Clear Channel to Buy SFX Entertainment

Radio giant Clear Channel Communications Inc. has agreed to buy SFX Entertainment Inc. for $3 billion in stock, in a deal that would marry the nation’s largest producer of entertainment events with a company in line to be the country’s leading radio station owner.

The deal represents a further consolidation of local advertising, allowing Clear Channel to sell advertisers bundles that include billboard, television, radio and arena sponsorships. Clear Channel, which is awaiting federal regulatory approval for its $23.5-billion acquisition of AMFM Inc., the nation’s leading radio operator, would also be able to use its radio, television and billboard holdings to drive traffic to SFX arenas. The deal, which must be approved by shareholders, would take San Antonio-based Clear Channel, which has concentrated on distributing entertainment, into the content business.

Clear Channel, with 867 radio stations, 19 television stations and 550,000 billboards, owns outlets in every city where SFX operates its 120 venues, which include Irvine Meadows.

Lowry Mays, chief executive of Clear Channel, was a pioneer in expanding beyond his core radio holdings into other forms of local advertising, including billboards, local transit and kiosks--a strategy that has become a model for other radio operators, including CBS Corp.

The proposed acquisition of SFX takes this vision one step further.

In fact, rumors surfaced last week that CBS and its proposed merger partner, Viacom Inc., which together own television and radio stations, outdoor advertising outlets as well as the MTV, VH1 and country music cable channels, were negotiating to buy SFX.

Though SFX Chief Executive Michael Ferrel denied Tuesday that discussions with CBS were serious, one source close to Clear Channel said CBS chief Mel Karmazin agreed to step out of the negotiations if Clear Channel would sell him nearly half of the $4.5 billion in radio stations he must divest to get federal approval for the AMFM merger. Mays, who sources said had previously refused to aid his biggest competitor from getting any bigger, apparently agreed, stunning the radio community with the reversal.

Wall Street, worried about Clear Channel’s ability to digest two large mergers, drove down Mays’ stock Tuesday. Clear Channel shares fell $8.56 to close at $66.63 on the New York Stock Exchange. CBS shares jumped $6.31 to close at $59.56 on the NYSE as Wall Street breathed a sigh of relief that it was not buying SFX.

Some radio industry sources question whether the synergies are as strong as Clear Channel suggests and wonder whether the Mays family was not acting merely to keep SFX away from CBS-Viacom, which could potentially do more with the assets because of its music assets.

Wall Street also worries that the deal, though sound in concept, could be financially cumbersome for Clear Channel. Since selling his own radio holdings two years ago to AMFM, SFX Chairman Robert Sillerman has spent about $1.5 billion consolidating the fragmented concert business by buying up local arenas, theaters and promoters.

SFX has spent an additional $1 billion or more buying up sports management companies that represent such marquee names as retired Chicago Bulls star Michael Jordan, New York Knickerbockers’ Patrick Ewing, cyclist Greg Lamond, sportscaster Al Michaels and tennis star Andre Agassi.

Sillerman has been criticized for overpaying for properties--creating the equivalent of “a lottery” for local promoters, as one music source put it. The company accumulated debt of $1.1 billion, which Clear Channel would assume as part of the deal. SFX’s loss narrowed in 1999 to $63.9 million, from $68.7 million in 1998, on revenue of $1.68 billion.

“Sillerman is a lousy operator and not a very good buyer, but he knows when to sell, and he’s the best stand-up salesman I’ve ever seen,” said William Steding, a former radio broker and managing partner of Dallas-based Darwin Group, a private investment firm.

Sillerman could not be reached for comment.

Some SFX stockholders complain that Sillerman is getting more than his fair share in the deal. Sillerman stands to make $474 million for his 14.3% stake in SFX--and his Class B shares are worth about 40% more in the deal than Class A shares.

In the transaction, SFX Class A shareholders will get 0.6 share of Clear Channel for each of their shares, and Class B shareholders will get 1 share.

SFX shares rose 50 cents to close at $38.50 on the NYSE. The stock has plunged from a peak of $51.63 last summer.