By Jeffrey P. Wright, ASA, CFA
Billboard companies are usually worth surprisingly high prices in the market. Buyers and sellers rely almost exclusively on market multiples that are widely recognized as the best measures of fair market value. Discount rates and capitalization rates in this industry are more closely aligned with real estate yields than returns on operating businesses.
Soon after the Anaheim Angels won the World Series in the autumn of 2002, The Walt Disney Company put the team up for sale. In May 2003, Arte Moreno bought the Angels for roughly $184 million. If more baseball teams were available for the same price, Mr. Moreno could have paid cash for one or two more ball clubs while still having money left in his retirement account. He is a wealthy man who did not inherit his wealth. Mr. Moreno grew up in a large Hispanic family in Tucson, Arizona and he made his money the old fashioned way – he earned it. Press reports say he received more than $1 billion when he sold the billboard company he created in the 1980s and 1990s. Not impressed yet? Take note: his partner in the billboard business received about the same amount of sale proceeds. Billboard companies can have huge values that surprise the uninitiated. When business appraisers encounter a valuation in this industry, they must understand how the prices are established and what drives the value.
A billboard company can be appraised very effectively by the use of market multiples. These pricing guides are commonly used by buyers and sellers and are widely recognized in the industry as the most effective approach to valuation. Market multiples have sound economic foundations and they are reliable guides to value.
Beginning in the 1960s, buyers and sellers began to rely almost exclusively on the Effective Gross Income Multiplier, or EGIM method of appraisal. This is the use of a pricing multiple applied to the net revenue generated from advertisers. As the valuation concept of cash flow began to grow popular in the 1980s, many larger billboard companies started to price their acquisitions as a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). Some of the large companies have modified their valuation theories and now price acquisitions on “forward” EBITDA. While EBITDA multiples continue to be the main focus of larger companies today, many smaller billboard companies (particularly sellers) still view value in terms of EGIMs. Both the EGIM and the EBITDA Multiple methods have sound economic fundamentals. To understand why buyers and sellers rely upon these methods, it is helpful to understand how the business works and the nature of billboard company revenue and earnings.
Billboard companies lease sites along roadways to erect billboards that display advertising messages to passing motorists. A group of these structures that is owned by one company is called a “billboard plant” and can range from a few signs to more than 200,000 at the largest billboard companies. There are hundreds of small companies with 5 to 50 signs, but three large corporations dominate the market. Viacom and Clear Channel are large international companies with other media holdings such as TV and radio, while Lamar Advertising is the largest pure play in the U.S. billboard industry.
Revenue is driven by advertisers that want their message exposed to motorists. That exposure is available through billboards that have valid permits from state or local zoning authorities. Demand by advertisers for billboard space tends to be quite steady at the best locations. A billboard company with top-notch sites can depend on relatively stable income throughout the economic cycle. What are top-notch locations? The most desirable sites are those with good visibility from roadways with high traffic counts. Other attractive features are low competition, strong demographics, long-term land leases at low rates, and tight restrictions on the construction of new signs.
Billboard values benefit from a scarcity of supply. Creating new signs can be daunting because permits are often difficult or impossible to obtain. Many cities and towns want to remove billboards, not allow for more. Creating a new billboard usually requires extensive time and effort to find a site, apply to the appropriate government authority, negotiate leases for the proposed sites, trudge through zoning hearings, and get the physical structure built if all of the other work proves successful. Once all that is done, the billboard operator must find advertisers willing to rent the faces to display their messages. Local restrictions on new permits and the resulting scarcity of new billboards are the most important aspects of value to a billboard company. An outdoor advertising firm with a sign plant in a populated area that has banned new signs can have very high value.
The level of competition varies widely in cities and towns across the U.S. Some smaller towns have few billboards, often owned by just one company. Larger cities may have thick jungles of these signs, and advertisers can almost have their choice of location and price. The wide variations in competition can have an important impact on the value of the business. As in most industries, a billboard company would like to have the entire market all to itself. While no large market is controlled by just one company, consolidation to fewer competitors has been a trend in the industry for many years.
The current trends in the industry are the increasing restrictions on new signs in many jurisdictions, and the expanding use of technology. Many communities are establishing very tight restrictions on new permits, often eliminating new billboards entirely. The industry is fighting against restrictions and has a powerful and highly organized lobby. The Outdoor Advertising Association of America (OAAA) fights restrictions on a national level and in every state. This battle is likely to continue for decades to come.
