The third failed buyout offer in 10 years from CEO and controlling shareholder Jeff Smulyan indicates that Emmis Communications Corporation (NASDAQ:EMMS) is selling below breakup value. Despite the specter of new technologies rendering radio obsolete, market research indicates total industry revenues continue to stay steady around the $20 billion mark. But moving beyond the macros of the radio industry, the underlying value of Emmis Communication's radio and publishing assets are the main reason why this stock is undervalued.
Through Rejection of Bid, Emmis Shareholders Agree Stock is Undervalued
Last August, CEO and controlling shareholder Jeff Smulyan made a bid to take the company private for $4.10 a share. This is Mr. Smulyan's third attempt to go private in the past 10 years (the first failed attempt was in 2006; the second attempt in 2010).
Shareholders rejected his bid, primarily due to concerns the bid significantly undervalued the underlying value of the company, particularly the potential value of the company's NextRadio app. The NextRadio app allows smartphones users to play FM radio through their mobile devices.
While the NextRadio app may be the sexier asset, the value of the company's radio and publishing division is where the true beauty lies.
Two Recent Asset Sales Show There Are Buyers For Emmis's Old Media Assets
While shareholders were rejecting Jeff Smulyan's bid to go private, Emmis Communications announced two asset sales. The first was a sale of the company's cluster of radio stations in the Terre Haute, Indiana media market. The company will recieve gross proceeds of $5.2 million once the transaction closes.
The second deal was a sale of the company's Texas Monthly magazine for $25 million to a prominent Texas media family. This price is somewhat of surprise, given the entire publishing division has trailing twelve month EBITDA of around $500,000. This deal may have been a fluke: a prominent family wanted a prestige publication, and Emmis was at the right place at the right time.
These two transactions showcase that there are many buyers out there for Emmis Communication's portfolio of old media assets.
Value of Radio Stations
Along with the soon-to-be-sold Terre Haute stations, Emmis owns stations in the following markets: Los Angeles (just one station, KPWR-FM); New York (three station cluster, along with a fourth station under a local marketing agreement with ESPN radio); St. Louis (4 station cluster); Austin, TX (6 station cluster, but Emmis owns only 50.1% of these stations); and Indianapolis (4 station cluster).
According to data on the Emmis corporate website, the Terre Haute radio market generates $7.1 million a year in revenue. The Terre Haute stations Emmis is selling have a 25% share of the market, giving us an estimated revenue of $1.775 million, which is just 1% of the $115 million in revenue generated the past 12 months by the radio unit. The Terre Haute stations may be more profitable than the other Emmis stations, so we cannot assume the entire radio unit is worth $500 million (extrapolating the $5m sale price of the Terre Haute stations). We'll estimate that the Terre Haute stations are selling for 7.5 times EBITDA (a conservative estimate), and that their contribution to EBITDA is $0.66 million.
The entire radio division has a trailing twelve month EBITDA of around $52.51 million (before corporate overhead). We will be very conservative and assume that all of the $11.2 million in corporate expenses were for providing support to the radio division. This gives us EBITDA of $41.31 million for the radio stations. Subtracting our estimated EBITDA of $0.66 million for the Terre Haute cluster gives us EBITDA of $40.65 million for the remaining stations.
The Austin station cluster is only 50.1% owned by Emmis, so we need to separate these stations from the wholly owned stations in order to accurately value each piece of the pie. According to data on the Emmis corporate website, the total market revenue in Austin is $86.2 million. The Austin stations have a 1/3 market share, giving us an estimated revenue of $28.7 million. Emmis's radio unit has a trailing 12-month revenue of $115 million, meaning the Austin cluster contributes about a 1/4 of the company's radio revenues. Assuming the EBITDA margins are equal, the Austin cluster produces $10.32 million in EBITDA after corporate overhead. Multiply this by a conservative EBITDA multiple of 7.5x, and the Austin cluster is worth around $77.4 million. This makes Emmis's 50.1% interest in the Austin cluster worth around $38.8 million.
This leaves us with around $30.33 million in EBITDA for the remaining radio stations (all wholly owned by Emmis). We will again assume a valuation of 7.5x EBITDA. This gives us a valuation of $227.47 million for the remaining radio stations.
To give us a grand total for the value of the radio business, let's add up the pieces of the pie:
- $5 million for the Terre Haute cluster.
- $38.8 million for the 50.1% interest in the Austin cluster.
- $227.47 million for the wholly owned stations.
This gives us an estimated value of $271.27 million for the radio business.
Value of Publishing Assets
Emmis owns 5 other regional magazines: Los Angeles Magazine, Orange Coast (Orange County, CA), Atlanta, Indianapolis Monthly, and Cincinnati.
According to circulation data provided in the 2016 10-K filing, Texas Monthly had a total monthly circulation of 297,574. This was 46.7% of the combined total circulation of all of Emmis's publications. This would imply that the whole publishing division was worth $53 million, which is not realistic given the whole unit has barely broken even. On the other hand, if those markets have interest buyers of prestige media properties willing to pay just quarter of that amount ($53 million minus $25 million for the sale of Texas Monthly), Emmis could generate $7 million from selling the rest of the publishing unit.
Now let's combine the combined total of the publishing business:
- $25 million in proceeds from the sale of Texas Monthly.
- $7 million (conservative estimate for the 5 other magazines).
This gives us a total value of $32 million for the publishing unit.
Assuming NextRadio Has a Present Value of Zero, Emmis is Still Selling at a Discount of Breakup Value.
For purposes of our breakup value calculation, we will assume NextRadio is not the next Pandora, and that the present value of the business is zero.
We conservatively estimated the value of the radio business at $271.27 million, and the publishing business at $32 million.
This gives us a total of around $303.27 million. Subtracting the company's $244.66 million in outstanding debt, we get a net value of $58.61 million. Divide that by the 12.28 million shares outstanding, and we get an estimated value of $4.77 a share. Emmis closed on 12/5/16 at $3.30 a share, meaning the company is currently selling for 70% of it's conservative breakup value (a valuation that assumes there is no value in NextRadio).
Emmis Communications is a volatile stock, with a 52-week trading range of 1.72-4.33. It may not be prudent to jump in right now, given the takeover bid and asset sales in the past 3 months have helped elevate the stock above $3 dollars a share. If the stock falls back to the $2-$3 range, it may be a stronger buying opportunity. Jeff Smulyan will likely make another bid to buy the company down the road. Even if that bid fails to win over shareholders, given that Smulyan is getting older (69), and none of his children appear to serve as officers of the company, it is likely he'll want to cash in his chips and sell the company to a larger strategic buyer.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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