Arlington Stays Tuned To Radio –

In the mid-1990s, private equity ran into the radio space in response to an FCC decree to loosen ownership laws. As a result, Hicks Muse Tate & Furst helped build the Clear Channel behemoth, while ABRY Partners, Veronis Suhler Stevenson and Greenwich Street Partners also found success on the radio dials.

Those triumphs, though, seem a distant memory, and just as music videos were supposed to kill the radio star, the new threat to the space is coming in the form of satellite. It already appears that the early adopters to this new medium will be paid handsomely, with Apollo Management, Blackstone Group and Madison Dearborn among those that will likely cash in. But where does that leave the investors in the old-fashioned, AM/FM, terrestrial radio?

Well, despite the spin Howard Stern puts on it, not everyone in traditional radio is searching for a life vest just yet. Arlington Capital Partners, the Washington, DC-based buyout shop, is among those who are confident that the industry will not only survive the threat of satellite, but will continue to thrive.

“It’s our point of view that satellite radio is a very good product, but the attention it has received is probably 100-fold the potential impact it has actually had on the overall radio market,” Perry Steiner, a managing director at Arlington, said. “Ninety seven percent of people listen to the radio every week, and the number of minutes that those people listen continues to go up because of increased commute times.”

Arlington is backing this sentiment with a bet on the sector through its investment in Cherry Creek Radio, a platform started in 2003 to invest in the space. The firm has earmarked $40 million for acquisitions, and Cherry Creek has already corralled 36 radio stations located in 12 different markets, primarily concentrated in the Western U.S. The latest acquisition for the platform, which closed early February, gives Cherry Creek its first exposure into the Eastern United States and brings four Long Island, NY stations into its mix.

“Traditional radio will always be needed,” Steiner said. “It’s got the local factor. People need local news, local weather, local traffic, and because of that, traditional radio stations can attract local advertising… Satellite will not be able deliver the local news that our station’s listeners in say Montana, for instance, are searching for.”

He also believes while traditional radio has been around for just about a century, it is not too old a dog to learn new tricks or even wean itself from bad habits. After a period of time in which traditional radio has become muddled with too many commercial breaks, industry bellweather Clear Channel has begun an initiative to cut its commercial time by more than 25 percent. Whether this is a concession that the mostly advertising-free satellite alternative does indeed pose a threat has not been explicitly stated, but analysts that cover the company’s stock say that whatever the motivation, the move is starting to pay dividends.

“The advertising market continues to grow [for traditional radio],” Steiner said. “The industry is going through a whole less-is-more’ initiative [with regards to advertising], and that takes clutter off the air and improves the listening product, which in turn delivers more value to the advertisers.”

Proof that the medium still carries some appeal on Madison Avenue is seen in Wal-Mart’s decision this fall to pursue radio advertising as a way to bolster sales. The retail giant had never before used radio as an advertising option.

But like other entertainment industries, new technologies will demand that broadcasters stay alert. In addition to satellite options, other still nascent – alternatives include “podcasts,” which are broadcasts that are automatically downloaded onto an mp3 player. This threat’ has not yet emerged as such, but if it were to materialize, it could cut a swath across an important 18 to 30 year-old demographic.

Arlington, though, remains at ease in terms of radio’s immediate future. And with the strategics, such as Clear Channel and Citadel Broadcasting (a Forstmann Little & Co. portfolio company), apparently sitting on their hands, the Washington, DC, firm has, for the most part, been unobstructed in its acquisition spree. Just one out of the five radio purchases the firm has made has drawn a competitive bid. There are however, other private equity firms that are also looking in the space, although much of the other financial-sponsor attention has been focused either overseas or in Spanish language formats. Most recently, Veronis Suhler Stevenson has teamed up with Wireless Group CEO Kelvin MacKenzie to make a public-to-private bid for the UK radio company, while Alta Communications and Providence Equity Partners have led an investment in Spanish-language radio station owner Bustos Media Corp.

Steiner could not comment on where Arlington will look to find its exit, but it is not impractical that the company could go public in the future. Forstmann Little’s Citadel Broadcasting was well received by the public just two years ago, at a time when the IPO market was in bad shape. Also, a sale to a strategic could also be in the offing should the larger players begin acquiring again.

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