Timing may be right for Emmis

Sagging radio sector, increased deals sweeten Smulyan proposal

Will 2007 be the charm for Jeff Smulyan, chairman, president and CEO of broadcaster Emmis Communications?

With media and entertainment companies going private left and right, mostly in private-equity deals, the Emmis boss last year tried to buy out the company. However, he failed to win support from a special committee of the Emmis board for a transaction.

Some on Wall Street believe that now could be the time for Smulyan to launch another bid to go private. After all, they point out, takeover and buyout prices in the radio space have fallen and so has Emmis. The firm's stock is up a bit so far this year thanks to the buyout speculation as of late, but it is down 14.2% during the past year. It closed at $9.06 on Monday. According to Yahoo! Finance, that amounted to a market capitalization of only $338.2 million. The stock's 52-week trading range stands at $7.63-$16.77.

"We believe Jeff Smulyan will likely bid for Emmis again in 2007, encouraged by lower private-radio transaction multiples between 2006 and 2007," Bear Stearns analyst Victor Miller said in a report last week.

He warned that Smulyan "faces the same issue he faced in 2006," namely the Emmis board's special committee's valuation method, which was based on a sum-of-the-parts approach. The CEO valued his offer based on multiples, Miller said, suggesting that shareholders might have to help break the deadlock.

Miller's comments followed those of Goldman Sachs analyst Mark Wienkes, who late last month upgraded shares of Indianapolis-based Emmis from "neutral" to "buy," arguing that there is the potential for a 15% return. He also boosted his price target from $7.50 to $9.25.

"We believe there is an increased probability that Emmis CEO Jeff Smulyan could make another attempt to buy-in the public float with an announcement as early as May," consistent with the timing of the previous tender offer, Wienkes wrote in a report. "Given Mr. Smulyan's voting control (67%) and the now smaller equity base (after a $4 special dividend), the economics of a go-private transaction are increasingly viable, particularly upon asset sales or with an equity partner."

The Goldman analyst said that smaller investors also could go for a buyout offer this time around "given weak radio trends and Emmis' likely continued underperformance in the near term." He estimates that they might be willing to tender their shares at a 20%-30% premium to the recent $8 price of Emmis, which would call for a bid of $9.60-$10.40 per share.

An Emmis spokeswoman declined comment on the renewed buyout offer chatter, saying the company "doesn't comment on market rumor or speculation."

Not all on the Street believe that the stars have indeed aligned for a renewed buyout offer that would find approval.

While Smulyan would like to take Emmis private, "I can't see how the offer can be higher than it was a year ago," one doubtful Street observer said. "One has to ask the question what rationale the board would have to accept a lower offer from precisely the same source?"

The observer said that the offer price a year ago was "a lot lower than the company could get if they held an auction" — a move that Smulyan did not allow.

Wienkes believes that Emmis shares won't see much upside without a new bid.

"We still see a challenging revenue outlook and further fundamental deterioration preventing any meaningful share appreciation," he said.

Others on the Street also are bearish on Emmis right now. Morgan Stanley analyst Benjamin Swinburne has an "equal-weight" rating on Emmis shares, also signaling little chance of a stock outperformance.

Some said Emmis is facing similar hurdles to boosting its stock as other radio groups as it has been selling off its TV stations and is nearly done exiting the television business.
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