Religious Broadcaster Salem Hopes Lofty Values Will Lift Its IPO

With its planned initial public stock offering this week, Salem Communications Corp., the nation’s largest religious radio broadcaster, is hoping to finance its expansion by riding the tail wind of lofty values in the radio sector.

The Camarillo-based broadcaster, which operates four stations in the Los Angeles area, seeks to raise $150 million to retire debt and continue a shopping spree that has already expanded its empire to 52 stations and into new arenas such as the Internet and publishing.

“This is a classic example of a company trying to get a valuation from the public that it can’t get in the private market,” said James Marsh, an analyst with Prudential Securities, adding that private lenders would probably be unwilling to give Salem as high a value as the stock market.

The deregulation of radio in 1996 set off a consolidation frenzy that has driven up the stations’ values--and stock trading multiples--to historic highs. Infinity Broadcasting Corp., the nation’s second-largest radio station owner, controlled by CBS Inc., raised $2.87 billion in December in the third-largest IPO as of that date. Shares of Radio One Inc., which targets African American listeners, have shot up 50% since their debut at $24 in May. Leading radio stocks are up more than 20% this year on average.

But Marsh and other radio experts caution that the religious broadcaster cannot be judged by the same standards as conventional radio operators because of its economic model.

Rather than rely solely on advertising revenue, which depends on programming popularity and a station’s demographic reach, Salem gets the bulk of its sales from selling blocks of time to third-party programmers, who in turn make money from selling products and soliciting contributions from listeners.

The programming includes gospel and Christian music and what is referred to in Salem’s offering prospectus as “talk and teaching” fare. The format is radio’s third-largest, after country music and news-and-talk, reaching 28 million listeners weekly, according to the document.

Today, 1,785 of the nation’s 9,000 commercial radio stations offer Christian programming, an increase of 79% from 10 years ago, according to the offering circular.

Many in the mainstream radio business distance themselves from this evangelical niche but agree it is “a license to print money,” in the words of one veteran radio investor. “I was in one of these counting rooms once and it looked like a Vegas casino, with people opening stacks of envelopes stuffed with dollar bills.”

The segment is more recession-resistant than the conventional business--and its high margins have helped build several of today’s radio giants. For instance, Jacor Communications Inc. and Beasley Broadcast Group started as religious broadcasters, leveraging into the traditional business by using the cash-flow strength of religious stations, whose costs are low because they have no need for big advertising sales and programming staffs.

They also don’t compete for the strongest stations in a market. “They can pick up peripheral stations cheaply,” said Herb McCord, a radio consultant.

That’s why Salem’s cash-flow operating margins, a common measure of radio performance, have hovered in the 42% to 46% range during the last three years. By contrast, Radio One’s margins are in the high 30% and low 40% range.

“Salem’s 45.4% broadcast cash flow margin would be impressive for any radio company, regardless of target audience,” said an article about the company’s IPO in Radio Business Report, a trade publication based in Alexandria, Va.

Executives could not comment because the company is in the “quiet period” required by the Securities and Exchange Commission to prevent the hyping of a stock before an offering. But Salem’s prospectus indicates that the company aims to use its net proceeds to acquire more stations, particularly in markets where it already operates, helping to further improve operating efficiencies.

The company has stations in such major cities as San Francisco, Boston, Philadelphia, New York, Chicago and Dallas. In the Los Angeles area, which accounted for 21% of operating cash flow in 1998, the company owns KKLA-FM (99.5), KKLA-AM (1240), KLTX-AM (1360) and KIEV-AM (870). It also owns KDAR-FM (98.3) in Oxnard.

Since the easing of federal rules restricting the number of stations one owner can control, most large radio groups have bought multiple stations in a market to reduce costs and use their dominance and broadened reach to raise advertising rates.

Salem is optimistic about its own advertising potential. The prospectus points to one indicator of the popularity of its genre: The nation’s largest retailer, Wal-Mart, devotes more than 20% of its music department to Christian titles.

In 1998, advertising accounted for 36% of revenue, up from 33% in 1996. The sale of block programming time accounted for about 50% of its $77.9 million in revenue last year, down from about 58% in 1996.

