Jeff Smulyan has been considering a new plan to buy out other Emmis Communications Corp. shareholders—a deal that could clear the way for him to finally take the Indianapolis media company private.
Terms of the transaction were outlined in an April presentation by Moelis & Co., an adviser working with Emmis. It said Emmis was soliciting a financial backer to buy $25 million in common stock. Based on the company’s trading price at the time, that sum was roughly equal to the market value of all shares not held by Smulyan.
There’s just one problem. Smulyan, Emmis’ founder and CEO, insists he no longer wants to take the company private, after failed efforts to do so in 2006 and 2010.
In a May 9 deposition taken by attorneys for a group of preferred shareholders suing Emmis, Smulyan said: “I have said it, and I will say it again. I will say it a thousand times. I did not have an intent and do not have an intent today to take this company private. Period. End of story.”
Smulyan’s intentions have become a key point of contention in the legal battle between Emmis and the preferred-shareholder group, which is seeking to prevent the company from stripping them of their rights to collect millions of dollars in dividends.
The investors pressing the lawsuit didn’t cash in when other preferred shareholders sold late last year and early this year. They charge in court papers that eliminating the rights “would render the preferred stock essentially worthless and pave the way for Mr. Smulyan to ‘take Emmis private’ at the time of his choosing.”
The preferred group unearthed the Moelis presentation during discovery. It isn’t clear how seriously Smulyan, Emmis’ largest shareholder, has considered the transaction. And because Emmis shares have risen sharply since April, to around $1.50, $25 million now would be far short of the amount needed to buy out all other shareholders. Emmis spokeswoman Kate Snedeker declined to comment because of the pending lawsuit.
That suit accuses Emmis of using a succession of illegal, sham transactions to amass the two-thirds voting control of preferred shares it needs to strip remaining holders of their rights. The investors are seeking an injunction blocking Emmis from putting the plan to a shareholder vote this summer.
Emmis raised $144 million by selling the preferred shares for $50 apiece in 1999. The company began repurchasing them last fall, using a $35 million high-interest loan from Chicago financier Sam Zell. It bought the shares on the cheap—for around $15 apiece—in part because of investor anxiety over the company’s hefty debt load.
Because of the firm’s financial pinch, it suspended paying the 6.25-percent dividend on the preferred shares in 2008, and unpaid dividends of $12.12 now have accrued on the remaining preferred stock.
Stripping remaining preferred shareholders of their rights would get Emmis off the hook for those dividends. It also would eliminate a provision that would require Smulyan to pay the full $50 a share to remaining preferred holders if he takes the company private.
John Barrett, a partner with New York-based Corre Opportunities Fund, said in a May 16 deposition that Emmis executives told him if he didn’t take their offer before the company used up its $35 million credit line, he might be left on the sidelines with near-worthless preferred shares.
Barrett said Chief Operating Officer Patrick Walsh told him he faced “a prisoner’s dilemma. … He basically said that they were pretty confident they would get to two-thirds, and if they got to two-thirds, you didn’t want to be in the preferred,” Barrett said.
Barrett said he refused to sell because he believed the preferred stock was worth far more. His firm, Corre, is among the five plaintiffs in the lawsuit.
Normally, when a company buys back shares, it retires the stock and the accompanying vote. However, Emmis worked out “total return swaps” with sellers of the preferred stock that it says keep the vote alive and require the seller to vote in accordance with Emmis’ wishes.
Even after doing so, Emmis fell just shy of two-thirds. So it decided to reissue some of the retired shares to a newly formed employee-retention trust. The additional shares diluted the holdings of the remaining preferred stockholders, thereby giving Emmis two-thirds voting control.
Emmis calls the transactions entirely proper. Attorneys for the preferred shareholders, however, say the company’s behavior violates Indiana law, federal securities laws and its own articles of incorporation.
“Courts and commentators alike have deplored this type of ‘empty voting,’ in which a person or entity buys shares’ voting rights in order to vote against the economic interests of those very shares,” attorneys for preferred shareholders said in a June court filing.
