Is Emmis Plan a Bellwether?

May 15, 2006  •  Post A Comment

A proposal by Emmis Communications Chairman Jeffrey Smulyan to take his company private is reviving questions about whether other station groups should be considering a similar move.

With broadcasting stocks floundering, some on Wall Street are wondering if it’s better for these companies to get out of the public markets entirely, avoiding the seemingly fruitless battle of convincing restive investors that the broadcasting business is here to stay.

“The marketplace’s thought process is they’ve got a lot of competition, the growth rates on revenue and cash flow are not that great and it’s a mature business,” said Doug Hurst, managing director and media investment banker at Sanders Morris Harris in New York. “Because the stocks are not trading well, I could see some going private.”

Investors are increasingly worried about the long-term viability of local television stations in the face of stiff competition from iTunes, Google and even broadcast networks themselves. With the media industry in a frenzy over delivering television shows on new platforms, many investors fear that local stations eventually will be left for dead as more video makes its way onto the Internet.

Because broadcasting is a mature business, these stocks are proving to be a mismatch for investors eager to hitch their wagon to high-growth companies. That many stations throw off huge and predictable amounts of cash doesn’t seem to matter to many investors.

Some investors are put off by the year-to-year revenue swings that come with the biennial flow of political advertising dollars. The car industry, whose advertising dollars can account for as much as 25 percent of a station’s revenue, is also causing jitters as domestic manufacturers reel from declining sales.

Executives of many of the station groups have responded to the fears by aggressively exploring new revenue opportunities, including online advertising and reaching out to advertisers that haven’t typically done business with a local broadcaster. Some are going as far as creating classifieds in multiple categories, including cars and real estate.

Still, many would-be investors don’t seem interested. Over the past several years stock prices at many station groups have tumbled, with Hearst-Argyle Television shares off 10 percent, LIN TV Corp. down 60 percent and Young Broadcasting off 80 percent.

As such, when Emmis’ Mr. Smulyan proposed that the company buy its outstanding shares for $567 million, taking the company private, market players began wondering which company might be next.

Though Emmis has some television assets, they are far fewer than those of some of the pure-play television station groups. Emmis owned 16 TV stations but began to sell them off last year as part of an effort to focus entirely on its radio assets. It now has two stations, both of which are still for sale.

Analysts agree that TV and radio broadcasters are by and large facing the same kinds of challenges of slow growth and threats from new technologies.

While most publicly traded TV station groups are considered candidates for privatization, Hearst-Argyle Television invariably winds up as the leading contender. The reason is that its majority shareholder, Hearst Corp., has spent the past several years buying shares on the open market. Hearst’s stake currently stands at around 72 percent.

Other Candidates

Asked during a discussion about Hearst-Argyle’s first-quarter earnings what Hearst’s intentions might be, Hearst-Argyle CEO David Barrett declined to offer any insight into Hearst’s plans, arguing that that is a question best put to Hearst’s management.

His only comment was that “Hearst on numerous occasions continues to buy shares in open market at what they consider to be a value price. That is a question that Hearst could appropriately answer.”

Spokesmen for both Hearst Corp. and Hearst-Argyle declined to comment.

Other companies that have surfaced as privatization candidates include LIN TV, Gray Television and Young Broadcasting. However, analysts note that each of those companies is currently carrying significant debt loads that could make going private anytime soon an uphill climb.

“A lot of it will depend on the capital structure of the individual business,” Mr. Hurst noted. “Many of these companies are already pretty highly leveraged, which would make it tough to do a leveraged buyout.”

In a sign that they might want to consider that option, the chief executives at both LIN and Gray last week said that reducing their debt loads is a top priority, with Gray CEO Robert Prather telling investors that 90 percent of that company’s cash flow would be directed toward paying down its debt.

But even as most investors shun the broadcasting sector, there are some shareholders that are sticking around, in large part because of the potential for these companies to go private.

Theo Wong, a Hearst-Argyle investor who owns and operates StokBlogs.com, a blog site about investing, said he is sticking with the station group for two very simple reasons: He doesn’t believe the hype about the demise of TV and he thinks Hearst will ultimately take the station group private.

“Once they can’t buy any more stock in the open market, I can see Hearst buying them out,” said Mr. Wong, who has been an investor in Hearst-Argyle since November but won’t disclose how many shares he owns. “It might take a few years, but I’m a long-term investor in the company and I’m prepared to wait.”