Mad Money

Cramer: Why the market is totally wrong about the CBS-Entercom merger

Key Points
  • "Mad Money" host Jim Cramer cuts to the core of the market's reaction to Entercom merging with CBS Radio.
  • Cramer says investors may have been mistaken about their expectations for the deal.
  • The complex combination is set to become one of radio's most attractive assets, Cramer says.
Market's wrong about CBS-Entercom merger

Investors may have grown hesitant about a merger between CBS Radio and Entercom Communications, but CNBC's Jim Cramer thinks they may have been wrong to worry.

The deal would combine the spun-off CBS Radio with Entercom, creating an entity that could reshape the U.S. radio industry. Entercom's stock surged over 10 percent when news of the deal broke in February, but it has since sold off, shedding almost $6.

"Clearly the market isn't as enthusiastic for this big radio tie-up as we first thought. But what if the market is misreading this CBS Radio deal?" the "Mad Money" host said. "It's a complex transaction. I think the negative sentiment here is giving you a fabulous buying opportunity."

The merger will happen via a Reverse Morris Trust, where one company (in this case, CBS) spins off part of its business in order to merge it with another, smaller company. The tax-free deal will give CBS majority control over the combined company, which will still be called Entercom.

In Cramer's eyes, this will be a monumental deal for Entercom. The new entity will preside over 244 radio stations across 47 U.S. markets.

"They'll be the No. 1 creator of local audio content in America. More important, they'll also have a gigantic sports business, broadcasting games from 45 professional teams [and] numerous college teams" on stations like New York's WFAN and Washington, D.C.'s 106.7, Cramer said.

The "new Entercom" will also become the United States' second-largest radio company by revenue with the best balance sheet in the industry, the "Mad Money" host said.

And while iHeartMedia, the industry's top player, is in danger of going bankrupt, Cramer said that the radio business has more potential to it than many investors might think.

After all, radio's penetration is widespread, with over 240 million weekly listeners. Entercom CEO David Field, who will continue to preside over the combined company, said that "radio reaches more Americans than any other entertainment medium" on the conference call about the merger.

"In short, while online competition's been devastating to television, radio is different because most people listen to radio in the car," Cramer said. "You can't play with your smartphone when you're driving — you need to keep your eyes on the road. All you can do is listen, which is why radio is still relevant."

Entercom's management expects the deal to be immediately additive to earnings and is experienced at integrating new acquisitions, having completed two deals in the last three years.

Entercom is also fairly small, with a $430 million market capitalization. But with CBS Radio's 100-plus stations, Entercom will soon be worth somewhere around $2 billion, a market cap more likely to draw deep-pocketed investors to the stock.

The new Entercom will also create a bustling live events business with some 4,500 live events a year. Cramer said this alone should make the stock a strong play on the rise of the experiential economy, one of his favorite trends.

Wall Street's main concern about the deal was how it was structured. Entercom will have to issue 105 million new shares, which isn't what the existing shareholders necessarily wanted.

"If you simply wanted to own a sedate, small-cap radio station with a nice dividend, well, things have suddenly gotten a lot more complicated," Cramer said. "Basically, Entercom is swapping out much of its shareholder base, and until the deal gets done, many new buyers, I think, are going to hold off on pulling the trigger."

Others worry about Entercom's recent performance, which included a notable earnings miss, but Cramer said he would give the company a pass given its impressive long-term performance.

"I say the negativity is misplaced and Entercom's stock is a bargain," Cramer said. "In fact, it may be one of the cheapest stocks in the entire market. Why? Because pf the complexity of the transaction and the perception that radio's dead. That's scaring people away. As long as there are cars with human drivers — and I know one day there might not be, but right now, there are — there will be radio, and Entercom could be the best way for institutional investors to profit from that longevity."

WATCH: Cramer gives a fresh take on CBS-Entercom

Cramer: Why the market is totally wrong about the CBS-Entercom merger

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