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After years of 'pushing water uphill,' Emmis now nimble

May 5, 2012

Here’s a statement you’d never expect to associate with a company run by Jeff Smulyan, who’s aggressively taken on debt throughout his career:

After a series of pending deals close, Emmis Communications Corp., the Indianapolis radio company Smulyan founded more than three decades ago, expects to have among the lowest leverage ratios in its industry.

Indeed, Emmis is on track to have less than $75 million in debt by this summer—down from $1.6 billion before it launched the divestiture of its TV stations seven years ago.

That sell-off preceded a harrowing span for the radio industry, which saw ad revenue and station profitability plunge. As profits evaporated, the leverage ratio ballooned to as high as 15 times cash flow. The latest move—a complex deal announced April 26 that includes leasing one of its New York City stations to ESPN Radio—is expected to push that ratio below three.

Getting Emmis’ balance sheet in order has been a long, painful odyssey replete with deep staff and expense reductions and tough decisions. Smulyan, 65, likened the exercise to “pushing water uphill.”

But thanks to the moves, investors, who for years shunned Emmis’ stock, are getting interested again. On the day the company announced the ESPN Radio deal, Emmis surpassed $1 for the first time since July. The shares have continued to rise and now fetch about $1.60.

Getting to this point has involved lots of wheeling and dealing. Last September, Emmis 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 chop long-term debt 38 percent.

On April 16, Emmis announced that Mexico’s Grupo Radio Centro, which operates an Emmis-owned station in Los Angeles, has reached a deal to buy that station for $86 million.

But the deal-making that really has the radio industry buzzing involves 98.7 Kiss FM, the Emmis adult urban station in New York City that on April 30 shifted to ESPN Radio.

That station and adult urban rival WBLS were perennially top five New York stations back when Arbitron based its ratings on diaries. But after Arbitron began gathering more precise listening data using electronic Portable People Meters several years ago, they fell to between sixth and 11th.

Other stations across the country with deep ties to the black community saw similar declines—an apparent sign that fans of the stations had demonstrated their passion by overestimating how much they listened.

Emmis’ 98.7 Kiss recorded revenue as high as $33 million before the advent of PPMs and the arrival of the economic crisis. In the latest fiscal year, revenue was just $11 million. The decline led Emmis brass to conclude that, with the new dynamics, New York City could support just one adult urban station.

So it was time to deal—first with the Disney Corp., which had an AM presence for ESPN Radio in New York City but wanted to bring it to the FM dial, where three-quarters of radio listening occurs.

Disney agreed to lease 98.7 from Emmis for 12 years. It will pay $8.4 million in the first year, with payments increasing 3.5 percent annually over the life of the lease.

While those terms in themselves were attractive, Emmis wanted more cash upfront. So it worked out a deal to sell that income stream to Wells Fargo and the Teachers Insurance and Annuity Association of America in return for an $82.5 million payment now.

Emmis also will pocket $10 million by selling the Kiss brand to WBLS. In addition, Emmis will receive 15 percent of the additional revenue WBLS generates over the next three years as a result of having the only adult urban format—bringing the total Emmis expects from the deals to about $100 million.

Not a bad take for Emmis considering that 98.7 Kiss had an operating profit of just $872,000 last year and that Emmis will retain ownership of the station after the 12-year ESPN Radio deal expires.

That Disney was willing to pay so much reflects the popularity of the sports radio format in New York City, Emmis Chief Operating Officer Patrick Walsh said. He noted that ESPN Radio’s principal competitor, WFAN-AM, generates more than $40 million in annual revenue.

“I don’t think they are paying too much attention to the operating revenue we generated,” Walsh said. “They are looking at the revenue potential of sports radio.”

Smulyan added: “It really was a deal that made sense for everybody.”

Emmis executives say their company still will have plenty of firepower in its portfolio of radio stations and magazines. Chief among them are Power 106 in New York City and Hot 97 in New York—the two most profitable hip-hop stations in the country.

And now that debt is under control, Emmis can pursue growth opportunities—perhaps by putting its expertise to work through partnerships with private equity players that would provide most of the capital, Smulyan said.

Walsh added: “We are moving this company into a position where we can once again be aggressive.”•

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