Thursday, January 30, 2020

Emmis Communications: Selling Below Net Cash, Mediaco Holdings

Emmis Communications (EMMS) is a micro-cap (~$50MM) radio broadcaster that recently sold their two popular New York radio stations (substantially all of their remaining operating business) via a creative transaction (which is interesting in its own right, more on that later) leaving Emmis as a cash pile and some miscellaneous assets that is currently trading at 60% of net cash.

Emmis has a long history in radio, it was founded roughly 40 years ago and is still run (and controlled via super-voting shares) by CEO Jeff Smulayn, they've done many radio station M&A deals as both a buyer and more recently a seller in the past but in recent years made the strategic decision to effectively exit the business.  Radio is a mature industry but slow-to-no growth as it is increasingly being competed against with superior on-demand products like music streaming and podcasts.  The few times I have the radio on in the car, I usually cringe at how terrible the listening experience is or how ridiculous it is that in 2020 we're still giving out weather and traffic every ten minutes.  Podcasts and streaming services are also getting quite good at targeting ads, I was recently listening to a highly popular podcast and received ads for a car dealership down the street from me -- radio's local advantage is overstated.

But back to Emmis, it now has the following assets:
  • ~$88MM in proforma cash after taxes and other costs of selling the New York radio stations
  • 5 radio stations, four of them are in Indianapolis (local ESPN sports talk affiliate, soft-adult FM that's #2 in the market, a country station that's #3 and a news/talk channel) and the other is an urban gospel channel in New York that's way down the ratings table.  Too much noise in the financial statements to determine what these are worth, but I doubt Emmis sells the Indianapolis stations anyway - there's likely a lot of social status that comes with being a media executive in your hometown, so I don't see Jeff Smulayn divesting these.
  • A licensing agreement with Disney for WEPN-FM in New York, which is the ESPN radio affiliate in the market, Disney is contractually obligated to pay the $42MM in debt associated with that station by 2024 and the debt is non-resource to Emmis.  This arrangement hides the true net-net position of Emmis.
  • Their headquarters building, 40 Monument Circle in Indianapolis, its just under 100k sq feet and was built in 1998 for $25MM.  They do have a $13MM mortgage loan with their headquarters and an additional 70 rural acres in Whitestown, IN (yes, an actual place) collateralizing the loan.  This is their only real debt remaining.
  • $5MM convertible note with Mediaco (MDIA) and they'll also be receiving $9MM in working capital from Mediaco, plus a $1.5MM/year fee for continuing to run the stations
Taking a fairly conservative view of the assets and I come up with Emmis trading at an adjusted enterprise value of -$64MM, or said another way, trading at $3.75 despite having $6.34 in net cash per share ($88MM + $9MM WC from Mediaco - $13MM mortgage debt).
Why is it trading at such a discount to net cash with no value to their other assets?  Well for one, the operating expenses and overhead of the remaining business are such that there is now a quarterly cash burn.  But more importantly, it is a legacy media company with a controlling share class structure, Jeff Smulayn owns all of the Class B shares (and effectively none of the publicly traded Class A) giving him a majority of the vote while only owning ~10% of the economic value of Emmis.  He has outlined a vague plan to buy a "growth business" outside of radio, kind of fashioning Emmis has a middle market PE buyer with its new found cash balance.
That's certainly a bit scary and almost SPAC like in nature, but what I think is potentially more likely and more appropriate for Jeff Smulayn to do is a large tender or take the company private and pursue that family office strategy outside of the public markets.  What's the logic in keeping the controlling structure in place when it is now effectively a SPAC?  The argument behind the legacy media control structure should no longer apply; seems inappropriate and an abuse of minority shareholders.  He tried to take EMMS private in 2016 but couldn't come to agreement on price with the board, I think he might try it again, if not, shares are pretty cheap at just 60% of net cash.

