Religious Broadcaster Hits Static In Plans to Continue Expansion

WALL STREET WEST

Salem Communications Corp., the Camarillo-based religious radio operator that has been on an acquisition binge in recent years, needs "significant financing" to fund its ongoing acquisition strategy, according to the company's annual 10-K report.

That doesn't necessarily mean Salem won't be able to find the funding, a crucial element in its strategy of acquiring geographic clusters of radio stations. But the pace of acquisitions has slowed in recent years, and Wall Street analysts have viewed Salem's debt load as something of an albatross.

In its 2003 fourth quarter, the company said it generated $5.5 million in free cash flow, while holding $324.4 million in debt. Debt levels have fallen from $350.9 million at year-end 2002, but are still viewed as an impediment to growth.

"High financial leverage could constrain acquisitions in the near-term," said Stuart T. Kagel, an analyst with SunTrust Robinson Humphrey in New York.

James C. Goss, an analyst with Barrington Research in Chicago, agreed that the company is highly leveraged, and added that Salem's options are few.

The company could sell something, but that would be counterproductive as its assets are prized, "and they want to grow," Goss said.

"So the only other true option is to perhaps issue stock, and shift the mix of debt and equity," he added. "But that wouldn't be their first choice until the stock price got to an acceptable level."

The stock would have to trade a few dollars per share higher in order for an offering to become desirable, Goss said.

Salem Chief Financial Officer David A.R. Evans declined to say how the company plans to pay for an expected six to 12 station purchases per year. A follow-on stock offering is an option, but timing is a factor, Evans said.

"For a company to issue stock, you ideally want to do that when the economy is in great shape, Wall Street is in great shape, and the sector is in great shape," he said.

Salem's stock has risen sharply in the past year, after bottoming at $15.59 on March 19, 2003. Since peaking at $28.37 on Jan. 27, shares have drifted downward, to $25.66 at the close on March 17.

Evans said concerns over debt levels are overstated. He pointed out that the company has plenty of borrowing muscle, especially with a $75 million credit line established last year.

Even so, the pace of Salem's acquisitions has trailed off the past three years. It invested $117 million in radio station acquisitions in 2001, $51 million in 2002 and $20 million in 2003.

Evans said this may be caused by fewer stations becoming available due to industry consolidation in the 1990s. Since 2000, a national advertising slump has also been a factor.

"One challenge is finding properties to acquire at reasonable prices," Evans said. "There are fewer opportunities than three years ago."

Salem, which has four stations in the Los Angeles area, hit a rough spot a year ago, when 60 stations dropped Salem's syndicated talk show hosts in favor of shows produced by ABC Radio Networks and Westwood One, whose lineups include personalities Sean Hannity and Bill O'Reilly.

Evans said ratings at stations in Dallas and Philadelphia are building, and that the company is investing in major upgrades to boost a station's signal in Chicago and add 700 feet to a tower in Atlanta. Recently, the company also announced plans to add William J. Bennett, former education secretary under Ronald Reagan, to a conservative talk show format beginning April 5.

"The key message from our perspective is that the Christian religious audience is very large," Evans said. "If you look at Gallup polls, 40 percent of the people in the U.S. go to church Sunday and read the Bible every week. We are clearly the undisputed market leader in offering Christian radio."

Pat Maio

Management Buyout

Duff & Phelps LLC, the Chicago-based investment bank with a longtime presence in Los Angeles, was purchased last week by a partnership of its management, Rolling Hills-based private equity group Lovell Minnick Partners LLC and New York investment bank Stone Ridge Partners.

Stone Ridge founder Noah Gottdiener will be chief executive of the combined firm, which will keep the Duff & Phelps name, said Greg Range, managing director of the Los Angeles office. Range is among the executives leading the purchase from publicly held Webster Financial Corp.

Duff & Phelps, which provides data for the LABJ 200 Index, is known for middle-market financial advisory and valuation services. It has 15 employees in its Los Angeles office.

Lovell Minnick founder Jeffrey Lovell said he has known Chet Gougis, president of Duff & Phelps, for more than 15 years. The purchase dovetailed with the firm's specialization in making equity investments of between $5 million and $30 million in non-bank financial services firms, Lovell said.

Its portfolio companies include investment advisor Stein Roe Investment Council, investment manager Arrowstreet Capital L.P. in Boston and Denali Advisors LLC in San Diego.

The transaction was initiated with Gougis and Gottdiener, a former partner at Thomas Weisel Partners who started Stone Ridge as an investment banking boutique. The two began looking for financing to arrange the buyout, Lovell said.

As part of the transaction, Stone Ridge will be merged into Duff & Phelps' New York office.

Kate Berry

Paper Tiger

Sun Valley-based packaging manufacturer Marfred Industries earlier this month acquired Barkoff Container & Supply Co. of Hayward.

Marfred, a 40-year-old business, converts 42 million square feet of corrugated board into shipping cartons, point of purchase displays and other merchandise holders per month. It will blend the sales and distribution operations of the Barkoff, a 76-year-old that is active in Northern California but has no manufacturing operation.

"They were a great fit because it is a new market for us," said Brian Malloy, Marfred's director of marketing. "We didn't serve Northern California before because we had no distribution presence there."

He refused to divulge the sale price of the March 1 acquisition, which follows the June 2003 purchase of El Cajon-based RICO Packaging Materials, which beefed up Marfred's distribution presence in the San Diego area.

Last year, Marfred invested $3.3 million in new corrugated conversion equipment, enabling the company to keep its manufacturing operation local and feed its other territories, including Nevada, by truck, Malloy said.

David Greenberg

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