Emmis Communications and Public Companies and Radio and Shareholders and Radio Station Owners and Jeff Smulyan and Communications and Media & Marketing

UPDATE: Large debt load will continue to weigh on Emmis

September 9, 2010

Emmis Communications Corp.’s large amount of debt will continue to weigh on the company following CEO Jeff Smulyan’s failed attempt to take the company private.

Company executives said Thursday morning that Smulyan had abandoned his efforts to strike a deal with a group of preferred shareholders that would be acceptable to his financial backer in the deal, New York-based Alden Global Capital.

Emmis announced in May the $90 million buyout bid by JS Acquisition LLC, a private company formed by Smulyan to complete the purchase. A group of preferred shareholders blocked the deal. Smulyan said Aug. 30 that Alden had backed out of an “agreement in principle” to sweeten the terms for the preferred shareholders.

Now, Emmis, which has been awash in red ink, must contend with more than $340 million in debt. Including noncash charges, operating losses over the last two fiscal years totaled more than $500 million. On a positive note, only $4 million of the company's debt comes due within a year.

Emmis, however, will need to renew its long-term debt, which could be risky in the current lending environment, said Greg Hahn, president of Winthrop Capital Management Group, a local institutional investment adviser.

“If the bank doesn’t want to renew this facility, that’s going to be a challenge,” he said. “But I think Smulyan’s a great operator, and he’s got a great team.”

Emmis is far from generating enough cash to pay off the debt. In its last quarterly filing in July, the company lost $3.9 million on $60.3 million in revenue, compared to a profit of $11.9 million in its first fiscal quarter last year.

“At some point it needs to generate enough income to pay interest and to pay down that debt,” Hahn said. “But it’s not growing its capital base; it’s not throwing off a lot of cash.”

Emmis, which owns 23 radio stations in the United States and publishes regional magazines in seven cities, including Indianapolis Monthly, completed the sale of its television division in 2008.

The company’s current debt load is likely to keep Emmis from growing in the future, said Mark Foster, chief investment officer of Kirr Marbach & Co. in Columbus.

“They’ve got to sort of hunker down, generate cash and work down that debt as best they can,” he said.

Meanwhile, Emmis’ stock price is taking a beating on the news that Smulyan dropped his bid to take Emmis private.

In late-morning trading, shares were fetching $1.20 each, down 26 percent from their opening price.

Smulyan and Alden agreed in April to take Emmis private. But in July, nine dissident investors emerged to block the deal. They collectively hold 38 percent of the preferred shares—more than enough to prevent Smulyan from securing the necessary two-thirds vote required to approve his plan.

The dissident holders of preferred stock balked at Smulyan’s initial offer to convert their shares into bonds worth only 60 percent of the value of the shares. But the bonds would pay a hefty12 percent interest rate, nearly double the rate on existing preferred stock.

Smulyan’s proposal also required approval from the holders of a majority of Emmis shares, a threshold he already had the votes to meet.

Emmis executives are disappointed that Alden walked away from an agreement to sweeten the terms.

“We’re just bitterly disappointed that this one didn’t get to the finish line,” said Patrick M. Walsh, Emmis’ chief operating officer.
 

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