RADIO ONE INC.

Harvard Business School Case 201-025

Case Software 201-706 (4th edition)

Copyright © 2000 by the President and Fellows of Harvard College

This case was prepared as the basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.
Exhibit 2 Radio One's Acquisition Strategy
Market Number of Stations

FM AM
Washington D.C. 2 2
Baltimore, MD 2 2
Philadelphia, PA 1
Detroit, MI a
2 2
Atlanta, GA 2
Cleveland, OH 1 1
St. Louis. MO 1
Richmond, VA 7
Boston, MA 1
TOTAL 19 7
Source: Adapted from numerous SEC 10-K Filings.
One station is located in Kingsley, MI.
a
 Year(s) of Acquisition

1980, 1987, 1995, 1998

1992, 1993
1997
1998
1999
1999
1999
1999
1999
Exhibit 3 African-American Demographic Information

Faster Population Growth

FasterIncomGwh
1995-2010
1980-5
Rate of Growth (%)

25 21.2
1210.7
20
10
13.3
15 8
10 64.3
5 4
2
0
0
General Population African-Americans

RateofGrwh(%)
GenralPoputiAfc-ms
Population
Populatin

Key Demographic Statistics

60% faster Population Growth
Largest Minority Group in the United States
Population projected to reach 40MM by 2010
150% faster Income Growth than General Population

Source: Adapted from Company Reports.

 Faster Income Growth
FasterIncomGwh
1980-1995
1980-5
Rate of Growth (%)

12 10.7
1210.7
10
10
8
8
6 4.3
64.3
4
4
2
2
0
0
General Population African-Americans
RateofGrwh(%)

GenralPoputiAfc-ms
Population
Populatin
Exhibit 4 Rising Urban Format Power Ratios 1991 – 2002a

0.90
0.84 0.85
0.85 0.82
0.80 0.81
0.78
0.80 0.76 0.77
0.73 0.74
Power Ratio

0.75 0.71 0.70

0.70
0.65
0.60
0.55
0.50

Year

Source: Adapted from Company Reports.

Years 2000– 2002 Estimated

a
Exhibit 5 Radio One's Turnaround Record

Cost(mm) 96BCF Multiple 99BCF Multiple

Washington DC $46.20 $6.30 7.3x $14.90 3.1x
Baltimore $13.70 $3.30 4.2x $11.80 1.2x
Philadelphia $20.00 $0.20 100x $1.70 11.8x
Atlanta $13.50 $1.20 11.2x $6.90 2.0x
Source: Adapted from Company Reports.
Exhibit 6 Radio One, Inc. and Subsidiaries—Consolidated Statements of Operations

1997 1998
Revenue

Broadcast revenue, including barter revenue of

$1,010,000, $644,000 and $1,821,000,
respectively $ 36,955,000 $ 52,696,000
Less: Agency commissions 4,588,000 6,587,000
Net broadcast revenue $ 32,367,000 $ 46,109,000

Operating Expenses
Program and technical $ 5,934,000 $ 8,015,000
Selling, general and administrative 12,914,000 16,486,000
Corporate expenses 2,155,000 2,800,000
Stock-based compensation -- --
Depreciation and amortization 5,828,000 8,445,000
Total operating expenses $ 26,831,000 $ 35,746,000
Operating income $ 5,536,000 $ 10,363,000
Interest expense, including amortization of deferred
financing costs 8,910,000 11,455,000
Other income, net 415,000 358,000
(Loss) income before (benefit) provision
for income taxes and extraordinary item $ (2,959,000) $ (734,000)
(Benefit) Provision for income taxes -- (1,575,000)

(Loss) income before extraordinary item $ (2,959,000) $ 841,000

Extraordinary item
Loss on early retirement of debt 1,985,000 --
Net (loss) income $ (4,944,000) $ 841,000
Net loss applicable to common shareholders $ (6,981,000) $ (2,875,000)
Basic and diluted loss per common share
Loss before extraordinary item ($0.53) ($0.31)
Net loss ($0.74) ($0.31)
Weighted average shares outstanding
Basic and diluted 9,392,000 9,392,000

