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Emmis' higher leverage ups pressure on Smulyan:

October 29, 2007

Jeff Smulyan can do almost whatever he wants with Emmis Communications Corp., since the supercharged shares he holds give him voting control, right?

That's the conventional thinking, but there's a growing crack in his armor. Because of the company's poor results of late, debt ratios are creeping up, raising the specter that Emmis will be close to violating covenants with its lenders by next May.

That won't happen, Smulyan, Emmis' founder, chairman and CEO, told IBJ.

"We are very, very aware" of where Emmis stands in terms of complying with its lending agreements, he said. "We will do what is necessary to stay within our covenants."

He's hopeful Emmis will win breathing room by posting improved results at its radio stations in Los Angeles and New York, which account for about half the company's U.S. radio revenue.

But if that doesn't happen, he said, "We have a series of contingencies." Among the options: "You can always sell something," he said, or cut costs.

The company's debt now totals $605 million, or 8.9 times so-called EBITDA-earnings before interest, taxes, depreciation and amortization. Because the radio industry is slumping, and Emmis is underperforming its peers, Standard & Poor's Corp. and Moody's Investors Service this month each lowered the company's credit ratings.

The growing credit pressures could tilt the balance of power in Smulyan's year-long standoff with dissident shareholders. After all, it's harder for a controlling shareholder to keep investors at bay if banks start breathing down his neck.

Smulyan agreed to work for $1 in salary this fiscal year, a magnanimous act but not nearly enough to win over increasingly agitated investors. Emmis stock now trades for just $5.40, off more than 80 percent from its 2000 high.

The company's most outspoken shareholder, Frank Martin of Elkhartbased Martin Capital Management, said in a regulatory filing last month that Emmis should seriously consider selling its radio stations and other holdings and "return capital to shareholders before [the company's] value may diminish further."

Another dissident, North Carolinabased Noonday Asset Management, said in a filing this month that "we broadly concur" with Martin's position. The filing said the board "should be exploring vigorously appropriate alternatives to bring the share price in line with the company's intrinsic value (including exploring the sale of some or all of its assets)."

The two groups together own more than 20 percent of Emmis' stock, while Smulyan owns about 14 percent. However, because most of his shares have extra votes, his voting power is 60 percent.

That's meant that Smulyan has been able to respectfully disagree when shareholders suggest he should sell the business piecemeal or at once, moves they believe would yield a big windfall.

As Smulyan told IBJ, "I think we have a little longer-term horizon than most of the funds that own media stocks these days."

For now, Emmis is trying to boost the company's stock price by repurchasing shares-a strategy that shrinks the number of shares outstanding but also narrows the company's margin for error.

As Bank of America analyst Jonathan Jacoby said in a report this month, "Stay tuned as we watch [Emmis] management's strategic direction. It appears that it's stock buybacks for now, but with leverage heading up and weak fundamentals, this can't go on forever."

One option for shareholder salvation: Smulyan could revive efforts to take Emmis private, lining up financing to acquire the shares he doesn't already own. He proposed such a buyout in May 2006 but was unable to reach terms with the board.

Or perhaps financial pressures would spur Smulyan, 60, to put the company on the block, for sale to the highest bidder or bidders.

In his filing, Martin wonders aloud whether the declining stock price has taken a heavy toll on Smulyan's personal finances, and he suggests selling before pressures worsen.

Martin noted that the company's May proxy statement showed Smulyan had pledged 3.2 million Emmis shares as collateral for lines of credit. At the time, Emmis shares traded for around $10, more than 40 percent above current levels. Banks sometimes seek additional assets to support collateral that has lost value.

"Of concern to us is that if the CEO has his back up against the financial wall, his judgment ... may be impaired," Martin said in his filing, a scenario that might prevent investors from getting full value for their shares.

Smulyan scoffed at Martin's doomsday scenario.

"I can say now, vigorously, that I don't have an issue, but Frank never lets facts get in the way," he said. "If I really were squeezed, why would I forgo my salary? Think about it logically."

Attacks like Martin's go with the territory when an executive runs a public company that's performing poorly. The remedy is better performance. That's what Smulyan desperately needs to win over shareholders and keep his bankers happy.
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