Emmis Plan May Spark Deals

May 16, 2005  •  Post A Comment

In deciding to leave the television industry, Emmis Communications might inadvertently breathe new life into the market for television stations.

After Emmis last week revealed plans to explore a sale of its 16 network-affiliated television stations and operate as a pure-play radio company, several analysts and industry experts said this could be just the jolt needed to revive the moribund mergers-and-acquisitions market for stations.

A number of sources said they believe Emmis’ stations would attract a lot of interest from large station groups looking either to get bigger or to create duopolies in certain markets. There is also expected to be significant interest from private-equity players, many of which are sitting on huge piles of cash. The Emmis stations could fetch between $900 million and $1 billion, according to broadcasting analyst Laraine Mancini of Merrill Lynch.

If Emmis does command a top-of-market price, that could compel other station owners that had been sitting on the sidelines to re-enter the market with the hope of replicating Emmis’ success. TV stations are generally sold based on multiples of cash flow, with buyers willing to pay between eight times and 10 times cash flow (though some recent deals have been much higher thanks to opportunities to create duopolies in certain markets). The higher the multiple that Emmis gets, the more it will help return some of the lost luster to the TV station market, which has languished in recent years as buyers balked at the high multiples (well into the teens) demanded by some would-be sellers.

To be sure, no one is presuming that Emmis’ decision to unload its stations could usher in a wave of selling similar to the M&A craze of the 1990s. Nor is anyone suggesting that the Emmis move will unfreeze those stations sitting on the sidelines waiting for Washington regulators to provide clarity on the rules governing duopolies or cross-ownership.

However, analysts and industry players agree that there is a lot of pent-up demand in the marketplace, and Emmis’ play could help release some of that demand. “This could be the year you could see some M&A activity,” said Ms. Mancini, whose firm has done some noninvestment banking services for Emmis over the past 12 months. “Multiples have gone down to the point where some private holders might say it’s time to get out. They miss the 18 times or 15 times cash flow and decide it’s time to sell.”

For others, it could be that the frustrations of owning TV stations has finally reached untenable levels. Indeed, that appears to be the thinking behind Emmis’ decision to get out of the TV business. As one network executive put it: “They ran out of ideas, so they’re selling.”

Last year Emmis Chairman and CEO Jeffrey Smulyan unveiled a plan that would have broadcasters pooling their digital spectrum to offer an alternative to cable TV. The idea was to pool local signals and about 30 popular cable networks in a package. Then the consumer would buy a set-top box for $100 and pay $25 a month for the service. This would allow them to compete with cable and recoup billions spent upgrading to broadcast digital signals. However, the initiative never got off the ground. Observers now see his decision to sell the stations as an acknowledgement that the much-talked-about idea is a nonstarter.

TV station values also have been hurt by restive investors who don’t like the up-and-down revenue performance of many stations. In even-numbered years, stations are flush with cash from political advertising. Then in the odd-numbered years, they suffer by comparison when there’s no political spending. Some investors also worry that political spending in even years could decline if the government cracks down on so-called 527 organizations, which lobby for specific issues and causes.

In anticipation of a sale, Indianapolis-based Emmis hired New York-based The Blackstone Group as its financial adviser to evaluate strategic alternatives. Mr. Smulyan during a conference call last week said that he is open to all options, including a possible management buyout, led by Randy Bongarten, president of Emmis Television.

A possible sale of the TV assets comes as the company launches a stock buyback program to repurchase up to 20.25 million shares starting May 17. Ms. Mancini noted that Emmis will increase its debt load to acquire those shares but is expected to pay down the debt once the stations are sold.

Mr. Smulyan said the challenges facing station groups these days forced the company to rethink its commitment to the business. “We hope we can find our group a home that will allow them to continue and grow,” he said during the conference call. “It’s a difficult decision, but it’s a right decision, and it sets us on a course that gives us the best opportunity to go forward in the future.”

The news sent Emmis shares soaring 20 percent Tuesday, the day of the announcement, and by week’s end, Emmis shares were still up more than 15 percent, after sliding more than 18 percent since the beginning of the year. By Thursday Emmis shares were off just 2 percent from where they started at the beginning of the year.

“Emmis invested in TV hoping to drive subscriber fees to the broadcast industry and galvanize its free, over-the-air brethren to that end [by creating an alternative to cable TV],” said Lee Westerfield, a broadcast analyst at Harris Nesbitt. “After five years [of owning TV stations] and a great deal of frustration in that regard, Emmis is returning to its radio roots and letting others run the TV business.”

But selling the stations has its risks as well. Merrill Lynch’s Ms. Mancini pointed out Emmis will be giving up around $91 million in free cash flow annually.