Other Data:
Broadcast cash flow $ 13,519,000 $ 21,608,000
EBITDA (before non-cash compensation) $ 11,364,000 $ 18,808,000
After-tax cash flow $ 2,869,000 $ 7,248,000
Capital expenditures $ 2,035,000 $ 2,236,000
Source: Company Reports
 1999

$ 93,260,000
11,557,000
$ 81,703,000

$ 13,576,000
30,683,000
4,155,000
225,000
17,073,000
$ 65,712,000
$ 15,991,000

15,279,000
2,149,000

$ 2,861,000
2,728,000

$ 133,000

--
$ 133,000
$ (1,343,000)

($0.08)
($0.08)

16,137,000

$ 37,444,000
$ 33,289,000
$ 16,303,000
$ 3,252,000
Exhibit 7 Radio One, Inc. and Subsidiaries—Consolidated Balance Sheets
1997 1998 1999

Assets
Current assets:
Cash and equivalents $ 8,500,000 $ 4,455,000 $ 6,221,000
Investments, available for sale -- 256,390,000
Trade accounts receivable, net of allowance for
doubtful accounts of $1,243,000 and $2,429,000,
respectively $ 8,722,000 12,026,000 19,833,000
Prepaid expenses and other 315,000 334,000 1,035,000
Deferred income taxes -- 826,000 984,000
Total current assets $ 17,537,000 $ 17,641,000 $ 284,463,000
Property and equipment, net 4,432,000 6,717,000 15,512,000
Intangible assets, net 54,942,000 127,639,000 218,460,000
Other assets 2,314,000 1,859,000 9,101,000
Total assets $ 79,225,000 $ 153,856,000 $ 527,536,000

Liabilities and Stockholder Equity

Current liabilities:
Accounts payable $ 258,000 $ 1,190,000 $ 1,663,000
Accrued expenses $ 3,029,000 3,708,000 6,941,000
Income taxes payable -- 143,000 1,532,000
Total current liabilities $ 3,287,000 $ 5,041,000 $ 10,136,000
Long-term debt and deferred interest, net of current
portion 74,954,000 131,739,000 82,626,000
Deferred income tax liability -- 15,251,000 14,518,000
Total liabilities $ 78,241,000 $ 152,031,000 $ 107,280,000
Commitments and contingencies
Senior cumulative redeemable preferred stock:
Series A, $.01 par value, 140,000 shares
authorized, 84,843 shares issued and outstanding 9,310,000 10,816,000 --

Series B, $.01 par value, 150,000 shares

authorized, 124,467 shares issued and outstanding 13,658,000 15,868,000 --
Stockholders’ equity:
Common stock—Class A, $.001 par value,
30,000,000 shares authorized, 0 and 17,221,000
shares issued and outstanding -- -- 17,000
Common stock—Class B, $.001 par value,
30,000,000 shares authorized, 1,572,000 and
2,867,000 shares issued and outstanding -- 2,000 3,000
Common stock—Class C, $.001 par value,
30,000,000 shares authorized, 3,146,000 and
3,184,000 shares issued and outstanding -- 3,000 3,000
Accumulated comprehensive income adjustments -- -- 40,000
Additional paid-in capital -- -- 446,400,000
Accumulated deficit (21,984,000) (24,864,000) (26,207,000)
Total stockholders’ (deficit) equity $ (984,000) $ (1,825,000) $ 420,256,000
Total liabilities and stockholders’ equity $ 79,225,000 $ 153,856,000 $ 527,536,000

