Soldiering on, Emmis’ Smulyan mulls station sales to cut debt

Jeff Smulyan seemed relaxed as he chatted with a reporter in his seventh-floor office overlooking Monument Circle.

Sure, Smulyan was disappointed his plan to take Emmis Communications Corp. private fell through this month. And, sure, the company has too much debt given how cash flow and ad sales have shriveled in recent years.
 

Smulyan

But not to worry. He said the radio company’s performance has improved this fiscal year. And even without continued improvement, he thinks Emmis could cast off some big-market stations, likely raising ample cash to pay off the company’s entire $340 million in senior bank debt before it comes due in November 2013.

“If we got half of the cash flow back we lost, the leverage ratio comes way down,” said Smulyan, Emmis’ CEO and founder. “If we don’t get half of it back, we would need to sell some things—probably.”

Emmis already has a deal pending to sell one of its Los Angeles stations to Mexico’s Grupo Radio Centro for $110 million. It also has quietly floated the idea of selling WLUP-FM and WKQX-FM in Chicago and WRXP-FM in New York—stations “where we believe the sale value could exceed the prospects for cash-flow generation as part of our portfolio,” Emmis said in a May regulatory filing.

Smulyan described the trio as “massive stations” that collectively might fetch hundreds of millions of dollars. He said Emmis would be left with plenty of firepower, including a station in Los Angeles, two stations in New York, and clusters of stations in Indianapolis, St. Louis and Austin, Texas. Emmis also owns magazines, including Indianapolis Monthly, Texas Monthly and Country Sampler.

But it may not be that simple, said Michael Bergner, principal of Bergner & Co., a media brokerage firm in Boca Raton, Fla.

Ratings for two of the three stations Emmis said it would consider selling rank outside the top 10 in their primary target demographics. Bergner questions whether the stations are making money, and without profits potential buyers in this tough climate likely can’t get financing.

“Over the last two years, he has been trying to make a deal on them, but the market has deteriorated,” Bergner said.

Adding to the challenge: Station values are uncertain these days because there are so many more sellers than buyers, said Glenn Serafin, president of Serafin Bros. Inc., a broadcast brokerage and finance firm in Tampa, Fla.

Brutal downturn

To be sure, the recession was tough on all radio operators, pushing ad sales down sharply. In the fiscal year ended Feb. 28, 2010, Emmis reported radio revenue of $178 million—down 27 percent from the $244 million reported two years earlier.

Smulyan is pleased Emmis eked out an increase in radio revenue in the quarter that ended May 31. But investors remain jittery. After Smulyan’s offer to buy out other stockholders for $2.40 a share fell apart this month, investors dumped their holdings, and shares now fetch only around 87 cents each.

Smulyan’s buyout, unveiled in April and backed by the New York-based private equity firm Alden Global Capital, valued the company at $90 million. Closing the deal hinged on getting Emmis’ preferred shareholders to accept a 60-cents-on-the-dollar swap for new bonds carrying a higher interest rate.

After a group of preferred holders blocked the deal, Emmis sweetened the pot, offering 77.5 cents on the dollar. The broadcasting company said Alden initially went along but then backed out, killing the entire transaction.

In a regulatory filing, Alden said the new terms would have left Emmis with too much leverage. But Smulyan, who is suing Alden in Marion Superior Court, calls that explanation disingenuous.

“The leverage of the company got better as the process went on, not worse,” he said.

Awkwardly, Emmis and Alden remain closely intertwined. Alden continues to own 42 percent of Emmis’ preferred stock and four percent of its common stock.

“It’s a little like a divorce where the spouse is stuck in the same house,” said Tom Taylor, executive news editor for Radio-Info.com.

Smulyan, 63, said “you can’t minimize the frustration of a process like that.” But he’s moving on and has renewed his focus on running the company, rather than trying to put together a new buyout deal.

Regulatory filings show he’d been trying to find a financial partner for a year before finally lining up Alden. In that span, he held preliminary talks with 20 hedge funds, private equity firms and other investors.

“The challenge is to run Emmis, and the good news is Emmis is having a much better year,” Smulyan said. “The company is doing better by every possible metric.”•