The other major industry trend is the increasing use of technology in ways that may not be obvious to outsiders at first. Pictures of signs can be emailed to potential advertisers for their selection in an ad campaign. Ad copy can be emailed to a printer hundreds of miles away for delivery of the vinyl sheets to the billboard company within a few days instead of the weeks it took for hand painting. Lighting can be turned on and off with daylight sensors, or even from a remote location. This allows billboard owners to keep costs down and earnings up. Three-message signs and full-motion video boards allow companies to display multiple advertising messages and multiply their revenue. The technology that is spreading across the billboard industry is a trend that is likely to continue at least through the remainder of the decade.
Revenue and Earnings
Revenue to billboard companies tends to be relatively steady, although there are modest cyclical trends that follow general changes in ad spending. The stability comes in part from certain advertisers that depend on billboards. Many of the signs on highways provide the major source of advertising for nearby motels, restaurants, and gas stations. Their ad spending does not fall sharply even during recessions because they need to maintain this type of advertising. While occupancy of billboards, or “utilization,” always rises and falls to some extent during economic cycles, the fluctuations tend to be mild. Occupancy might remain steady at 80% to 85% for a billboard plant during typical economic expansions and fall to 75% during recessions. Of course individual companies will vary, but this is typical of many firms in the U.S.
Revenue growth in the industry was robust even in the recession years from 1980 through 1982, with spending growing at 10% to 15% each year. Thereafter, the growth rate declined steadily through that decade until billboard revenue actually declined in 1992, the year after the latest recession. Billboard revenue tends to lag changes in Gross Domestic Product. Growth was steady again from 1993 through 2000, rising between 7% and 9% each year. Ad spending on billboards then turned down, falling nearly 2% in 2001 and about 1% in 2002. Industry analysts expect revenue to grow about 5% compounded annually over the next several years based on average occupancy levels.
Even during periods of lower occupancy, billboard companies seldom lose money. EBITDA margins are very high in this industry, usually around 45% to 50%. Fixed expenses normally represent a rather high percentage of total costs and expenses, with 75% to 85% typical for larger companies. This includes site leases, taxes & licenses, lighting, vehicles, and to some degree labor. Workers must be employed to change advertisements even if ad revenue is not strong. Variable expenses include a smaller number of items like printing and sales commissions. However, even commissions are a semi-fixed expense for some companies. Billboard firms have flexibility in some areas of spending because costs and expenses can be outsourced today. Sales can be generated through outside agencies, printing services can be obtained from a wide variety of vendors who will deliver within two or three days, and maintenance can be provided by local independent sign builders.
Some rural signs that need little service can be quite profitable. Rural billboards and some signs in populated areas have low costs because they can be painted just once a year and then be left alone with no further maintenance. However, the appraiser should be careful in accepting the claims of small billboard companies that report 60% or 80% profit margins. Small companies may not identify and report all of their operating costs such as management, sales, accounting, and legal compliance.
Metro areas tend to generate the highest billboard incomes because they deliver the most traffic. Advertisers usually want to get their message out to as many viewers as possible for a low cost per impression. The more motorists that pass a billboard the more impressions that are made. It is not unusual for a small company with 15 or 20 billboards on freeways in metropolitan areas to have as many viewers as 60 or 70 signs on side streets or rural byways.
The appraiser has the choice of using actual revenue and income in the valuation process, or making a forecast of normalized levels of future revenue and income. Most buyers make a forecast based on their assumptions about how the plant would be operated under their ownership. While a billboard plant may be operating at 50% occupancy due to management’s inattention, buyers usually develop revenue and earnings estimates assuming that they can achieve something higher, like 70% occupancy. The appraiser can develop potential revenue for a plant by collecting information on market advertising rates in the area. This is not usually a complex portion of research and analysis.
Appraisal Approaches and Methods
The entire appraisal process for billboard companies is simple in some ways and complex in others. From the standpoint of applying conventional appraisal methods, these businesses are often priced on a simple multiple of revenue, or a multiple of EBITDA. However, the identification of the proper multiple involves an assessment of several important factors that require thorough analysis. These factors are described later after the conventional appraisal methods are discussed.