Source: Company Reports

Exhibit 8 Radio Industry Trading Multiples as of March, 2000 based on 2001E forecasts
Ticker Company BCFa EBITDAa After-Tax Cash
Flowb
BBGI Beasley Broadcasting Group 11.8 13.7 15.4
CBS CBS 15.1 15.8 22.3
AFM AMFM Inc 14.7 15.4 14.4
CITC Citadel Communcations 14.6 15.7 21.7
CCU Clear Channel Communic. 17.2 17.9 20.1
CXR Cox Radio 17.4 18.7 24.2
CMLS Cumulus Media 17.7 19.2 37.2
EMMS Emmis Broadcasting 11 12 13.2
ETM Entercom Communications 16.6 17.7 21.1
HBCCA Hispanic Broadcasting 42.1 44.5 59.7
INF Infinity Broadcasting 18.8 19.4 26.9
ROIA Radio One 22.1 24.2 36.5
SGA Saga Communications 9.9 11.4 14.5
WOM Westwood One 24.4 25.3 38.6
AVERAGE 18.1 19.4 26.1
Source: Credit Suisse First Boston, Radio One, Inc. Equity Research Report, March 9, 2000 and casewriter estimates.
a
BCF & EBITDA: Adjusted Market Value Multiple to 2001
b
After-Tax Cash Flow: Current Price as a Multiple of 2001

c
Asset betas are equity betas adjusted for leverage by multiplying the equity beta by the equity-to-value ratio and
adding the debt beta (assumed to equal 0.25) times the debt-to-value ratio.
 Asset Betac

NA
1.06
0.96
0.68
0.65
0.27
0.83
0.55
0.3
1.23
0.82
0.82
0.26
1.29
0.75
2000 and casewriter estimates.

the equity-to-value ratio and

Exhibit 9 Radio One, Inc. Actual and Projected Financial Performance of Existing Markets and Poten

