Emmis' market value in free fall as radio industry takes beating

September 29, 2008

For more than two years, Smulyan, 61, has been unflaggingly optimistic during quarterly conference calls. But since early 2007, Emmis' stock has fallen 84 percent, shrinking the company's stock market value from $307 million to $48 million.

The troubles have cast uncertainty over one of Indianapolis' highest-profile businesses. The company employs more than 1,100 workers--including 245 in Indiana, most of those at its Monument Circle headquarters.

"The radio industry, and that includes Emmis, has a very bad cold," said Doug Ferber, senior associate for Star Media Group, a Dallas-based firm that advises media companies. "And right now, there's no proof there's a remedy."

Smulyan is undaunted.

"I know we're the only media company here in Indiana, so people go, 'Oh my gosh,'" Smulyan said. "But this is not a problem specific to Emmis. All of us have traded in lockstep: Entercom, Radio One, CBS and Clear Channel.

"We must show good top-line growth, and we're working on that. But really, I think Wall Street's response is an overreaction. This is a problem of perception, not consumption."

Smulyan points to New York-based Arbitron Co. ratings that indicate radio stations nationwide attract more than 260 million listeners each week, a slight increase from a decade ago.

Investors--and advertisers--have lost enthusiasm for radio as competition intensifies from other media options, including the iPod, satellite radio and the Internet.

Emmis' bottom line has taken a big hit as a result. The company has reported three straight quarters of financial losses as radio revenue--which accounts for two-thirds of the company's business--remained weak. Its U.S. radio revenue in the fiscal year that ended in February was $320 million, a decline of $30 million from two years earlier.

The company owns 23 U.S. radio stations, including four in Indianapolis and two in Terre Haute. It also publishes specialty and regional magazines, including

Indianapolis Monthly.

In response to the pressures, the company in August cut 40 jobs in its publishing division and trimmed salaries for the 348 remaining workers by 2 percent.

This month, Emmis said it is reducing the pay of 64 executives companywide to $15,000.

Smulyan, who worked for $1 in salary in the last fiscal year, is among those taking the cut. If the executives meet what are expected to be easy-to-attain performance goals, proceeds from the sale of a New Orleans TV station will be used to bring their salaries up to where they were, $905,000 in Smulyan's case. If they miss those targets, the difference will be paid in company stock. The change allows Emmis to lower its operating costs as defined in its debt agreement--something the company wouldn't have to bother with if it were posting robust profit.

Capable captain?

Opinions among investors and media experts vary about Smulyan's ability to right Emmis' ship.

While one camp thinks he has the savvy to ride out the storm, others believe he should sell the company to maximize shareholder value before it crashes into bankruptcy.

Smulyan dismisses such doomsday scenarios, and says he doesn't want to sell. And as the controlling shareholder, he can throw his weight around. While Smulyan, who founded Emmis in 1980, owns less than 20 percent of the company's stock, most of his shares have 10 times the voting power of the stock held by other investors.

Smulyan's most outspoken critic has been Frank Martin, an Elkhart money manager whose firm owns nearly 10 percent of Emmis shares. A year ago, when Emmis stock was trading at more than $6 apiece, he implored the company's board to consider selling its radio stations and other holdings and "return capital to ... shareholders before [the company's] value may diminish further."

Some observers said Smulyan's own missteps have compounded the problems.

In 2005, Emmis spent $395 million to buy back 20.3 million shares at $19.50 per share--15 times the price where the stock now trades.

That same year, it launched a plan to get out of TV broadcasting--a segment that in the span since has outperformed radio. Emmis sold nine TV stations that year for $259 million. It sold the New Orleans television station this year for $41 million.

Smulyan defends divesting the TV holdings, saying Emmis needed to focus on its core radio business. He also points out that TV is being propped up this year by political advertising.

In 2006, Smulyan offered to buy the Emmis shares he doesn't already own for $15.25 apiece, or $471 million. After he was unable to come to terms with a special committee of independent directors, scuttling the buyout, he rolled out a plan to pay stockholders a special dividend of $4 a share, or a total of $150 million. The move drained cash from company coffers, reducing its financial flexibility as times have gotten tougher.

