EnvisionCap.com: Forbes Article

Radio Days

Marilyn Cohen, Forbes Magazine, 10.30.06

Some of those old-media companies will be around for a long time and make for good prospects in fixed income.

Old media are dead; bring in the new ones. You've heard this again and again in the debate over the future of newspapers, broadcast television and landline telephone companies. The argument is that these are all doomed by the Internet, YouTube and wireless connections. I'd like to make the case for betting the other way: investing in a century-old communications medium that still has a lot of life left in it. You should consider owning the bonds of radio broadcasters.

Despite the arrival of the wireless Internet and iPods, radio still has a huge audience of addicts. People listen for the weather and news as they shave, clean house or drive to work. And that guarantees big bucks to radio providers. Bond buyers will find several opportunities worthy of their investment dollars.

Clear Channel Communications (nyse: CCU - news - people ), which also owns billboards and TV stations, gets half its $7 billion a year of revenue from radio. Responding to shareholder complaints about the stock price, the company in the past year bought in 9% of its shares at a cost of $1.6 billion and announced an additional $1 billion share buyback.

While these buybacks are detrimental to credit quality, this bad news has already been baked into bond prices. I like the Clear Channel 4.4%, due May 15, 2011. It is rated BBB-- by Standard & Poor's and priced at 93.5 cents on the dollar for a 6.05% yield to maturity. The $250 million issue is noncallable, and the maturity is short enough that the buybacks don't greatly raise the risk of a default. Still better is the Clear Channel 6.25%, due Mar. 15, 2011, priced at 100.3 to yield 6.17%.

Radio is dead? Not at Univision Communications (nyse: UVN - news - people ), which is the leading Spanish radio broadcaster in the country, with 70 stations reaching 73% of the U.S. Hispanic population. It also owns 60 television stations in sizable Hispanic markets. The combination draws in rich revenues, now $2.24 billion a year and growing 5% a year.

Univision has accepted a $12.3 billion buyout offer from a private equity group (Texas Pacific Group, Thomas H. Lee Partners, Providence Equity and Madison Dearborn). Fearful that the new owners will load the company with more debt, Moody's (nyse: MCO - news - people ) recently downgraded Univision bonds to a non-investment-grade Ba3 and has it on negative credit watch. Standard & Poor's already has Univision in the junk heap at bb--.

The business and demographics are strong and compelling, enough to curb my wariness of the poison of high leverage. I like the Univision 3.875%, due Oct. 15, 2008, a noncallable $250 million issue. It trades at 95.5 for a 6.3% yield to maturity.

The newest frontier is satellite radio, available by subscription. Wall Street's skeptics say that Sirius Satellite Radio (nasdaq: SIRI - news - people ) and XM Satellite Radio Holdings are going to run out of listeners willing to pay $13 a month. But I see plenty of big spenders out there, the same people who pay $70 for cable television and spend $3.55 a day for a Starbucks (nasdaq: SBUX - news - people ) cappuccino. This new technology for radio listeners has expanded our choices and changed audio entertainment just as thoroughly as cable changed television. It took a few years for cable and satellite television to catch on. Just give this concept time.

Of the two I prefer Sirius because of my high regard for its chief executive, dealmeister and salesman, Mel Karmazin. XM has 7.2 million subscribers while Sirius has 5.1 million. Analysts wonder whether there's enough room for two independent services. Maybe, maybe not. But my money is on the canny Karmazin. Don't be surprised if he engineers a merger of the two and figures out how to overcome regulatory hurdles. If not, then Karmazin, who expects to have 6.3 million subscribers by year-end to XM's estimated 7.7 million, sooner or later may nose out XM because they are growing at a faster rate.

In the end, the huge signing bonus that Sirius paid to get shock jock Howard Stern may pay off.

Sirius bonds carry the junkiest of the junk bond ratings, CCC by Standard & Poor's. It's hard to apply the usual rules of financial analysis here because the company is so far away from profitability. But here are the numbers.

Sirius will take in something near $615 million in revenue this year. From that it should lose $565 million in operating income (Ebitda, that is). Resting atop this meager income stream is a debt load of $1.1 billion, on which the interest is $65 million a year. One of three things has to happen: Sirius gets a big boost in its subscriber base, it gets a big equity injection or it undergoes a recapitalization. The bonds (if not the stock) should do okay even in the third of these scenarios. I like Sirius 9.625%, due Aug. 1, 2013, and trading at 97.5 to yield 10.15%. Strictly for speculators.

Marilyn Cohen is president of Envision Capital Management®, Inc., a Los Angeles fixed-income money manager and author of The Bond Bible. Find past columns at www.forbes.com/cohen.