Emmis vote could deal blow to preferred shareholders

March 14, 2012

Emmis Communications Corp. is calling a special meeting where investors will vote on whether to strip preferred shareholders of their right to collect millions of dollars in dividends.

The get-tough tactic, if successful, might cause Emmis’ long-slumping common stock to spring higher. Common shares fetch a mere 73 cents each, weighed down by massive liabilities stemming from the company’s issuance of $140 million in preferred stock 13 years ago.

In addition to being asked to weaken the rights of preferred shareholders, investors at the meeting will consider authorizing a reverse stock split that would push the price of the company’s shares above $1. NASDAQ has been threatening to delist the shares because they have closed below that threshold since July 2011.

The Indianapolis company, which owns radio stations and magazines, filed a preliminary prospectus for the meeting late Tuesday. It has not determined when the meeting will occur.

The move is the latest step in Emmis’ quest to free itself from the burdensome requirements of the preferred stock. The shares are supposed to pay 6.25 percent, but the financially strapped company has been exercising its right to suspend payments since October 2008. From then through early December 2011, $26.7 million in unpaid dividends piled up as liabilities on Emmis’ balance sheet.

Emmis has made tremendous inroads in recent months eliminating the albatross. Last fall, it borrowed $35 million from Chicago financier Sam Zell to begin buying up the shares at a huge discount, and it now has voting control over 61 percent of the preferred stock.

The changes to be voted on at the special meeting require two-thirds approval of the preferred shareholders. The company said in a Securities and Exchange Commission filing in late January that it may be able to get over that two-thirds hump by selling preferred shares to a friendly investor.

In the preliminary proxy, Emmis’ board—except for Dave Gale, the sole director appointed by holders of the preferred stock—recommend support of the changes, saying they “will have a positive effect on the overall capital structure of Emmis, which will have a beneficial impact on the holders of common stock.”

The proxy said Gale argued “there is no economic reason [for the changes], other than to transfer wealth from the holders of preferred stock to the holders of common stock.” He said “the proposed amendments use corporate resources to subvert the rights of holders of preferred stock and are not in the best interests of Emmis.”

In an interview with IBJ in January, Emmis Chief Operating Officer Patrick Walsh called the preferred stock “a significant part of the structure that would need to be addressed for the common shareholders to ever see significant appreciation in value.”


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