There also have been format changes at key radio stations--including switching a Los Angeles station from country to R&B and dance music--that backfired.

Still, no one in Smulyan's industry is doing well these days. Since January, stocks in publicly traded radio companies have declined 62 percent.

That's partly because national advertisers in the nation's biggest radio markets of New York, Los Angeles and Chicago are leaving in droves. Emmis is heavily vested--more than most radio groups--in those large markets.

In August, radio had its worst month since 2001, as ad revenue declined 12 percent, led by a 14-percent decline in national advertising and an 11-percent drop in local advertising.

And there's uncertainty how Arbitron's new radio listener measuring device--the Portable People Meter, which will be rolled out in Chicago, Los Angeles and New York in October--will affect radio ratings.

The pager-sized PPM tracks radio listening in real time, rather than relying on survey participants to log what they listen to during the course of a day. Testing in Philadelphia and Houston this year suggested some blacks, Hispanics and other minorities are reluctant to participate, potentially leading to undercounting listeners in urban markets with high minority populations.

Part of the problem for Emmis and other operators is that industry executives have been slow to realize the scope of their problems, said James B. Boyle, an analyst with C.L. King & Associates in New York.

"We have not ever seen such breadth of weakness in our market data," Boyle said in a Sept. 22 report. "We are downgrading Emmis from neutral to underperform as there is additional risk to our estimates given that the radio industry deterioration may not be over."

Not standing still

Smulyan isn't sitting around waiting for better times. He recently joined other radio operators on a road show to state their case to large national advertisers and ad buying agencies. Smulyan also continues to expand the company's interactive division, which helps media companies pursue business opportunities through the Internet and other digital technologies.

In September, Emmis and Toronto-based WorldBand Media LLC announced a partnership that will broadcast programming targeted to the South Asian communities in New York, Los Angeles and Chicago using HD radio technology.

Six months earlier, Emmis was one of eight radio companies that formed a joint venture, the Broadcaster Traffic Consortium LLC, to build a nationwide network to distribute traffic data via radio technology.

Emmis also is spearheading an effort to get cell phone manufacturers to install radio receivers in their units. A number of European cell phone makers are doing this, Smulyan said, but North American manufacturers are behind the curve.

"If anyone can innovate his way out of this, it's Jeff Smulyan," said Scott Uecker, general manager of WICR-FM 88.7 and communications instructor at University of Indianapolis. "Emmis under Jeff Smulyan's guidance has been very quick to adopt new technologies and change directions when they need to. I actually think they're in a better position than most in this industry right now."

Smulyan might have to hunker down for another 18 months to survive the storm.

"Wall Street expects radio will have more declines next year, before seeing some stabilization in early 2010," said Drew Marcus, vice chairman for Deutsche Bank Securities in New York.

Some wonder if Emmis and Smulyan have the firepower to ride out the slump. One issue of increasing concern is Emmis' debt load.

The company's debt keeps creeping higher, raising the specter that Emmis could violate covenants with its lenders. Smulyan said that won't happen and that the company has sufficient financial breathing room. He notes that a long-term loan for more than $450 million isn't due to be paid off until 2013.

Adding to the uncertainty: The company's latest proxy statement shows that Smulyan has put up nearly all his 5 million company shares as collateral for a personal bank loan. "If Mr. Smulyan defaults on the line of credit and the pledge is foreclosed, the sale of shares ... could result in a change in control of the company," the proxy states. As Emmis' stock price has fallen, more and more of Smulyan's stock has been needed as collateral.

"We're working on a plan to deal with that," Smulyan said, declining to elaborate. "It's not an issue for this company or me."

Station sales?

If Emmis' performance continues to deteriorate, creating financial strain, Smulyan has an ace in the hole, analysts said.

The radio stations in Chicago, New York and Los Angeles that have been dragging down the company's results lately remain top properties that other radio station companies would covet. If necessary, Emmis could sell them for more than $600 million.

"Jeff has de-levered in the past many times, and he has a track record of doing this very successfully. He has consistently gotten more for the assets that he has sold than Wall Street predicted," said Boyle, the C.L. King analyst. "One of the reasons the stock price is so low is because Jeff said he won't put the entire company on the block," Boyle said. "But that doesn't mean he doesn't have valuable assets available."

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