Although the company’s acquisition binge led to an operating loss of $1.6 million in 1998, its same-station revenue increased 13%, while cash flow grew 21%.

The company plans to use a fourth of the proceeds from the offering, which is being underwritten by Deutsche Bank Alex. Brown, along with ING Baring Furman Selz, to retire debt, which amounted to $179 million at the end of last year. Its ticker symbol will be SALM.

After the IPO, the company’s two founders, Edward G. Atsinger III and Stuart W. Epperson, will continue to control the company through Class B super-voting stock. The 50-50 partners plan to sell about 7.5 million of the 17.182 million shares of Class A common stock outstanding, at about $20 each.

The founders, who run the company day-to-day and are brothers-in-law, have been in the radio station business since the 1960s. Through a complicated series of transactions, they pooled their radio holdings in 1986, then merged them into Salem in 1999.

“This isn’t a swing-for-the-fences kind of strategy,” said Prudential’s Marsh. “It’s a series of singles and doubles.”

Still, many radio investors have remained on the sidelines as market values have soared, concerned that the 8% to 10% annual growth of the business does not justify trading multiples of 17 to 20 times cash flow.

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Times staff writer Sallie Hofmeister can be reached at [email protected]. Note that initial public offerings are speculative, and unsuitable for many investors.

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Tracking the Deals

A look at initial public stock offerings planned by California companies. For more information on upcoming deals, contact the companies or the underwriters. Most of the companies and underwriters have Web sites you can visit.

Company: Seminis

Ticker symbol: SMNS

City: Saticoy

Industry: Seeds

Size, in millions: $268

Est. share price: $17-$22

Underwriter: Goldman Sachs/JP Morgan

Est. week: 6/28

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Company: DVD Express

Ticker symbol: DVDS

City: Los Angeles

Industry: DVD retailer

Size, in millions: $50

Est. share price: $10-$12

Underwriter: ING Baring

Est. week: 6/28

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Company: Ask Jeeves

Ticker symbol: ASKJ

City: Berkeley

Industry: Search engine

Size, in millions: $30

Est. share price: $9-$11

Underwriter: Morgan Stanley DW

Est. week: 6/28

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Company: Eloan

Ticker symbol: EELN

City: Dublin

Industry: Online mortgages

Size, in millions: $35

Est. share price: $9-$11

Underwriter: Goldman Sachs

Est. week: 6/28

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Company: Salem Comm.

Ticker symbol: SALM

City: Camarillo

Industry: Religious radio

Size, in millions: $150

Est. share price: $19-$21

Underwriter: Deutsche Banc

Est. week: 6/28

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Company: Digital Island

Ticker symbol: ISLD

City: San Francisco

Industry: Businews networks

Size, in millions: $83

Est. share price: $10-$12

Underwriter: Bear Stearns

Est. week: 6/28

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Company: Clarent

Ticker symbol: CLRN

City: Redwood

Industry: Net telephony

Size, in millions: $56

Est. share price: $13-$15

Underwriter: CS First Boston

Est. week: 6/28

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Company: Commerce One

Ticker symbol: CMRC

City: Walnut Creek

Industry: E-commerce software

Size, in millions: $46

Est. share price: $13-$15

Underwriter: CS First Boston

Est. week: 6/28

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Company: Women First

Ticker symbol: WFHC

City: San Diego

Industry: Health care

Size, in millions: $41

Est. share price: $10-$12

Underwriter: Allen & Co.

Est. week: 6/28

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Company: JFax.com

Ticker symbol: JFAX

City: Los Angeles

Industry: Internet messaging

Size, in millions: $77

Est. share price: $8-$10

Underwriter: Donaldson Lufkin

Est. week: 7/12

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Company: Quokka Sports

Ticker symbol: QKKA

City: San Francisco

Industry: Sports programs

Size, in millions: $50

Est. share price: $9-$11

Underwriter: Merrill Lynch

Est. week: 7/19

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Company: MPThree

Ticker symbol: MPPP

City: San Diego

Industry: Online music

Size, in millions: $90

Est. share price: $9-$11

Underwriter: CS First Boston

Est. week: 7/19

Source: IPO Financial Network (https://www.ipofinancial.com), Bloomberg News