We stated earlier that the fair market value of a billboard company is based on some multiple of its income and earnings, rather than its assets. Asset methods are secondary to market methods. However, from one perspective it is valid to say that the same value conclusion is inherent in the assets themselves. The Adjusted Balance Sheet Method or the Asset Accumulation Method can result in a legitimate estimate of value if the assets are valued properly.
Virtually all of the value in a billboard company resides in the signs, including the structures, the leasehold interests in the sites, and the permits. There are usually supporting assets as well, such as a printing facility or “paint shop,” trucks and cranes, plus related machinery and equipment. However, these latter assets are not often substantial in comparison to the signs, and they are not necessary to running the business. The business could be run very well with just the signs. The advertising copy for the sign faces can be obtained easily from an outside printing company, and the truck and crane activities can be obtained from a local sign construction company. While tangible assets other than the signs themselves may have some market value, it normally pales in comparison to the value of the billboards. Very little value, if any, is attributable to customer lists, contracts, and other non-tangible assets.
Inherent in the value of billboards are the site leases and the permits. A leasehold interest usually has value when it assures continued tenancy for more than a short time such as a year or two. Billboard companies typically have a portfolio of leases that range from short to long term, and from low monthly rent to substantial percentages of the annual ad revenue. In condemnation cases, only leases below the market rate are considered to have value. In reality, the existence of a portfolio of solid site leases is a valuable asset in a billboard company. The cost to replace such a portfolio could be substantial if it could be done at all.
Permits are also much more valuable than they might seem. No open market exists for permits in most states, but buyers and sellers know how dear these assets have become. New permits can be very difficult to obtain. Many communities have restricted the issuance of new permits so severely that they are prized by billboard operators. A permit that might be issued for a fee of a few hundred dollars could be worth more than $100,000 to a billboard company. This is similar in some respects to liquor licenses, which are often limited in supply and sell for relatively high prices compared to their cost. Substantial value can be created when a valid permit is added to a leased site and a billboard is erected.
It is difficult to prove that there is intangible value in these businesses because virtually all of the revenue is derived from tangible assets (billboards). There is little or no intangible value in billboard companies in terms of goodwill or a brand name. Revenue and earnings are generated by the signs, which are real estate and fixtures (or trade fixtures). Rarely, if ever, is there any substantial value to a customer list. While this asset may receive an allocation of value in the accounting for an acquisition, most customer lists are transitory and must be regenerated continually. Customer loyalty is rare in this industry, especially because customers will do business with any billboard company that can deliver high traffic counts. Value does not lie in management, branding, intellectual property, or human resources, so even poorly managed billboard companies can have high value. Buyers know that the underlying assets generate the revenue and earnings.
In the asset approach to value, there are valid appraisal methods for billboard companies, but they tend to take a back seat to market methods. The main asset value lies in the billboards themselves, and this value derives from income potential. This can become circular reasoning between assets generating income and the income being used to value the assets. The appraiser should place the greatest emphasis on income and market approaches.
Although income methods also take a back seat to market methods in this industry, some buyers do use the two chief income methods, Discounted Cash Flow (DCF) and Direct Capitalization. Since these methods are well known to appraisers, we describe their application only briefly.
Both of the income methods are usually applied to EBITDA, which is equivalent to Net Operating Income in real estate appraisal terms. Discount rates and cap rates tend to be quite low compared to most operating businesses because of the steady and reliable income stream and the solid asset base inherent in the billboards. These rates are low also because billboards are a very low-risk type of real estate: no human tenants, no plumbing, no parking, no elevators, no A/C, no moving parts, etc. Discount and cap rates for billboard companies are more like those for commercial real estate properties than business enterprises. This is true even after recognizing that analysts normally evaluate real estate earnings on a pre-tax basis. Discount rates for billboard companies are often around 13% to 15%, and cap rates are usually in the area of 8% to 12%. There is nothing unusual in applying the income appraisal methods to billboard companies. Once the appraiser has established the appropriate income stream, it is forecasted and discounted in the DCF method, and residual value is added. In the Direct Capitalization method, the appropriate income stream is divided by the cap rate.