----Pro Forma---- ----------------------Projected----------------------

1999 2000 2001 2002 2003 2004
Gross Revenue – Existing
Washington 32,221 34,812 37,597 41,357 45,492 50,042
Baltimore 25,162 26,952 29,108 32,019 35,221 38,743
Philadelphia (WPHI) 6,239 7,277 8,151 8,966 9,863 10,849
Philadelphia (WPLY) 8,978 9,500 10,450 11,495 12,645 13,909
Detroit 8,309 11,075 12,736 14,010 15,130 16,341
Atlanta 15,811 17,584 19,782 21,760 23,936 26,330
Cleveland 2,415 5,488 6,311 6,942 7,497 8,097
St. Louis -- 1,028 2,056 2,467 2,837 3,064
Richmond 10,713 13,226 15,210 17,492 19,241 20,780
Boston -- 3,401 4,081 4,693 5,162 5,575
Existing Gross Revenue 109,848 130,343 145,482 161,201 177,024 193,730
Gross Revenue – Potential New Marketsa
Charlotte 1,002 1,250 2,250 3,250 4,250 4,700
Augusta 2,708 2,750 3,200 3,400 3,600 3,800
Indianapolis 5,173 5,814 6,600 8,200 9,500 11,000
Los Angeles 38,626 41,117 45,221 49,517 54,221 59,372
Miami 1,501 1,634 1,634 2,043 2,553 3,191
Cleveland 13,370 13,750 15,000 16,500 17,750 19,000
Houston 36,618 39,547 43,502 47,852 52,638 57,743
Dallas 4,756 6,120 8,500 11,700 13,500 15,188
Greenville 4,614 4,864 5,418 5,750 6,250 6,500
Raleigh 12,118 13,538 15,163 16,679 18,347 20,182
New Markets Gross Revenue 120,486 130,384 146,488 164,891 182,609 200,676
Direct Expenses – Existing Markets
Washington (4,098) (5,080) (5,486) (5,790) (6,369) (7,006)
Baltimore (3,232) (4,018) (4,339) (4,483) (4,931) (5,424)
Philadelphia (WPHI) (800) (1,078) (1,207) (1,255) (1,381) (1,519)
Philadelphia (WPLY) (921) (1,078) (1,207) (1,379) (1,517) (1,669)
Detroit (818) (1,483) (1,705) (1,961) (2,118) (2,288)
Atlanta (2,080) (2,436) (2,741) (3,046) (3,351) (3,686)
Cleveland (166) (632) (727) (972) (1,050) (1,134)
St. Louis -- (163) (326) (345) (397) (429)
Richmond (1,607) (1,982) (2,279) (2,449) (2,694) (2,909)
Boston -- (484) (581) (657) (723) (781)
Existing Gross Expenses (13,722) (18,434) (20,598) (22,337) (24,531) (26,845)
Direct Expenses – Potential New Marketsa
Charlotte (150) (189) (313) (435) (549) (607)
Augusta (406) (357) (379) (402) (426) (452)
Indianapolis (519) (607) (702) (882) (1,078) (1,257)
Los Angeles (5,155) (5,496) (6,045) (6,619) (7,248) (7,938)
Miami -- -- -- -- -- --
Cleveland (1,707) (1,650) (1,800) (1,980) (2,130) (2,280)
Houston (4,479) (4,746) (5,220) (5,742) (6,317) (6,929)
Dallas (547) (825) (1,063) (1,463) (1,688) (1,898)
Greenville (566) (603) (672) (729) (791) (858)
Raleigh (1,565) (1,770) (1,982) (2,180) (2,398) (2,638)
ROI Direct Expenses (15,094) (16,243) (18,176) (20,432) (22,624) (24,857)
Net Revenue – Existing Markets
Washington 28,123 29,732 32,111 35,567 39,123 43,036
Baltimore 21,930 22,934 24,769 27,536 30,290 33,319
Philadelphia (WPHI) 5,439 6,199 6,944 7,711 8,482 9,330
Philadelphia (WPLY) 8,057 8,422 9,243 10,116 11,127 12,240
Detroit 7,491 9,592 11,031 12,048 13,012 14,053
Atlanta 13,731 15,148 17,041 18,714 20,585 22,644
Cleveland 2,249 4,856 5,584 5,970 6,448 6,964
St. Louis -- 865 1,730 2,122 2,440 2,635
Richmond 9,106 11,244 12,931 15,043 16,547 17,871
Boston -- 2,917 3,500 4,036 4,440 4,795
Existing Net Revenue 96,126 111,909 124,884 138,863 152,494 166,887
Net Revenue – Potential New Marketsa
