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Financial maneuvers give Emmis new lease on life

January 21, 2012

Back in 1999—before everything from the iPod to the economic crisis ravaged the radio industry—Emmis Communications Corp. raised $140 million by selling preferred stock at $50 a share.

That move has continued to haunt the Indianapolis company. As one holder of the preferred shares told IBJ this month, “It’s kind of like a ticking time bomb” weighing down the company’s balance sheet and preventing a resurgence of the company’s common stock. The common shares these days fetch a mere 69 cents, leaving Emmis with a stock market value of $26.8 million.

The preferred shares were supposed to pay 6.25 percent, but the financially strapped company has been exercising its right to suspend payments since October 2008. From then through early December 2011, $26.7 million in unpaid dividends piled up as liabilities on Emmis’ balance sheet.
 

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The preferred shareholders rank ahead of common shareholders in Emmis’ capital structure—giving them considerable clout over the company’s future. They used that clout in 2010 to scuttle Chairman Jeff Smulyan’s plan to take the company private.

The preferred stock “becomes a significant part of the structure that would need to be addressed for the common shareholders to ever see significant appreciation in value,” Emmis Chief Operating Officer Patrick Walsh acknowledged.

The good news is, Emmis has made tremendous inroads in recent weeks eliminating the albatross. Last fall, it agreed to borrow up to $35 million from an affiliate of Chicago financier Sam Zell—money it has tapped to repurchase most of those shares at a huge discount, an average of $15.56 apiece. Through the repurchases and other transactions, Emmis now holds voting rights to 61 percent of the preferred stock.

If Emmis can get its voting control up to two-thirds, it would have the ability to weaken the rights of the preferred holders and discontinue the dividend requirement. But even if it can’t reach that threshold, the buybacks alone reduced claims on the company by $80 million, Smulyan said during a Jan. 12 conference call to discuss Emmis’ fiscal third-quarter results.

It’s a reflection of how badly Emmis wants to address its preferred stock problem that it borrowed the money for the buybacks from Zell at a stunningly high interest rate of 23 percent.

But Emmis officials hope they won’t be paying the usurious rate for long. Their larger goal is to take advantage of a resurgence in high-yield markets to pull off a refinancing that pays off Zell and reduces interest rates and extends maturities on the company’s long-term debt.

The company took a big step toward making itself attractive to lenders and bond investors in September, when it sold controlling interest in three radio stations to a new Chicago-based company, Merlin Media. Emmis received $120 million from the deal, which it used to reduce long-term debt 38 percent.

It still has $88 million in long-term debt due in November 2013 and another $110 million due in November 2014.

Because of the debt reduction and preferred stock buybacks, Smulyan said in the January conference call that Emmis had just completed “the most transformative quarter we’ve had in this company in many, many years.”

Walsh said the Merlin deal reduced the company’s debt to a point where it can access the refinancing market, and it is working with investment banks on when it makes sense to plow ahead.

Remaining preferred holders seem to be growing more optimistic about the company’s future. Those shares have risen to around $21.00.

The preferred investor who spoke with IBJ thinks his brethren who cashed in were “stupid.” He sees more upside if the company pulls off the refinancing and a deluge of election spending next year causes radio station revenue to surge.

“The wind is getting at their back,” he said. “It’s a big political cycle, and the high-yield market is getting better.”

Banker Kit Stolen exits Indy

One of Indianapolis’ best-known bankers has headed to the show-me state.

Alvin “Kit” Stolen III, 56, who resigned as president of Indianapolis-based Salin Bank in December, started this month as CEO of Providence Bank of Columbia, Mo.

Providence has $675 million in assets, similar in size to Salin. He’d been president of family-owned Salin since August 2009.

Stolen is best known as the former CEO of Indianapolis-based Union Federal Bank. He spent five years there before helping orchestrate its $321 million sale to Ohio-based Sky Financial Group in the fall of 2006. Just a few months later, another Buckeye bank, Huntington Bancshares Inc., gobbled up Sky.•

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