Indeed, Emmis has taken a drubbing in the court of public opinion. This spring, for instance, New York Times columnist Floyd Norris wrote that Emmis was using tactics that “the old Chicago Democratic machine would have found all too familiar.”
Timing is everything
Attorneys for preferred shareholders charge that one way company insiders violated securities laws was by failing to tell the broader market about their plan to strip preferred holders of their rights until they were close to the two-thirds threshold.
In addition, Emmis was “crying poverty” in order to buy the preferred shares at a big discount, even though insiders knew deals were in the works that would slash the company’s debt and brighten its outlook, attorneys for the preferred shareholders allege.
The transactions, announced in the second half of April, are expected to bring in more than $180 million. They include the sale of a Los Angeles radio station and an agreement to lease a New York City station to ESPN Radio.
Emmis e-mails unearthed during discovery suggest company executives knew they had a limited window of opportunity to buy shares at a deep discount. They needed to purchase while holders were worried what would happen if they didn’t sell–anxiety that would diminish once the company chopped its debt.
“They will not sell to us for a low price after the leverage is down. I promise that,” Moelis Managing Director John Momtazee said in a Dec. 28 e-mail to Smulyan. “There is no reason. .... We need fear as well as greed.”
In response, Smulyan quipped: “I’ve built Emmis around the twin concepts of fear and greed. … or maybe that’s how I ran Libya.”
Emmis contends attorneys for preferred shareholders use selective disclosure to paint a distorted picture.
They “cherry pick snippets of internal communications among Emmis’ senior management and its financial and legal advisors to argue that possibilities only imagined by management in the fall of 2011 should have been publicly disclosed as if they were duly adopted board resolutions.
“But when the facts are fairly viewed as they actually unfolded, without the bias of partisan hindsight, the picture is clear: Emmis properly disclosed what was appropriate to disclose in a timely way.”
The internal communications show Emmis executives and their advisers were exuberant once they concluded in January that the company had amassed the two-thirds voting control it needed. A New York lawyer representing Emmis joked he should inform the holdouts: “Now, witness the firepower of this fully-armed and operational battle station”–a reference to a popular line from the film “Star Wars: Return of the Jedi.”
In court papers, preferred shareholders say Smulyan is using extreme tactics because of his frustration over twice falling short in efforts to take Emmis private through legitimate means. He pulled his first offer, in 2006, after failing to come to terms with a special board committee on price. His second offer, in 2010, unraveled after he failed to get enough support from preferred shareholders.
If Emmis succeeds in stripping away preferred shareholders’ rights, “defendants will have unfettered power to irrevocably alter the course of the company,” a filing by attorneys for the preferred shareholders says. “And Smulyan will have obtained, through indirect and illegal means, the control he could not acquire on his own.”
But Emmis says the problem with that narrative is it’s flat-out wrong.
There’s been “no discussion at all” about trying again to take the company private, Emmis Chief Operating Officer Patrick Walsh said in a May deposition.
“Jeff was so beat up personally, professionally (after the earlier attempts). I don’t know if you knew him before this, but he’s aged demonstrably. ... And he said to me, he doesn’t want to do this again. … In fact, I think he used the phrase, ‘I don’t want the cheese anymore.’”
In his deposition, however, Smulyan, 65, left himself wiggle room. “It is not going private,” he said of Emmis. “That is my intention today. … I will promise I will call you tomorrow if I change my mind.”
It is not clear how those statements jibe with the Moelis stock-buyback presentation unearthed during discovery. That draft document says Emmis was soliciting a financial backer “to facilitate the repurchase of the company’s common stock.”
The financier initially would purchase about $25 million in stock itself. Over the next 18 months, Emmis would have the right to buy it back at a predetermined premium to what the financier paid. At the end of that term, the financier would have the option of requiring Emmis to buy the stock at a premium.
John Momtazee, a managing director in Moelis’ Los Angeles office, said in his May 21 deposition that he had marketed the transaction to several financiers and still was talking with one of them.
In that same period, Smulyan added to his holdings through a new partnership with Herb Simon, owner of the Indiana Pacers. Their company, HSJS LLC, bought 789,680 shares May 11-22.•