Radio One On Same Frequency

Radio One, Inc. (ROIAK) is diversifying into businesses outside its core radio operations, which in the longer-term could offset the effects of radio’’s secular decline. Together with Comcast (CMCSA), the company started the African-American cable TV network, TV One, which is expected to be cash-flow positive in the second half of 2008.

The company is also investing in online content and an Internet portal. With the recent sale of the Los Angeles and Miami stations, we expect ROIAK to acquire another 10% stake in TV One in 2009, and consolidate it, providing meaningful accretion. Near term, we expect revenue and earnings to trough in 2009 but have no visibility to renewed growth.

Meanwhile, in our view, the company’s high leverage may hinder its acquisition activities in the near future and thus, its attempts to diversify. Moreover, in a period of declining earnings and cash flow, Radio One is nearing its covenant limits. The company’s leverage of 6.6x is not far from the 7.5x covenant limit, and similarly its interest coverage ratio was 1.85x, slightly above its lower limit of 1.60x. Although the company is utilizing sale proceeds to pay down debt, we think any additional near-term sales will be small and thus don’t expect debt levels to decline substantially.

Sumit Singh contributed to the report.

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