Charlotte 852 1,061 1,937 2,815 3,701 4,093
Augusta 2,302 2,393 2,821 2,998 3,174 3,348
Indianapolis 4,654 5,207 5,898 7,318 8,422 9,743
Los Angeles 33,471 35,621 39,176 42,898 46,973 51,436
Miami 1,501 1,634 1,634 2,043 2,553 3,191
Cleveland 11,663 12,100 13,200 14,520 15,620 16,720
Houston 32,139 34,802 38,282 42,110 46,321 50,814
Dallas 4,209 5,295 7,438 10,238 11,813 13,289
Greenville 4,048 4,261 4,746 5,021 5,459 5,642
Raleigh 10,553 11,769 13,181 14,499 15,949 17,544
New Markets Net Revenue 105,392 114,143 128,313 144,460 159,985 175,820
Operating Expenses – Existing Markets
Washington 13,480 13,827 14,864 15,734 16,316 16,807
Baltimore 9,860 10,260 11,030 11,737 12,121 12,425
Philadelphia (WPHI) 3,779 3,957 4,254 4,618 4,926 5,240
Philadelphia (WPLY) 5,815 3,622 3,743 3,791 3,853 3,875
Detroit 6,421 6,578 7,071 7,495 7,776 8,032
Atlanta 6,799 7,503 8,066 8,393 8,716 8,994
Cleveland 1,774 3,791 4,075 4,234 4,451 4,667
St. Louis -- 1,440 1,548 1,912 2,199 2,358
Richmond 5,914 7,648 8,222 9,627 10,319 10,709
Boston -- 2,243 2,411 2,783 2,998 3,137
Existing Operating Expenses 53,842 60,869 65,284 70,324 73,675 76,244
Operating Expenses – Potential New Marketsa
Charlotte 665 1,023 1,249 1,461 1,659 1,781
Augusta 1,361 1,584 1,669 1,758 1,851 1,949
Indianapolis 2,954 3,206 3,463 3,848 4,255 4,639
Los Angeles 14,448 15,621 16,176 16,584 17,581 18,642
Miami 510 584 584 862 1,224 1,313
Cleveland 4,862 4,600 4,700 4,958 5,101 5,149
Houston 10,129 10,592 11,046 11,469 11,850 12,035
Dallas 4,012 4,195 4,938 5,238 5,500 5,900
Greenville 1,919 1,928 2,071 1,945 1,922 1,574
Raleigh 5,516 5,769 5,981 6,627 7,077 7,561
New Markets Operating Expenses 46,376 49,102 51,877 54,750 58,020 60,543
BCF – Existing Markets
Washington 14,866 15,904 17,246 19,833 22,808 26,229
Baltimore 11,846 12,673 13,738 15,799 18,169 20,894
Philadelphia (WPHI) 1,658 2,242 2,689 3,092 3,556 4,090
Philadelphia (WPLY) 2,500 4,800 5,500 6,325 7,274 8,365
Detroit 1,069 3,013 3,959 4,553 5,236 6,021
Atlanta 6,933 7,645 8,975 10,321 11,869 13,650
Cleveland 470 1,066 1,510 1,737 1,997 2,297
St. Louis -- -575 182 209 241 277
Richmond 3,192 3,596 4,709 5,415 6,228 7,162
Boston -- 674 1,090 1,254 1,442 1,658
Existing BCF 42,534 51,038 59,598 68,538 78,820 90,643
BCF – Potential New Marketsa 20% 17% 15% 15% 15%
Charlotte 187 38 688 1,354 2,042 2,312
Augusta 941 809 1,152 1,240 1,323 1,399
Indianapolis 1,700 2,001 2,435 3,470 4,167 5,104
Los Angeles 19,023 20,000 23,000 26,314 29,393 32,794
Miami 991 1,050 1,050 1,181 1,329 1,878
Cleveland 6,800 7,500 8,500 9,563 10,519 11,571
Houston 22,009 24,210 27,236 30,641 34,471 38,780
Dallas 197 1,100 2,500 5,000 6,313 7,389
Greenville 2,129 2,333 2,675 3,076 3,538 4,068
Raleigh 5,037 6,000 7,200 7,872 8,871 9,982
New Markets BCF 59,014 65,041 76,436 89,711 101,966 115,277
Growth in New Markets BCF 10% 18% 17% 14% 13%
Total BCF 101,548 116,079 136,034 158,249 180,786 205,920
Growth in Total BCF 14% 17% 16% 14% 14%
Corporate Expenses 6,000 6,000 6,900 7,935 9,125 10,494
EBITDA 95,548 110,079 129,134 150,314 171,661 195,426
Non-cash Compensation 225 0 0 0 0 0
Depreciation and amortizationb 107,520 107,520 107,500 107,500 107,500 107,500