Since buyers and sellers in this industry view value in terms of actual market transactions (multiples of revenue and/or EBITDA), this is the best method for appraisers to use. Market multiples of EBITDA are the reciprocal of the Direct Capitalization method, but it is the multiples that the industry relies upon. This approach is effective and widely used because of the relatively stable nature of income and the well-established earnings margins.
Pricing multiples also tend to be used because they are reliable guides to achieving a return from a dependable income stream. A buyer can anticipate a fairly predictable level of revenue and EBITDA. The two common multiples in this industry apply to revenue, and to EBITDA. The multiple of revenue is known as the EGIM, or Effective Gross Income Multiplier. The multiple of earnings is simply an EBITDA multiple, as typically seen in business valuation.
The Effective Gross Income used in the EGIM method refers to actual receipts, or revenue according to Quon Associates accountants. Business appraisers know this method as a revenue multiple. While this method in business valuation is often considered only a rough estimate, it is much more accurate in the billboard industry because of the well-established earnings margins achievable on outdoor advertising signs. Buyers usually know with a high degree of certainty what their earnings margin will be. They can base their price on revenue, and be quite confident that earnings will be within a fairly predictable range. Buyers and sellers have been relying on this method for decades. A history of the EGIM shows that the multiple rose with the strong economy in the second half of 1990s. It has stayed high in the past three years because of low interest rates.
The EGIM rose with the exuberant stock market in the late 1990s, as investors became more willing to pay higher prices for investment assets. When the stock market collapsed beginning in the first half of 2000, billboard company acquisition multiples did not decline substantially in part because of low interest rates. Debt can be used very effectively in the capital structure of these companies due to the reliable nature of revenue. Another reason that company values stayed up in the past few years is because of the acquisition programs of large billboard companies. While revenue at billboard companies has declined slightly since the recession of 2001, EGIMs have held up reasonably well.
EBITDA multiples are not as well documented as EGIMs, but they have followed the same general trend. These multiples in the past few years have tended to be 8X to 12X for companies with a good inventory of signs. This is reciprocal of cap rates between 12% to 8%. The average multiple of forward EBITDA is about 10X by the most active acquirer, Lamar Advertising. Forward EBITDA multiples became popular in the latter half of the 1990s, but they are dangerous. Forward EBITDA is the amount of earnings expected to be achieved in the following four calendar quarters. Since expected earnings growth did not materialize for most billboard companies in the last half of 2001 and in 2002, forward multiples never materialized.
A few buyers are taking the market multiple method a step further in major metropolitan areas by distinguishing between signs with high and low occupancy. This is done more often on a few spectacular billboards rather than for large groups of standardized signs. A higher multiple is given to those faces that are more frequently sold to advertisers, and a low multiple applies to faces that are difficult to sell. For instance, the EGIM might be 5X for faces with high occupancy and 3.5X for faces that do not generate consistent revenue. This is a logical approach because a lower price (higher yield) is appropriate on risky assets that may not fulfill an investor’s expectations. Occupancy records for each face are usually available from a billboard company’s management.
Selecting the Multiple
Selection of the proper multiple is not always based on obvious factors like the company’s growth rate or its profit margin. The appropriate multiple relates more to the manner in which a target company’s inventory of signs would fit into the acquirer’s plant. Other factors play important roles as well. Higher multiples may be appropriate for sign companies in or near major markets that have an abundance of premium sites. Top multiples are likely in regions where demand is steady or strong, and new signs are difficult to create because of restrictions on new permits. Lower multiples are often found for companies with older rural signs, which are frequently on wooden poles and may not be in good physical shape.
The best billboard plants are widely acknowledged to be those with high traffic counts, good visibility of sign faces, and low competition from other companies. The appraiser can obtain traffic count information for a subject company’s market area and compare that to other similar markets. The business owner will probably have traffic count information for the billboard plant and possibly for competitors. It is important to note that traffic counts have been reported by each billboard company in the past, based on their collection of government statistics. The industry is moving toward independent measurement standards, which puts reporting in the hands of an independent organization (the Traffic Audit Bureau). Visibility is more difficult for the appraiser to measure since it would require a knowledgeable observer to drive by many or most of the company’s main billboards. The business owner is likely to state that visibility of signs in the company’s plant is excellent. The appraiser should develop an objective assessment in order to avoid relying solely on management. Competition is easier for appraisers to assess since they can easily research the number of billboards operated by other companies in the same market. The most attractive target companies are usually those that dominate their market and have a low level of weak competition.
