Monday, April 16, 2007

RBC Weighs In on CCU and Google Deal

April 16, 2007

Latest research from David Bank - RBC Capital Markets*

RBC/CCU: The Shot Heard Round The World, Or A Pop Gun?

CCU and GOOG Agree To Sell Clear Channel Radio Ads Through Google Audio

CCU First Radio Broadcaster Moving to Monetize Offline Inventory Through Online Mechanism-Clear Channel has signed a multi-year contract with Google to sell advertisements on Clear Channel Radio's 675+ stations.

Deal Involves Commitment of Primetime Inventory-The agreement involves a guaranteed commitment of a reported 5% of CCU's inventory. This likely includes at least some prime as well as remnant inventory. We expect this will give Google Audio enough inventory in the crucial top 25-50 markets to enable advertisers to make flighted buys in
necessary markets.

Could Be A Big Coup for CCU-5% of CCU's 2006 radio revenue (excluding anticipated divestitures) would imply roughly $150mm in inventory given to GOOG. We think CCU will likely keep the majority of the revenue, given previous Google revenue share deals. CCU indicated that Google will focus primarily on advertisers who currently run ads online but do not run ads on radio. Should Google succeed in bringing new advertisers into radio, this will be viewed as a big win.

Trying To Limit The Risk Of Cannibalization-It is unclear how much revenue will be incremental vs. simply redirected. We believe the key risk to CCU is that existing advertisers simply migrate from the offline purchase of inventory through traditional sales
representatives to Google Audio's online platform, in search of pricing arbitrage.

* Mitigating risk is potential for arrangement to usher in new class of radio advertisers, tightening demand for inventory and driving pricing up.

Ultimately a Short-Term Positive-CCU will likely pick up at least some incremental guaranteed revenue from the deal. Given our expectation for 1% radio revenue growth in 2007, we don't think it will take much to make an impact.

But Jury Still Out on Long-Term Implications-Whether move increases demand or decreases pricing remains to be seen. The agreement is expected to "go live" by the end of 2Q07. At that point, the impact of online distribution of offline radio inventory should become more evident.

LBO Shareholder Vote on April 19-Although it appears increasingly unlikely shareholders approve the buyout, upside in either scenario still possible. Exclusive of an LBO, investor sentiment and our previously published break-up analysis suggests restructuring
solution could support low-40's stock price.

We use a triangulated valuation methodology to derive our $37 price target for Clear Channel. We average our DCF analysis and our 1-year forward discounted multiples on a blended 2006E / 2007E EBITDA and FCF. We use a 15x FCF multiple as this approximates a "normalized" average one year forward P/E multiple for the S&P 500 for the past 15
years, where in a steady state, we believe net earnings and FCF converge. We use an 10x EBITDA multiple as this represents the approximate multiple for Radio broadcasters. In addition, we adjust EBITDA and FCF to include FAS123R expenses in our valuation
methodology as we believe that these are true economic expenses that could potentially shift toward cash expenses over time.

Given growth expectations for 2007 and beyond, we believe CCU (and the broadcasting industry) growth could be vulnerable to slower than expected advertising growth, should consumer confidence weaken significantly--factors which could impede achievement of our price target objective.

4/16/2007 03:23:00 PM

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