NEWS

On-the-air niche
Radio: Two entrepreneurs turned their backs on cable TV to go on a timely buying spree in radioland.

SUN STAFFTimothy J. Mullaney

Published on September 23, 1996
© 1996- The Baltimore Sun

Five years ago, Bruce R. Spector was a partner in a little Washington cable TV company when he thought he saw the future. And for all the breathless whiz-bang hype of the Information Age, it wasn't cable. Humble as it seemed -- and as pitiful a financial shape as it was in after a series of failed or struggling leveraged buyouts -- Spector and partner Joseph L. Mathias IV decided the future was radio. Based on that insight, they launched Benchmark Communications, a Baltimore company they hope to take public later this year, one that an industry peer says could be worth up to $160 million.

Benchmark has been on an acquisition spree since Congress approved the Telecommunications Act of 1996, which let companies such as Benchmark own many more stations in the same radio markets. This month alone, it has bought six stations to bring its total to 33, all in the southeastern United States, in small cities where the company can avoid such giant players as Westinghouse Electric Corp.

``In 1991, the radio industry was at its darkest hour, which to me signified great opportunity,'' said Spector, a 44-year-old former lawyer. ``Things were no different. People still listened to the radio.''

The 1990-91 recession, Spector said, had cut radio advertising for the first time in 40 years, at precisely the time when a series of entrepreneurs had loaded debt onto radio companies they had thought would grow indefinitely. A lot of people in that spot were hurting and preparing to sell out on the cheap.

``In 40 years, there's only been one year where [radio] revenues were not higher than the year before. That was 1991, and it wasn't much,'' Spector said. ``It was only single digits. [And] historically, those were the lowest prices ever offered for media properties.''

As Spector and Mathias saw it, this was their choice: Should they fight to buy local cable franchises against such then-emerging giants as Comcast Corp. and Tele-Communications Inc., all for the privilege of growing in a business where Congress was about to pass the 1992 law putting cable rates under federal scrutiny? Or should they buy into a cheap but fundamentally healthy industry in which new rules let companies buy more stations in each market than ever before, raising the prospect of cost savings and sales gains?

It was a no-brainer.

``We basically were riding the regulation wave,'' said Mathias, a 31-year-old who met Spector when they both worked at the cable company, which also was named Benchmark Communications. ``Cable was being re-regulated, and consolidation in cable was so strong it made it hard for an entrepreneur to compete.''

The pair bought their first station in 1990 and have gone from there. Today, the stations are owned by seven different partnerships under the Benchmark umbrella, with investors ranging from a Pittsburgh venture capital firm to executives at Alex. Brown Inc., the Baltimore investment bank.

Spector and Mathias together own 30 to 35 percent of the partnerships, said Spector, who put privately owned Benchmark's annual revenue at $45 million and its profits before interest payments at $16 million to $17 million.

Though their company has gotten relatively large, its success was built on the lesson Spector and Mathias learned in the cable industry: Stay out of the way of the big boys.

That's why Benchmark's 33 stations are all in unglamorous, even minor markets, nearly all in the Southeast. While the $3.9 billion merger between Westinghouse and Infinity Broadcasting Corp. puts it in the lead in such markets as New York and Chicago, Benchmark's motto is to rule Roanoke, Va., and to be the king of Columbia, S.C.

``Greenville [S.C.] was growing faster than Detroit last I checked,'' said Mathias, the more blunt-spoken of the pair, who plays the operations expert to Spector's deal-maker. ``We can get better market share in our markets than they can. Four or five stations in New York City won't give you 50 percent. In Roanoke, I can get that.''

Spector calls this a Wal-Mart strategy: Like Wal-Mart in the early days, Benchmark's theory is about concentrating on a handful of small markets -- its biggest is 59th-ranked Greenville. And the new law allowing firms to own up to eight stations per market (fewer in smaller markets) makes the strategy work better.

With more than one station in a market, Benchmark can have fewer people divide the sales and back-office work, while boosting revenue by using the stronger stations to beef up their weaker siblings, Spector said. Owning several stations in one place makes radio a lot like owning television stations -- it's a highly profitable business that investor Warren Buffett has called a ``be-smart-once'' business because the stations are so easy to run an owner needs only to be smart enough to buy them in the first place.

``Radio is becoming more like broadcast TV in that it's oligopolistic,'' Spector said. ``There are three or four companies per market, and it gets some market power and some pricing power -- not much but it's enough to make a difference.''

No one doubts that Benchmark's strategy works fine as long as it sticks to its niche. The only question is whether it will stand up to the rigors of the public markets -- or whether it will get a chilly reception if and when it goes public.

``Those are good markets but our strategy was to own a piece of geography that was very lucrative,'' said Stuart D. Frankel, a partner in the Timonium venture capital firm Grotech Capital Group, which owns a stake in Nassau Broadcasting of Princeton, N.J. Nassau owns or has contracts to buy 15 stations serving New Jersey and eastern Pennsylvania, far more affluent turf than most Benchmark cities.

Frankel says the initial public offering market has cooled down since earlier this year, making it more important to have a compelling story to tell Wall Street. He said Grotech has no plans to take Nassau public, because it believes Nassau would need to be bigger to be competitive for the investments of institutions.

Naturally, Spector argues that the faster-than-average economic growth of many southeastern markets will make Benchmark competitive for investors' hearts and wallets. And he gets support from other industry leaders.

``If they want to go public, there is zero reason why they can't complete it,'' said Bruce Friedman, chief executive of New York-based Commodore Media Inc. ``Investment bankers understand groups our size can do very well.''

Commodore filed to go public in May, in an offering led by two top New York investment banks, but canceled the offering after accepting a buyout offer in July from Hicks, Muse, Tate & Furst Inc., the Dallas merchant bank.

Friedman said companies like Benchmark are worth about 10 times their broadcast cash flow, minus the amount of money they owe banks and others who helped them buy up stations. That puts Benchmark's value at $160 million to $170 million, minus debt, he said. Benchmark has never disclosed how much it owes.

James H. Duncan Jr., publisher of Duncan's American Radio Inc., an industry directory company in Indianapolis, said Benchmark's emphasis on markets ranked between the 50th and 150th largest in the United States is a niche strategy that will work even as consolidation in radio intensifies.

He said Commodore and Triathlon Broadcasting Co. of San Diego have both been successful following the same basic plan as Benchmark, though Triathlon is concentrated in the western states and Commodore has stations in the Northeast as well as the South. Triathlon went public in May 1995 at $5.50 a share and closed Friday at $8.50.

Spector and Mathias don't know what their future holds -- Spector said deregulation has every company in radio talking to every other company about mergers, and they both make clear that they'll sell the company if that's what generates the most money -- but Spector said they may make a big move soon.

``We would really like to get a little larger before we go public,'' Spector said, hinting at more acquisitions or a possible merger with another company ahead.

``But I would like to do it by year-end.''

Pub Date: 9/23/96

JOHN MAKELY : SUN STAFF Small markets: Bruce R. Spector (left) and Joseph L. Mathias IV hope to take their Baltimore-based Benchmark Communications public later this year. The company owns 33 radio stations, all in little cities and mostly in the Southeast.