Disclosure: No position (Frank)
On an LTM basis, Emmis Communications Corp. (“EMMS”) appears to be an overvalued, overlevered company. However, after the quarter ended, the company closed (or is in the process of closing) several transactions that are significantly accretive and massively deleveraging. Pro forma for these transactions (and an unannounced but inevitable refinancing of debt, including 12.25% and 23.0% debt), EMMS is trading at only 5.9x equity cap/LTM free cash flow. The valuation drops to 4.8x equity cap/free cash flow if EMMS wins a lawsuit regarding its outstanding preferred stock. This is a complicated (and somewhat illiquid) situation that for a variety of reasons has not appeared on many investors’ radar screens. However, insiders believe the stock is undervalued and instituted a 10b5 plan to buy up to 1million shares at prices up to $2.00 per share (up 33% from current levels). In an unusual situation, the 10b5 was abruptly terminated after only two days due to an error by the broker, and could not be reinstated due to blackout issues. We believe that had this termination not occurred, EMMS’ stock price would be significantly higher today.
Emms operates the 8th largest publicly traded radio portfolio in the United States based on total listeners. Emmis owns 18 FM and two AM radio stations in New York, Los Angeles, St. Louis, Austin, Indianapolis and Terre Haute, IN.
DEBT AS OF LATEST 10-Q
At Feb. 29, 2012, the company had the following debt ($mm):
Term @ L+4: $87.9
Term @ 12.25%: $110.0
Total OPCO debt: $203.8
Notes @ 23.0%: $33.9
Total Debt $237.7
For the LTM ended Feb. 29, 2012, EMMS generated reported EBITDA of $26.3 mm (or $23.4mm as per Bloomberg and Yahoo), which implies a Debt to Ebitda of 9.0x. However, this reported EBITDA figure includes certain non-recurring items and, as illustrated by the company’s analysis (http://www.emmis.com/investors/quarterly-earnings.aspx then under Quarter 4 click Non-GAAP Leverage Disclosure, 2.29.12 ), a more appropriate LTM EBITDA is $30.8 mm, which implies a still high leverage ratio of 7.7x. However, this ratio comes down significantly when the below asset sales are considered.
After the quarter ended, EMMS closed or will soon close 3 transactions that combined should generate $169 million of after tax and fees proceeds that will be used to repay debt.
1) ESPN transaction which has already closed and generated $75 million of cash proceeds.
2) KISS transaction which should generate $10 million of cash proceeds when it closes this summer.
3) Grupo Radio Centro Put/call which should generate $84 million of cash proceeds when it closes this summer.
For more details on these sales, see the earnings call transcript and SEC filings.
After closing the above asset sales, the company will be much less levered, so the company can refi its debt at significantly lower rates. All of the company’s debt is prepayable with the following caveats. The 12.25% debt is subject to a 6% prepayment fee and due to a make whole provision, its not economically feasible to repay the 23% debt until next May, although we imagine the company could negotiate a prepayment.
A refinancing post-closing of all the asset sales might look like:
Asset Sale Proceeds 169.0
New Debt at 6.5% 88.3
Total Sources 257.3
Repay Revolver 6.0
Repay Term 87.9
Prepayment fee on 12.25% 6.6
Repay 12.25% Term 110.0
Repay 23% Holdco 41.6 (assumes 1 year of accretion from current balance)
Other Fees 5.0
Total Uses 257.3
Note: on May 30 the company refinanced over $70 million of its debt with a new 4.1% facility, but this isn’t reflected in our analysis.
Pro forma this refinancing, EMMS would have Debt/EBITDA of 3.7x (down significantly from the current levels). Importantly, the company has large NOLs, so it pays no cash taxes and thus delevers more quickly than the debt/ebitda ratio may suggest.
We are assuming the new debt can be obtained at 6.5%.
