Emmis Communications has already been written up a few times on VIC, and never without controversy so I submit this knowing that reviews may be poor. Hopefully investing results will be better. All of the writeups have taken a slightly different view of the valuation, but I would argue that EMMS today is as undervalued as it has ever been (started writing this up when it fell below $1.90 but point still holds). The most recent quarterly pacings were actually very strong, but that has made no difference as it has continued to remain very attractively priced. I will lay out the major issues/"hidden value and you can decide yourself whether you can hold your nose and invest alongside Jeff Smulyan. I believe there is upside of more than 100% from today, using conservative assumptions.

 

Most Recent Quarter: Was actually ok. SG&A is under control, revenue was down slightly but not as bad as expectations. Pacings were up mid to high single digits for Q315, with very little of this due to political. Radio doesn't tend to get a lot of political advertising and beyond that the markets that Emmis operates in do not have much political advertising. They continue to out-operate the industry, with revenue and ratings numbers well better than the markets they participate in. Emmis continues to be extremely well operated.

 

Acquisition: In February Emmis purchased WBLS and WLIB, both stations operating out of New York. WBLS is the #2 radio station in New York. It programs to urban adult contemporary. They paid 7.1 BCF for it after synergies, which seems like a reasonable purchase price. They have used it grow scale within NY and their business. They are currently operating under LMA and will close the deal fully in February. They already operate HOT 97 and New York and there were a lot of ex-Emmis employes at WBLS. They have co-located WBLS and HOT 97 since 2012, so they know this asset well. 

 

Preferred Litigation: Please see one of the old write-ups for an analysis of the pfd litigation. Try to move past a moral frustration that this can be done to pfd shareholders and look at the case on its merits. While it may seem crazy to us who deal more with Delaware law, our opinion is that what they did was legal under Indiana law.  On March 3, 2014 they has Summary Judgment granted by Judge Sarah Barker. While the pfd shareholders can appeal the decision, we believe they will continue to be defeated. One should note that Emmis has the full support of those in Indiana responsible for crafting the law that has is at issue. I treat the PFD as a $12mm liability in this write-up, while not counting the common shares associated with them. This should be resolved within the next 3-4 months.

 

Capital Allocation: Jeff Smulyan has not historically been a great friend to stakeholders in the company. Regardless of the legality, the pfd shareholders did not end up with a great deal. He attempted to buy out the company at $2.40 a share, which seemed too low at the time. The company is in a much better situation today and the stock trades below that price.

 

Various Hidden Assets: Emmis has a variety of hidden assets. I have talked to various people on this name, and most highlight or discount them to some degree. The NOL's are fairly self explanatory when doing a SOTP based on EBITDA, I have gone over a couple of the larger ones below:

 

WBLS: In April of 2012, EMMS leased WBLS to Disney for a rate starting at $8.4mm a year and increasing by 3.5% a year over a 12 year term. At the end of those twelve years in 2024, Disney will be paying $12.7mm a year. This payment stream has already been monetized, but the hidden asset is that they will own the station at the end of the 12 years. Assuming the rate at the end of the 12 years, applying a 6x multiple to that cash flow and discounting that back at a 12% discount a year back to today, you get to $30mm of current value from this asset. That isn't being reflected anywhere in the earnings stream.

 

Nextradio: The most recent writeup on VIC has some more information on Nextradio. I value it at $5mm on option value. Emmis spends a lot of time talking about Nextradio and are clearly very excited. They have one solid partner in Sprint and are working to sign up other cell phone carriers/automakers. While they have made some traction, it is not clear to me what direction Nextradio is going. Others are very bullish on this part of the business, but I dont think you need to believe anything on Nextradio to get to values significantly higher than today.

 

Net working capital- $25mm, fairly self explanatory, but they have huge AR right now which they will cash in on over next couple of quarters. Company looks significantly more levered now than it should.

 

Media Landscape: You obviously have to believe that local media/radio specifically is going to be ok to invest in this. I do, and I think recent trends continue to support the value of radio. A larger defense of radio is more than this write-up contemplates.

 

End Game: All of the math I lay out for Emmis is on a standalone basis, but eventually Emmis should be sold. Even a slimmed down Emmis has $12mm of G&A which could be cut by a strategic player. If they were to be purchased by a strategic at 8x BCF, that would yield a stock price of $6.76. 7x BCF would be $5.63. In all scenarios where they are a seller the stock is materially higher than today. Jeff is economically motivated to be a seller, he has a large stake in the company. But he also appears to really like his job and want to run a bigger company. He is 67 years old. I would be surprised to see another CEO of EMMS. That being said, I have no reason to believe he can't run the business for another 5 years or maybe even 10.

 

EMMS		Notes
Stock Price	$2.02
Market Cap	88.9
Preferred Equity	12.0
Total Debt	199.5
Cash	6.4
Total EV	294.0
Asset Value:
Publishing Assets	10.0	5x EBITDA
Excess Real Estate	7.5	Indianapolis
Venture investments	3.6	marked at 1/2 cost of what is on balance sheet-Courseload is big one
Net Working Capital	25.0	huge AR right now because of Seasonality
NextRadio	5.0	option value currently
NYC station	30.0	$30mm in DCF assuming it is worth 6x BCF at exit, 12% discount rate back
NOL's	20.0	$66mm NOLs as of end of year 2014
Digonex	1.5	purchased in Q214 for $3m
Radio Stations	400.0	50mm of runrate at 8x
SG&A Load	-96.0	12MM at 8x-once Litigation/M&A are over, SG&A should run-rate to this level
Total Asset Value	406.6
Equity Value	$4.58
Upside in Equity Base Case	127%
Value to Strategic	$6.76	8x BCF
% Upside in upside case	235%
2014 Pro-Forma FCF		Notes
BCF/publishing	52.0	BCF+publishing
G&A	-16.0	Using elevated current G&A, still have PFD litigation/NextRadio drag
EBITDA	36.0
Interest	-10.6	TL
Taxes	-0.3	NOL
Capex	-3.5	guidance
FCF	21.6
per share	$0.49
Yield	24.3%
Price at 12% FCF yield	$4.08
Company "FCF"	19.7	includes debt amort, I don’t include for valuation
per share	$0.45

Conclusion: How much of a discount does Emmis deserve for all of the stuff I mentioned above? I would argue not this much. Emmis has historically out operated the industry, Jeff has been creative and found transactions that have actually benefitted shareholders and there is huge embedded upside with an eventual take-out. I would expect once the dust settle in small cap and media land and the pfd litigation finally gets put to bed that you will see this stock hover around $4 within a year.

1. win pfd litigation appeal

2. close on transaction

3. eventual sale