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BEHIND THE NEWS: For trio of high-profile firms, turnarounds remain elusive

January 21, 2008

It's like a recurring nightmare. Quarter after quarter, three of Indianapolis' most prominent companies report weak results, and their stocks slide lower and lower.

How can Emmis Communications Corp., The Finish Line Inc. and The Steak n Shake Co. reverse their downward swoon? It's a question of great urgency, given that the stocks of all three have slid deep into the cellar.

Emmis now fetches $2.79 a share, 96 percent below its 1999 high. Finish Line goes for $1.66, 93 percent off its 2005 high. Comparatively, Steak n Shake is the star performer. Its stock trades for $7.49, 65 percent lower than its 2006 high.

Trouble is, there seems to be no simple way to pull the stocks out of their dives.

Emmis, for instance, is fighting stiff headwinds, including slack demand for radio advertising time industrywide. Revenue for Emmis' radio stations fell 6 percent in its last fiscal year, and 5 percent in the first nine months of this one.

CEO Jeff Smulyan tried to strike an upbeat tone during the company's Jan. 9 conference call with analysts, noting performance improvements at key Emmis stations. Yet things are too bleak for words alone to rekindle investor confidence.

"From a company standpoint, I am encouraged," Smulyan said, though he went on to add, "I know this is the worst point in the history of the industry."

Investors long have hoped Smulyan would be their savior. Two years ago, he tried to buy out other shareholders and take the company private, but was unable to come to terms with the board. Now that the entire market value of the company is barely $100 million, why not make another run?

An Emmis spokeswoman declined to comment beyond noting that Smulyan has said he would re-evaluate from time to time whether to make a new offer. Here's one hunch why he's still on the sidelines: He can't get financing.

Smulyan wouldn't be alone. The leveraged-buyout business has been in a deep freeze since credit markets slid into disarray last summer. It also surely doesn't help that Smulyan's own financial firepower has waned as his Emmis holdings have withered in value.

One major Emmis shareholder appears to be losing faith. New York-based Arnhold and S. Bleichroeder Advisers this month scaled back its Emmis stake to 4.7 percent and implored the board "to explore all options ... to create shareholder value."

Those options should include negotiating a going-private deal with Smulyan "to the extent one is feasible in light of current industry and market conditions," the filing said.

Finish Line limps

Finish Line's challenges are equally messy, extending far beyond the $1.5 billion buyout of Tennessee-based Genesco Inc. that it agreed to in June but now is trying to void.

If courts ultimately force it to close that heavily leveraged acquisition, it might have to sell off assets or agree to a private-equity buyout. But even if Finish Line wins the right to walk away, it still must revive its own flagging business, which has reported seven straight quarters of declining samestore sales.

That won't be easy, given that athleticapparel sales continue to sag, and competition is intense. In a conference call with analysts Jan. 4, CEO Alan Cohen said, "I think we have reached a point in this [specialty-athletic] industry where we have to face up to the reality that there are just too many stores out there."

Late last year, during litigation with Genesco over the buyout, Cohen testified that Finish Line in October 2006 hired advisers to explore "strategic alternatives." The Indianapolis company even considered a merger with its archrival, New Yorkbased Foot Locker Inc., though the idea never received serious consideration.

Steak n Shake shaken

Steak n Shake has been in a downturn the longest-it now has reported 10 straight quarters of declining same-store sales. But it also has only modest debt, giving management and the board a cushion as they plot a turnaround, or perhaps a sale.

But they're feeling the heat, just the same. Activist investors are swarming. They scooped up shares last year at what now look like lofty prices-perhaps even higher than the company now could fetch in a buyout.

That means Steak n Shake's future might hinge on management's ability to improve performance-a tall order at a time the economy is teetering, high gas prices are gobbling up disposable income, and cheaper fast-food outlets are upgrading their menus.
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