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Thursday, Mar 28, 2024

Investors See Promise in Salem’s Acquisition Strategy

Investors See Promise in Salem’s Acquisition Strategy Corporate Focus By MICHAEL HART Staff Reporter If Salem Communications Corp. isn’t the first company whose name comes to mind when you think of those who have benefited most from the Telecommunications Act of 1996, you wouldn’t be alone. Until recently, the Camarillo-based company that started out with one tiny AM radio station in Oxnard in 1974 has not attracted the kind of attention bigger competitors like Clear Channel Communications Inc. or Cumulus Media Inc. have unless perhaps you were already a fan of contemporary Christian music. Early on, Salem began its strategy of buying up what its executives gladly call “sick” stations and transforming them into Christian “teaching and talking” formats. By 1980, it owned 10 stations and, by 1995, 31. But when, in 1996, new regulations allowed it to own up to eight radio stations in a single market, its acquisitions strategy really took off. Today, Salem owns 82 stations, 57 of them in 22 of the nation’s 25 largest media markets. It also offers syndicated religious programming to 1,400 other radio stations and provides on-demand audio streaming online at OnePlace.com. It has spent $300 million on acquisitions in the last two and a half years ($126 million in 2001) and will probably fork over another $45 million before this year’s over. And even if Salem, with a market cap of $155.6 million, is carrying $307.6 million in long-term debt, investors are nothing if not optimistic about its future. Salem was trading at $28.87 on June 7, a 10.2% increase over the same day a year ago and a 28.3% increase since the beginning of the year. “We have been correctly perceived as a hedge against recession,” said Salem CEO Edward Atsinger III. He also said, “In a recovery economy, investors are looking for growth opportunities.” Salem has convinced investors and stock analysts (three of them have initiated coverage of the company in the last month, all with “buy” recommendations) alike that it can be both a hedge and a growth stock. Most of the company’s 25 AM stations are devoted to block programming, selling blocks of air time primarily to nonprofit religious organizations, contributing 40 percent of Salem’s revenue. “That kind of business doesn’t have a lot of expense attached to it,” said Victor Miller, an analyst with Bear Stearns & Co. Inc. “They’re not dependent on advertising,” which was helpful through much of 2001 when an economic slowdown compelled advertisers to slash spending. Even the radio industry, more recession-resistant than other media outlets, saw ad sales drop roughly 8 percent last year. Salem’s block programming revenue, however, rises 5 to 7 percent annually. Meanwhile, Salem has launched its contemporary Christian music format, branded “The Fish” after flagship station KFSH-FM in Los Angeles, at 11 other stations in the last year. Those and its other stations where revenue is primarily driven by advertising account for another 40 percent of the company’s revenue. Its syndication, publishing and online businesses account for the remainder of its revenue. Salem has apparently benefited from a surge of interest in the contemporary Christian format in recent years. “And there’s some evidence to suggest that since Sept. 11 that has increased,” said Paul Sweeney, an analyst with Credit Suisse First Boston Corp. “Last year, it was the only niche to grow in terms of album sales.” For the first quarter of 2002, Salem reported a net loss of $1.8 million on revenues of $37.2 million, compared to a net loss of $4.7 million on $32.0 million revenues in the same quarter a year earlier. Most of the radio stations Salem has acquired in recent years have been either poor performers that have since undergone format transformations or stations owned by churches or other religious organizations that didn’t necessarily use them to generate revenue. “We have targeted stations without cash flow,” Atsinger said, “but the launches that have involved considerable start-up costs are behind us now.” He said Salem will continue to look for opportunities for acquisitions, but will also spend some time “digesting” what it already has. The promise, he and analysts say, is in the revenue growth expected from those stations over the next few years. “They have a bunch of stations that generate no cash flow whatsoever right now,” Miller said. “Those stations are where their growth will be. Those acquisitions are their fuel for growth.”

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