Mediaco Holdings (MDIA)
Potentially more interesting to some -- as part of the sale of the two New York radio stations (Hot 97 and 107.5 WBLS), a new company was formed controlled by Standard General LP, a hedge fund that has historically done well in media sector.  The new company, blandly dubbed Mediaco Holdings (MDIA), is a tiny microcap at this point, the Class A public float that was distributed to EMMS shareholders is around $11MM (Class B is 100% owned by Standard General), but the stated strategy is to pursue an M&A fueled growth strategy looking at "off-the-run" deals in the media space.  The first one was with Emmis and they recently completed another deal funded with debt and convertible preferred stock to buy a billboard company.  The trading dynamic kind of reminds me of Five Star (FVE); Mediaco's current public float was distributed as a taxable dividend to Emmis shareholders on 1/17 as a tiny fraction of their holding in EMMS.  It has traded erratically since the spin/distribution, but Standard General effectively paid ~$7.75 per share for their super-voting shares in the New York radio station deal, although they do have converts and other economic interests that aren't aligned with minority shareholders it still could be interesting well below that price.  Standard General seems to agree and actually bought some of the Class A shares in the open market in the past week:
MDIA is so levered (EV is about $153MM versus a market cap of $47MM) that it is not going to be cheap on an EV/EBITDA basis against radio or billboard peers, but might be on a FCFE basis and is essentially investing in a quasi-public private equity media fund.  I haven't found a website for Mediaco yet, but they did publish an investor deck to Edgar for those interested.

Disclosure: I own shares of EMMS and an insignificant amount of MDIA

17 comments:

  1. "That's certainly a bit scary and almost SPAC like in nature, but what I think is potentially more likely and more appropriate for Jeff Smulayn to do is a large tender or take the company private and pursue that family office strategy outside of the public markets."

    Well, my counterpoint would be: if he has to buy out ~11m shares at $5 there isn't much cash left to pursue that strategy (buying companies with $10m - $25m cash flow, according to the latest call). Insider compensation also seems egregious, with a $6.5m 'discretionary bonus' and $1.4m in 'extra director fees' in 2019 as cherry on the top.

    For sure it is very cheap but it has some hair as well .. Thanks for the idea though, will have a better look.

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    1. Fair - but then he's still the CEO of a collection of radio stations in Indianapolis, doesn't have the headache of minority shareholders or the expense of public disclosures. Could be a fairly nice retirement gig glad handing around town. The radio stations, excess real estate are worth something, could still sell those off and buy another business outside of the public view. Or who knows, maybe he does find something interesting, a fair amount of optionality here.

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  2. I'm embarrassed to admit that I haven't been paying any attention to the EMMS in my retirement account and didn't even realize what had been going on with it. So thanks for this!

    Also, speaking of cash boxes with uncertain future, have you ever looked at Quarterhill (formerly Wi-Lan)? Basically a patent troll which bought some operating businesses to try to smooth out results and ensure a longer-term future. The largest of their acquisitions, IRD, is in my opinion a decent business for which they overpaid; I don't have much of an opinion on the rest of them (though I have my suspicions).

    Their legacy patent biz won a $145 million verdict against Apple; there was then a separate trial for damages, which were just reduced to ~$85 million, and while I imagine there will be further wrangling this case is inching toward a finish line and payment. The stock barely reacted, perhaps because the verdict was reduced by over 40%, perhaps because it's not necessarily done, or maybe because the case has been dragging on forever and the stock, which barely trades, had investor fatigue. Anyway, assuming they get something like the $85 million verdict they'll have quite close to their market cap in cash, plus their legacy and new businesses, which are rather variable but over time do generate a bit of cash, I think. It's not so different from what ACTG is in the process of becoming, likely--a lot of cash, a checkered but not wholly-terrible past, and a story which you can believe or not.

    Anyway (he said, already too longwindedly) still struggling with what will replace ASFI in my portfolio. I am watching semi-storied AP Alternative Assets LP, which (barely) trades on the Pinks and in Amsterdam, because it looks like it will probably liquidate by year end, when the current extortionate management contract ends, and has roughly 25 cents in assets backing shares which can be bought, if one is patient, at 10 cents. But there is no alignment here between stakeholders, so liquidation is not a given, and since it truly is a cigar with only one more puff in it it's not something I can recommend (though it is fascinating).

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    1. Interesting, I though I was the only person in the world looking at that. Have a decent position. FWIW you do know that the management fee is a prepaid asset on the underlying balance sheet? Real operating costs are ~$1m / year. But the real question is indeed: will they liquidate and distribute ... I even went to the AGM last year to try and find out (I was the only shareholder) but to no avail.

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    2. I haven't looked at these, thanks for pointing them out.

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    3. Is there any analysis on AP Alt. out there publicly (e.g. blogs, letters, etc.)?

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    4. Oh, wow, Writser, I thought I was the only one looking at it! I considered going to the AGM (I have a midsized position), but they were so tightlipped when I tried to contact them beforehand that I figured I wouldn't get anything from them. I do know about the management fee asset/liability; I like the blessed simplicity within the complex structure (silly, considering the current size).

