July 19, 2010 - 1:57pm EST by
2010 2011
Price: 2.15 EPS $0.00 $0.00
Shares Out. (in M): 38 P/E 0.0x 0.0x
Market Cap (in $M): 81 P/FCF 0.0x 0.0x
Net Debt (in $M): 340 EBIT 0 0
TEV ($): 575 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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This $2.40 take-private looks dead on the vine, yet EMMS stock is priced as if the deal is likely to go through.  2/3rds of preferred shares must approve certain unfavorable amendments but nearly 1/3rd have signed a lock-up agreement to vote against.  Shorting the stock at $2.15 is an opportunity to make 25 - 50% if the deal breaks vs. losing 12% if the deal closes at $2.40.  The deal could close as soon as Aug 3rd and be called off any day.  In any event, we are likely to see resolution by the Sept. 24 termination date of the merger agreement.
EMMS Overview

Emmis primarily owns and operates domestic radio stations with a focus on large markets (NYC, LA, Chicago clusters).  It also publishes regional magazines and owns radio assets in Slovakia  / Bulgaria.  The domestic radio business constitutes the bulk of EMMS' value.  CEO Jeff Smulyan controls the company with > 60% of the vote through complete ownership of a super-voting class and owns ~ 14% of shares outstanding.

Brutal declines in local and national radio advertising over the past 3 years and a levered operating structure (only ~20% of costs are variable) has driven LTM EBITDA to $25mm, a major decline from 2007 EBITDA of ~$70mm.  Declines have been driven by massive drops in ad rates as operators scramble to fill generally fixed inventory - ad rates are 65% of what they were in 2007 -- offset to a small degree by operating and corporate cost savings.  The FY 2011 budget (CY 2010) projects $40mm of EBITDA.  Operating trends are volatile, but as of May 3rd (before the potential slowdown), radio revenues were trending y/y flat in May and + 10% in June.

EMMS essentially sold the LA radio station to Grupo Radio Centro for $110mm, which will eventually help de-lever the capital structure.  EMMS owns/operates the station while Centro pays $7mm annually through an LMA (Centro provides all programming, gets to sell all advertising) - if Centro doesn't exercise right to purchase for $110mm by 2016, EMMS can exercise the right to put the asset to them at the same price.

The nature of the current opportunity is rooted in the company's capital structure:  ~ $345mm of secured credit facility and $141mm liquidation preference of 6.25% cumulative preferred  (2.81mm shares * $50 liq. pref).  Preferred dividends were halted on Dec. 15 '08, and the preferred are now $15.4mm in arrears ($5.47 per preferred share) through June 15 '10.  They trade thinly around $22.  (EMMSP PFD in bloomy)  Very importantly, the preferred has the right to be redeemed in full a year after any take-private.  Also very importantly, Alden has amassed 41% of the preferred shares in the open market.

Deal Overview

Emmis signed a take-private with an entity controlled by Jeff Smulyan and Alden at $2.40 per share.  As part of the deal, EMMS must exchange new $30 par 12% PIK subordinated notes due 2017 for each $50 liquidation preference preferred.  The notes have no protective covenants, are unlikely to require reporting under the Exchange Act, and the indenture contains no reporting requirements.  Accumulated dividends on the preferred would be cancelled.  Effectively, EMMS is delivering a big haircut to the prefs and stripping transparency and liquidity, all in return for a contractual maturity.  It's a terrible proposition for non-Alden preferred holders who believe in the future of the company. 

Alden will also exchange their preferred stock, but they further benefit through significant preferred and equity interests in the newco.  Alden receives these equity interests as consideration for funding the tender for the common, but the deal is structured so their preferred interests are likely to be redeemed before any of the new sub debt.  I will go into more detail if anyone is interested in the thread.

Because the preferred redeems in full upon a take-private, EMMS has called an Aug. 3rd meeting of the preferred stock to strip this provision and create other amendments to unfavorably cash out unexchanged preferred at $5.85.  The exchange offer is conditioned on this vote.  EMMS needs 2/3rds of preferred shares outstanding to approve the change.  A holder may submit shares for exchange while voting against the amendments.  Alden agreed to vote their 41% in favor.  Based on the sparse EMMSP holders list as of April, the vote looked achievable.

On Friday, July 9 everything changed when "Scepter Holdings" filed a 13-D after the market with a lock-up and voting agreement disclosing numerous signatories owning ~970k preferred shares,  or 34% of the amount outstanding.  All parties agreed to vote against the amendments.  Major parties to the lock-up include:   DJD Group, Third Point, R^2, Zazove Aggressive Growth Fund, and LKCM Private Discipline Fund.  The lock-up may only be amended by a majority of the group's shares.  Subsequent D's show Third Point acquired 100k preferred shares after the July 1 record date, but with a 31% group record date position, the vote is still practically impossible.  I think Smulyan / Alden were caught by surprise since many of these large filers had not disclosed Q4 '09 / Q1 ' 10 holdings despite this security being on the 13-F list.

Thus unless Alden / Smulyan can get preferred holders on board by improving the terms of the exchange offer, the deal will break.  Receiving non-reporting notes while the large preferred haircuts flow to the benefit of the new equity holders (Alden / Smulyan) is a non-starter.  The logical way to maximize value to all preferred holders (not just Alden) is through a public debt exchange + warrants, or holding the preferreds as EMMS de-levers through EBITDA stabilization / growth with the eventual $110mm proceeds of LA station sale to Group Radio Centro hitting in 2016 and potential Chicago / NY station sales along the way.  Either one leads to a broken deal.

R^2 is the largest holder at 337k shares and appears to have lead the effort.  This is notable because based on the names and Fort Worth address on the filing, they are associated with Q Investments.  Q  recently lead unitholders of Cedar Fair (ticker: FUN) to vote down a take-private by Apollo, citing long-term value of the company.  Apollo reportedly received room from its banks to increase the bid by > 10%, but Q was not supportive of a deal, citing long-term value, and proceeded to put 2 representatives on the board.  Though I've never spoken to them or any other filer about EMMS, I suspect they see similar long-term value in EMMS preferreds, and have probably made that view clear to the group.  R^2 controls 35% of the group's shares, so without them it's tough to get a majority of the group's shares on board to break the lock-up agreement.

EMMS / Alden will bear their own expenses in the event the amendments are voted down and the deal is terminated.

Upside / Downside

Downside to this trade is obviously capped.  There is no feasible scenario where the $2.40 consideration is increased.  The preferred holders either don't own any shares or own a small amount, so they are interested only in consideration for the preferred.  13-D's in the common indicate selling and/or shorting.  You can lose 11.6% shorting it at $2.15.

I won't offer precision on the upside.  Anything that touches radio is very financially and operationally levered, normalized EBITDA is anyone's guess, many of the stocks are thinly covered, etc.  But you can pick any radio company to see massive stock price declines from the time the $2.40 proposal was made:  CMLS -51%, ROIAK -84%, ETM -46%, WWON -45%, Russell 2000 -18%.  Stocks of businesses centered around local advertising (billboards, newspapers) have seen large declines.  The deal was literally made over the weekend right after the market peak.  My best guess is you make 25 - 50% from $2.15.

If my low-end 25% upside estimate is correct, the market is pricing a 68% chance the deal closes.

If the high end 50% upside estimate is correct, the market is pricing a 81% chance the deal closes.

Given the position of the preferred, I estimate a sub-25% chance the deal happens.  I have had no problems locating borrow.


August 3rd special meeting of preferred shareholders.
September 24 drop-dead date of merger agreement.
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