So, pro forma the refinancing the company will have LTM free cash flow of:
23.8 – Adjusted EBITDA (as per May 10 eps call)
(5.7) -6.5% interest on new debt
(0.0) -Cash taxes (~100mm NOL)
(5.4) – Capex
(2.9) – Preferred dividends
9.7 Free cash flow
Stock Price $1.50
Shares outstanding 38.2
Equity cap 57.3
Equity Cap/Free cash flow 5.9x
But it may be even cheaper than that.
On its balance sheet, EMMS has 6.5% preferred stock with a liquidation value of $47 million. In a complicated and controversial transaction, the company repurchased (for ~ $17 per preferred share compared to its $50 per share liquidation value) significant amounts of preferred and is now attempting to strip the remaining preferred stock of its dividends and essentially force each preferred to convert into 2.4 shares of common. There is currently a lawsuit regarding this matter and the next court date is later this summer. We believe EMMS has a good chance of prevailing. However, in order to be conservative, our analysis assumes EMMS loses this issue. However, if EMMS wins, and the preferred convert into 2.3 million common shares and there will be no more dividend payments, the pro forma equity cap would be increase to $60.7 million, pro forma free cash flow would be $12.7 mm (9.7+2.9) and the equity cap/fcf multiple would be 4.8x. The preferred are publicly listed (EMMSP) and last traded at $15 (much less than the $50 liquidation value), but on very light volume.
INSIDER BUYING / 10B5-1
When the window was briefly open after the last earnings release, insiders bought stock. Perhaps most interesting was the activity by Herb Simon (of Simon Property Group). After some earlier purchases at lower prices, on May 16 he bought 98k shares at $1.50. The following day he formed a “partnership” with EMMS’ Chairman/CEO and that entity entered into a 10b5-1 plan that would enable it to buy up to 1.0 million shares at no more than $2.00 per share. On May 17 the partnership bought 98k shares at $1.48 and on May 22nd it bought 106k shares at $1.70 (15% above current price). On May 23 the 10b5 plan was terminated because the broker apparently screwed up by not buying any shares. We believe that since the company was in a blackout period, the 10b5 plan could not be reinitiated. However, the company reports earnings in mid-July at which time the insider buying window would reopen and the 10b5 could be restarted. We believe the $2.00 limit and $1.70 last purchase price give a good sense for what insiders think EMMS is worth. We also believe that had the 10b5 plan not been terminated, EMMS’ stock price would currently be significantly higher not only because of buying by the plan, but also because the frequent insider buying filings would put this (complicated) idea on more investors’ radar screen.
Since the 10b5 plan situation is unusual, below is the announcement from the original 13d.
HSJS, LLC has entered into a Rule 10b5-1 Purchase Plan with Stifel, Nicolaus & Company, Incorporated (“Stifel”) which provides for the purchase of up to 1,000,000 shares of Class A Common Stock, including shares of Class A Common Stock purchased on or after May 17, 2012 by HSJS, LLC. Under the plan, Stifel is not permitted to purchase any shares of Class A Common Stock at a price greater than $2.00 per share. The plan can be terminated at any time subject to the Issuer’s insider trading policy and pre-clearance by the Issuer.
Below is the disclosure in a later 13d announcing the termination of the plan.
Although the Rule 10b5-1 Purchase Plan entered into by HSJS, LLC provided for daily purchases of the Issuer’s Class A Common Stock, subject to certain conditions and limitations, the broker implementing the Purchase Plan failed to purchase any Class A Common Stock on May 23, 2012. The decision not to purchase shares was made without the approval or knowledge of the Reporting Persons. Because the Purchase Plan had been deviated from, HSJS, LLC terminated the Purchase Plan on May 24, 2012.
1) This idea has several moving parts so we suggest you read the transcript of the last earning call and view SEC filings and the financial information on the Investors section of the website.
2) While the company does not give guidance, comments from the earning call seem to indicate that this quarter (which will be announced in July) is doing well.
3) Reported results are very deceiving because they do not reflect the asset sales mentioned above. As discussed in the earning call, pro forma these transactions, the business is doing much better than the “reported” results may indicate.
4) Management essentially controls the company thru a dual class of stock and in the past has attempted to take it private. On the last earnings call they indicated they will not try to take it private again.