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