EBIT (12,197) 2,559 21,634 42,814 64,161 87,926

Source: Adapted from company reports

a
Potential acquisitions in Charlotte and Augusta were from Davis Broadcasting; in Indianapolis from Shirk, Inc
and IBL,LLC; and the remaining potential acquisitions were from Clear Channel Communications, Inc.
b
Includes about $90 million of tax deductible depreciation and amortization in each year beginning 2001 and
ending in 2015, as a result of the potential acquisitions.
ng Markets and Potential New Markets
Incremental Corporate Expenditure
Now make calc about corporate expdt. and use economies of scale.
Corp Exp increased 15% during 2001-2004, BCF also grew at the same rate (Exh 9)
Corp Exp appears to fall from about 16% of BCF in 1997 to about 11% of BCF in 1999 (Exh 6)
From Exh 9 it falls to 5% during 2001 through 2004 with acquisition. Assume mid-point [(11+5)/2]=8% for existing

8%BCF(Exisiting)+x%BCF(Acq)=5%(BCF(Existing)+BCF(Acq))
If BCF(Exisiting)=BCF(Acq)=BCF
BCF(8+x)=5*2*BCF
x=2
.Ra=Rf+beta*(Rm-Rf)

Discount Rate
Risk Free Rate = 6.3% From Exh 10
Risk Premium = 6.0% Given Assumption (is it correct??)
Asset Beta = 0.75 From Exh 8 (INDUSTRY AVG)
Asset Return = 10.8%
DCF Value of Acquisition Opportunities
(in '000 of $)

----------------------Projected----------------------
2001 2002 2003 2004
BCF New Markets 76,436 89,711 101,966 115,277
Incremental Corp Expense 1529 1794 2039 2306
EBITDA 74,907 87,917 99,927 112,971
Depreciation 90,420 90,840 91,260 91,680
EBIT -15,513 -2,923 8,667 21,291
Taxes @34% -5,274 -994 2,947 7,239
Net Income -10,238 -1,929 5,720 14,052
Incremental Working Capital 35,157 4,417 4,252 4,336
Capital Expdt 2,100 2,100 2,100 2,100
Depreciation 90,420 90,840 91,260 91,680
Cash Flow 42,924 82,394 90,628 99,296
Discount Factor 0.903 0.815 0.735 0.664

PV of Cash Flow 38,741 67,114 66,626 65,883

Net Working Capital as % of Revenues

% of Revenue
Revenues net Trade/
of Accounts Accounts
Commission receivables Payables Accounts
(Exh 6) (Exh 7) (Exh 7) Receivable
1997 32,367 8,722 258 27%
1998 46,109 12,026 1,190 26%
1999 81,703 19,833 1,663 24%

Average 26%

Terminal Value as growing perpetuity

4% 6% 8%
PV of Cash Flow (2001-04) 238,364 238,364 238,364 238,364
TV @18.1xBCF 2,086,514
TV 1,518,649 2,192,793 3,830,000
PV of 2004 TV 1,384,402 1,007,624 1,454,918 2,541,205
Total Enterprise Value 1,622,766 1,245,987 1,693,282 2,779,569
TV/Total Ent. Value 0.85 0.81 0.86 0.91
Valuation of Potential Acquisitions Using Trading Multiples (Exh 8)
Industry Average Radio One
Acquisition
Value (From
Above) Multiple Value Multiple
BCF 2001 76,436 18.1 1,383,492 22.1
EBITDA 74,907 19.4 1,453,201 24.2
After-tax cash flow 74,968 26.1 1,956,654 36.5
Average 1,597,782

Note - Normalised After-tax cash flow for Radio One to remove the effect of the initial working capital funding in 2

Calculation of Normalised after-tax cash flow

2001 After-tax cash flow 42,924 Calculated for DCF calc
plus Initial working capital 35,157 Calculated for DCF calc
Less: WC for change in sales
from 2000-01 at 24% of net
revenue 3,114 From Exh 9
74,968
CF in 1999 (Exh 6)
e mid-point [(11+5)/2]=8% for existing station in 2000 and beyond.
 tion (is it correct??)
NDUSTRY AVG)

Acquisition Opportunities

Exh 9
2%of BCF

After taking incremental cap ex of $100,000 per station and depr. It over 5 year using SLM methid if depreciation

24% of Change in revenue (estimated below)

21 stations @$100,000 per station each year

% of Revenue

Net
Accounts Working
Payable Capital
1% 26%
3% 24%
2% 22%

2% 24%
 Radio One Hispanic

Value Multiple Value

1,689,236 42.1 3,217,956
1,812,756 44.5 3,333,374
2,736,318 59.7 4,475,566
2,079,436 3,675,632

the initial working capital funding in 2001

hid if depreciation
Exhibit 10 Corporate & Government Bond Rates as of March 1, 2000
Government Bond Yields
Maturity Rate
3 months 5.36
6 months 5.68
1 year 5.84
3 years 6.14
5 years 6.19
10 years 6.28
30 years 6.35

Corporate Bonds (10-year maturity)

Rating Rate
AAA 7.1
AA 7.18
A 7.34
BBB 7.7
BB 9.1
B 9.68

Source: Federal Reserve Statistical Release; Bloomberg