      I see three scenarios, in my assumed descending order of likelihood:

      1. Year end liquidation/distribution, which will yield a nice result, assuming Athene doesn't collapse

      2. "Reloading" of the vehicle with an entity from one of their funds, which I assume would be dilutive but would drive liquidity

      3. An extension of the "agreement" (fascinating that it's not contractual, if I remember correctly) to manage AP and a slow draining of meager remaining assets--within Apollo's rights, but certainly looks bad

      It's the lack of ability to handicap these which means I can't recommend it, even though I own it. That said, if I could find 5 of these types of situations, I'd be very happy...Don't suppose you've come across any?

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    5. Regarding AAA: Shoot me an e-mail (my username at gmail dot com).

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    6. Thanks! Have done so from my (spammy?) Yahoo email.

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  3. Standard General owned a billboard business along with an insurance company through their sub 'standard diversified', which also held a large portion of turning point brands. Standard diversified recently announced (and very possibly proceeded with) their plans to liquidate and merge with TPB. It seems likely the billboard assets may have moved from standard generals sub standard diversified over to Mediaco? I believe the billboard assets may have been under 'pillar general' (i'd have to check on this). Anyway, I'm not sure from memory whether they broke out the billboard financials from their failing insurance segment or not - but may be worth a look i guess.

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    1. Here's the description of the transaction from the latest 10-Q:
      On December 9, 2019, the Company’s Board approved the assumption from an affiliate of SG Broadcasting of an agreement to purchase FMG Valdosta, LLC and FMG Kentucky, LLC from Fairway Outdoor Advertising Group, LLC for a purchase price of $43.1 million, subject to customary working capital adjustments. Closing of the transaction occurred on December 13, 2019. FMG Valdosta, LLC and FMG Kentucky, LLC are outdoor advertising businesses that operate advertising displays principally across Kentucky, West Virginia, Florida and Georgia. Fees and expenses associated with the transaction were $1.2 million. The acquisition was funded through $23.4 million of additional borrowings under the Senior Credit Facility described above, which were net of a debt discount of $0.8 million, resulting in $22.6 million of proceeds. The remainder was financed by SG Broadcasting through $22.0 million of newly-issued Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock pays an in-kind dividend equal to the rate on the existing SG Broadcasting Promissory Note, is convertible into MediaCo Class A common stock on the same terms as the SG Broadcasting Promissory Note, and is redeemable at the option of the holder five years and six months after issuance. The excess $0.3 million of cash received will be used for general corporate purposes.

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  4. EMMS is trading at discount due to CEO. Ofcourse, i got small bonus on Mediaco stock recently. However, we may not be able to create big enough position on this stock. CEO will slowly eat the company cash -- no returns to share holders guaranteed.

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    1. Right - you don't get to be selling at 60% of net cash because the public markets love you the job you're doing.

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  5. Thanks for the write up. In this scenario I think it's appropriate to include the non recourse Disney guaranteed debt of 45mm in your EV calculation as the company is making regular amortization payments on the debt and is unlikely to walk away given the 10mm in annual LMA fees it receives from Disney. Even with these fees, the company anticipates burning cash so you can't really net the difference. Alternatively, we can increase the annual burn estimate to include non recourse debt repayment. With that said, it looks like the net asset premium to market cap gives us a couple years of cash burn to work with for management to figure something out and there should be some value to the indy radio stations.

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  6. Just as a followup on my search for the "next Asta Finance," Advent-AWI is the current contender. It is truly tiny--$12 million CA mkt cap, trading ~1k shares/day on the TSXV and even fewer on the pinks--so might not be actionable, and has plenty of caveats, but for ~$C1.05 a share you're buying ~$C1.25 in net cash (have to give liabilities a closer look to make sure I haven't missed anything material) and three mildly profitable businesses, and a management that is not averse to paying dividends. It is likely a value trap, but I do like their very refreshingly-clear SEDAR filings, which may be indicative of a management team (again, TBD) that is more of a plus than a minus.

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  7. https://sec.report/Document/0001564590-20-004050/

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  8. https://www.sec.gov/Archives/edgar/data/783005/000156459020009883/emms-8k_20200310.htm

    They bought some strange sound masking company for $75MM, I guess they are going the family office PE fund route, in this market route I sold. Only holding/adding to higher conviction positions at this time. I was wrong here.

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