****FOOL ON THE HILL*****How to Buy $12 in Cash for $5 7/8 date:6/6/97
An Investment Opinion by Randy Befumo
CHILDREN'S BROADCASTING CORP. (Nasdaq: AAHS) (N) (S) leapt $2
1/4 to $5 7/8 today after the downtrodden producer of radio shows for pre-teens
announced the sale of a number of radio stations throughout the U.S. With a
market capitalization of little more than $18 million yesterday, news that the
company had made a significant strategic change and sold all of its AM radio
stations to Global Broadcasting Corp. for $72.5 million caused a number of
investors to take another look at the company. Until today, Children's Broadcasting
owned and operated more than 32 stations, running programming for children on
them 24 hours a day.
Under terms of the deal, Children's Broadcasting will sell all of its AM stations,
including one only acquired yesterday in Arizona, to Global Broadcasting. With
only 5.9 million shares outstanding as of its last reported fiscal quarter, this slug of
cash accounts for almost $12.28 a share. So with more than $12 in cash per share,
why is the stock only at $6 1/8 today? Despite the huge influx of capital, Children's
Broadcasting unfortunately has a number of issues that it has to work through
before it can become cash flow positive -- the most important of which is the fact
that one of its biggest customers announced last year that it was becoming a
competitor.
The company's woes began almost a year ago on June 28, 1996, when it announced
that its revenues would not meet expectations for the fiscal year. A month later the
company announced that it had hired Southcoast Capital to assist it in possibly
selling the company, sending it's shares up 12.5%, but the devastating revelation on
July 30th that ABC Radio was canceling its contract with Children's Broadcasting
quickly knocked the stock price down to $6 1/8. Although the stock did recover
somewhat initially, when word broke that ABC Radio's parent, DISNEY (NYSE:
DIS) (N) (S), had terminated the contract to start its own network of children's
radio stations with a format similar to Children's Broadcasting, the shares went as
low as $3 and change, and except for a slight blip in January have not looked back
since.
Despite the company's decision in September to sue ABC Radio and Disney over
the decision to start their own radio network, claiming unfair competition because
of information they gathered while they were still a customer, until the sale of the
AM stations there was really nothing to recommend Children's Broadcasting to
anyone. Declining revenues and negative cash flows suggested that the business
model was flawed, even if the economic value of the actual radio stations was not
being reflected in the company's market capitalization. Children's jacked up its
long-term debt by getting regular cash infusions to keep going, the most recent of
which was $15 million in financing in November of 1996. Additionally, the
company filed to sell five million shares in February even though the stock was
below $5 a share, highlighting the urgency of its working capital needs.
After Children's Broadcasting closes the Global Broadcasting Corp. deal, it will
have ample working capital to develop a new business modeled around providing
programming to radio stations that it does not own. The company will significantly
reduce its operating costs by removing the overhead of the radio stations from its
cost structure, implying that the $72.5 million cash infusion should keep the
company afloat for some time. Even if you look at the cost structure prior to the
divestiture of the radio stations, $72.5 million could have supported it for more
than seven years at the current rate of expenditures. Although Children's
Broadcasting has yet to prove that its new business model is viable or that it can
intelligently deploy the cash that it has on hand, for investors willing to do the due
diligence and talk to the company and ask the right questions, it is certainly more
appealing that it was yesterday. |