Restrictions on new signs in the same market area can be a positive factor or a negative factor. Tight restrictions can be a positive factor for a billboard plant that has many signs in a certain area and does not want any new competition. Restrictions can be a negative factor if potential acquirers would need to grow the plant to achieve economies of scale. This is often done through the establishment of new locations in a market. If that avenue of growth is blocked by tight restrictions on new signs, some of the larger billboard companies may not be as interested in making an acquisition. The key issue for the appraiser in this segment of the analysis is an assessment of the existing plant to determine if it is large enough to be efficient for a larger company that may be an acquirer. If the plant is large enough, then restrictions on new signs can be a positive factor in the valuation. As in other industries, acquirers might buy a company as a platform to enter a new market or as a tuck-in acquisition to expand existing market penetration.
The values derived by income methods and market methods include an assumed maximum level of tangible assets to support operations. According to Jason Robson, for a small company, this might be a few trucks and a crane. Larger billboard companies obviously require more supporting assets. Sellers cannot count on a higher price for their business if they have extensive tangible assets. Except in unusual cases, many buyers do not need, and are not willing to pay for, extensive support assets.
The selection of the final market multiple to be applied to the company under appraisal can be found by examining comparable sales. Sources of information on comparable sales normally can be found in conventional sources like Done Deals, Pratt’s Stats, filings with the Securities and Exchange Commission, and at signvalue.com.
The Buyers and Sellers
Buyers can be grouped generally into two categorizes according to size. The first is made up of smaller billboard operators that are getting started or beginning to expand through acquisitions. These buyers continually emerge in markets as entrepreneurs decide to enter the industry. Aggressive buyers often see under-utilized billboard plants that they believe can generate higher income with better management. These buyers may try to acquire smaller operators that are not able to optimize their sales and earnings. Smaller acquirers also like to pay lower prices because they know the generally low cost of creating new signs. Unless a target company is in an area where new permits are prohibited, small acquirers have the alternative to develop their own signs instead of making an acquisition. Prices from these buyers tend to be at the low end of the range because large companies may not be interested in bidding up the price if the target does not fit well into their strategy. EGIMs may be as low as 2.5X to 3X.
Large billboard companies make up the second general category of buyers. The three largest corporations in the industry, Viacom, Clear Channel Communications, and Lamar Advertising, collectively have more than 85% of the national market. These companies have certain advantages that allow them to pay higher acquisition prices. They have better access to capital markets, they have management already in place to handle the additional inventory, and they have national sales forces that can usually fill new signs with ads. Another motivation of the larger companies to pay higher prices is their need to grow through acquisition. The industry’s internal growth rate is not fast enough to appease the stock market. Consequently, larger companies may be on the acquisition trail to keep their growth rates up. Also, since larger companies often don’t want to go through the time consuming process of developing signs, they pay a premium to get the whole package already put together. They are able to pay higher prices and they are willing to do so. While some acquisitions have reportedly occurred at EGIMs above 10X, typical multiples of revenue are 4X to 6X.
The low end of the value range for billboard companies is usually established by the cost of creating a plant, plus a premium for accomplishing the task. The high end is defined by the high advertising revenue that can be achieved by signs that are ideally located with long-term site leases in areas where new permits are hard to obtain.
Buyers and sellers in the billboard industry consider acquisition prices almost exclusively in terms of revenue multiples and EBITDA multiples. These measures have become the industry standards. The most valuable billboard companies are those with modern structures in areas where demand for advertising space is high, and new competition is unlikely due to local zoning restrictions. If a target company has attractive sites under long-term leases in this type of market, the value of the business is likely to be maximized. Some companies may be worth more than seven or eight times annual revenue. Like other industries, premium values can be achieved by sellers that have a dominant market share in a region with a diversified economy that can support a variety of businesses as advertisers.
Jeffrey P. Wright, ASA, CFA is a principal in Centerpoint Advisors, a business valuation firm in Scottsdale, Arizona. He is a partner in SignValue.com, a consulting company and website dedicated to billboard appraisal, and he is co-author of Billboard Appraisal: The Valuation of Off-Premise Advertising Signs published by the American Society of Appraisers in 2001.