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Smulyan says Emmis ready 'to go back on offensive'

June 25, 2011

Emmis Communications Corp. CEO Jeff Smulyan always has been an upbeat guy. Even in recent years, as hundreds of millions of dollars in debt weighed down his media empire and ad revenue grew scarce, he talked up his business with unwavering conviction.

So now that Emmis has struck a breakthrough deal, Smulyan seems almost giddy. The sale of two stations in Chicago and one in New York City will allow the company to chop more than $100 million off its $331 million in long-term debt—clearing the way for it to arrange a refinancing under favorable terms.

“We look at this as a chance for Emmis to go back on offense,” said Smulyan, 64, who founded Emmis 30 years ago. “Emmis has been doing everything it could to ensure the company’s long-term viability is maintained. In the next stage, you are going to see Emmis do some interesting things.”

Under the deal announced June 21, Emmis will sell Chicago’s WLUP-FM 97.9 and WKQX-FM 101.1 and New York’s WRXP-FM 101.9 to a partnership of Chicago private equity firm GTCR LLC and Randy Michaels, the former CEO of Tribune Co.

Sure, it’s no fun to cast off marquee stations. But they were underperformers, and, as Smulyan acknowledges, “there were things we would have loved to do with these three stations that we just didn’t have the balance sheet to do.”

The unique terms of the deal ease the sting. Emmis will receive $110 million to $130 million in cash while becoming a minority owner of the newly formed buyer, Merlin Media LLC.

As part of the transaction, Emmis is set to receive as much as $47 million in preferred stock accruing 8 percent a year, plus common stock equating to a 20-percent to 35-percent ownership stake. The more upfront cash it takes, the less stock Emmis gets.

“We wanted to take as much cash out as we needed to refinance the company. We wanted to leave as much cash in as we could because we like this opportunity,” Smulyan said.

Merlin Media has the financial firepower to pursue other acquisitions as well as aggressively invest in WLUP and WKQX—two of Chicago’s iconic media brands.

Michaels, who resigned in disgrace from Tribune in October amid allegations of lewd behavior and frat-house antics in the executive suite, isn’t the kind of executive who thinks small.

He worked his way up from radio DJ to media executive, gaining fame along the way for creating a raunchy radio format in Tampa, Fla., called the “Power Pig.” In addition to leading Tribune, he’s been CEO of Jacor Communications and Clear Channel Communications.

In a statement, Michaels said: “At Merlin Media, we aren’t building a broadcast company, but a multimedia, multiplatform company.”

Smulyan said he and Michaels have been friends for 30 years. He declined to comment on Michaels’ personal behavior but called him “a wonderful operator of broadcast properties” who likely will significantly increase the value of the stations over the next few years.

But the most important thing Emmis is accomplishing with the deal is ratcheting down debt, which has hobbled the company for years. Without station sales, Emmis would be at risk of defaulting on debt by 2013.

“We do think this announcement is particularly good for [Emmis] given that it allows them to refinance their credit facility, which has been an overhang on the stock,” Wells Fargo Securities said in a research note.

The company would continue to own and operate 19 radio stations—including one in Los Angeles and two others in New York City—along with Indianapolis Monthly and other magazines. The stations being sold generated 14 percent of the $185 million the radio division generated in revenue in the fiscal year that ended in February, but just 4 percent of the division’s $25 million in operating profit.

But don’t expect the deal to suddenly invigorate Emmis shares, which rose just 6 cents, to $1.14, on the day of the announcement. Investors have fled radio stocks over the last six years or so amid growing anxiety over everything from weak ad sales to the proliferation of iPods.

Through it all, Smulyan points out, listenership has remained strong.

“Wall Street will start to rediscover the industry. It will take a while,” Smulyan said.

Then he couldn’t help but put a pitch in for Emmis.

“Do I believe this company is wildly undervalued? Sure,” he said.•

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