's performance was also impacted by the uncertainty during the time between when the acquisition was announced and the expected closing in NOVEMBER in our opinion."