Cheap For A Reason

Hi, guys –

Emmis is cheap for a reason. They just got done completely screwing over their preferred shareholders. I'm probably wandering into “too soon” territory, but if they get away with this – and I think they will – there are eery parallels to the Trevor Martin/George Zimmerman tragedy. The ethical questions will make the stock uninvestable for many; read no further if you can't handle a relationship with a bit of baggage!

The company owns a bunch of radio stations, some regional magazines, and has other potential sources of upside. Most of the value is in the radio stations. Let's start with those and then see what the optionality might be worth. Throughout, I'll be using really round numbers. For simplicity and laziness, we can just use the fair values reported in the latest 10-K:

The company valuations are derived from something that sounds like a DCF using a 12% discount rate, sub-GDP revenue growth, stable share and margins, all of which assumptions sound reasonable. $3.44 is comfortably above the last quote of $2.75, which is the the 52-week and 5-year high, umm, sorry about that ….

What else is there?

1: The magazine division. I suspect the economic value as currently managed is close to nil, but they win awards and are highly thought of. I dunno – say you had a trophy husband with an interest in publishing who was starting to seem a little bored and in your way. What would Texas Monthly be worth to you? I'm assigning zero value to this group.

2: The radio station marks are likely conservative. The NYC and LA stations are prize assets, honestly, they're worth more like $85MM-$100MM. That could be another $1/share. The company has been selling stations to get out a severe debt bind. The sales were certainly all above carrying value, and I think (and am willing to double-check) that they were also above fair value.

3: Through a complicated securitization, Emmis has leased 98.7FM, AKA KISS-FM to Disney through 2024. But they'll be getting it back in only 11 years! Using a 12% discount rate and a $100MM valuation, that's another $0.5/share.

4: The company has plowed significant money and energy into NextRadio, an app & infrastructure to allow users to listen to FM radio on their smart phones, and FM radio stations and the carrier to monetize that listening. They have the broadcast industry behind this platform and have struck a deal with Sprint. FM-over-smart-phone is pretty standard in Europe and Asia; ~15% of European revs come from smart phones. NextRadio is worth somewhere beween a nothing and a lot. Call it another $0.5/share?

5: They're suing the Hungarian government for getting screwed out of some broadcast licenses. Since they're also getting sued for raping the preferred, let's call this a wash, although I were working on contingency, I rather represent them against Hungary than litigate for the preferred holders.

So I get:

$3.44 solid +

$1.00 undervaluation of trophy assets +
$0.5 PV of leased station +
$0.5 NextRadio =

$5.44/share speculative.

Other stuff –

Is radio dead? Well, no! That's stupid. Is it dying? I don't know, maybe, but it'll take a while and there's some residual value from the spectrum.

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I'm doing a sum of the parts valuation while ignoring corporate overhead. What's up with that? Well,

1: I suspect that some chunk of corporate G&A is going to NextRadio. This should become success-based pretty soon.
2: An acquiror will of course look through the corporate G&A. My poster-stock here, for no particular reason, is the software company, JDAS, which has always traded at a high multiple, because it's never been a question of what it's worth on a DCF basis as stand-alone entity, but rather when it would be sold and for how much.
3: Finally, given the cashflow and relatively modest financial leverage, it's possible for the company to empire-build to a point where corporate G&A is no longer an embarrassment.

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Recent business trends are encouraging. Check out the latest transcripts, or even better, listen to the calls, because these are radio guys, and they just sound great! Revenue is up some 5-7%. Smuylan, the CEO, chairman and controlling shareholder, attributes this to advertisers realizing that radio's not dead after all.

Debt covenants prohibit share repurchases and dividends until debt is under 2.5x adjusted EBITDA. Improved results and debt reduction should get us there pretty soon.

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On a personal note, I worked for ClickRadio, an internet-bubble-era startup intended to deliver radio over the internet. As a result, I've spent some time with radio guys. Great people, with great voices. Really sweet. There were the usual problems around sex, alcohol and drugs, of course. And a lot of these guys believe in radio. Really believe in it. I wouldn't count on great long-term capital allocation from anyone in the industry.

Back then, the radio guys said revenue growth was GDP+; now they say GDP-, so reality has sunk in.

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The Elephant in The Room: Is Smuylan, chairman, CEO and controlling shareholder, going screw the common? He just screwed the preferreds, and before that tried an MBO.

My guess is, no. The guy sounds bullish on the company's prospects. This is after 3 years of trying to sound broke so you can steal the company and take value from the preferred. It seems like, for whatever reason, he'd like to get the stock price up.

With regard to preferred screwing – I don't want to try to excuse it. I hope that nothing I say will … Oh, I don't know, so you're talking to some lawyers and they point out some interesting wrinkles about Indiana corporate law, and then you ask,

“So these preferred holders, who are all bunch of scum-sucking hedge-fund bastards who don't give back to the community, do I have any fiduciary responsibility to them?”
“No.”
“But I do to the common shareholders, right?”
“Right.”
“OK, tell me more about these wrinkles ...”

Equity value should increase over time. The company is profitable and covenanted to reduce debt.

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A special shoutout to specialk99, whose excellent work I am building on/stealing from here. I feel zero need to replicate his spot-on reporting of the preferred screwing and in general agree with everything he said, he is my hero and leader in this “investment,” if that's even what it's called.

Yours,
Bowd