Emmis Privatization Could Bring $10M More Debt



Jeff Smulyan

Regardless of whether Emmis Communications’ third privatization attempt by company founder and CEO Jeff Smulyan is successful, reducing its leverage prior to any future recession is highly advised.

That’s the advice from Moody’s Investors Services VP and Senior Credit Officer Scott Van den Bosch, who also notes that Emmis will add $10 million of high interest rate second lien debt to its balance sheet – following a required $25 million repayment of first lien debt and a second repayment of about $35 million of similar debt once it closes its future asset sales.

In an advisory distributed September 1, Moody’s said Smulyan’s offer to acquire all of Emmis’ outstanding shares will reduce its quarterly EBITDA “modestly” pro-forma for the asset sales, which include the company’s Terre Haute, Ind. radio stations, WLIB-AM 1190 in New York, and a group of magazines that includes Los Angeles and Texas Monthly (minus Indianapolis Monthly).

Emmis’ free cash flow would also be reduced from the privatization effort, due to higher interest rates following the amendment to the existing first lien facilities and the high interest rate on the new second lien debt — although cash interest expense would be limited to $3 million, Moody’s notes.

But, the total amount of Emmis’ debt could be largely unchanged if the company is able to sell the magazines and radio stations it’s put on the market at a premium, Moody’s adds.

Additionally, Emmis could use an additional $5 million of asset sale proceeds to repay debt; Emmis has the option to use those funds for additional liquidity or repay the second lien term loan.

“The modest reduction in EBITDA would cause Moody’s calculated pro-forma leverage to increase to approximately 6.3x from 5.8x as of May 31,” Moody’s notes.

Should Smulyan be unsuccessful in his buyout bid, the asset sales would still happen. This would reduce Emmis’ debt and also modestly reduce EBTIDA.

More importantly, Moody’s notes, leverage would decline and the company would be better positioned to remain in compliance with existing financial covenants.

Moody’s pointed to the size of Emmis today, saying it is “relatively small” and thus, revenue and EBITDA will be reduced following any asset sales whether or not a privatization effort is approved.

But, “given Emmis’ sensitivity to the economy and secular pressure on the radio industry, it’s important for the company to reduce leverage prior to any future recession to better position its balance sheet to withstand the potential for a decline in results,” Moody’s concludes.

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Adam R Jacobson is a veteran radio industry journalist and advertising industry analyst with general, multicultural and Hispanic market expertise. From 1996 to 2006 he served as an editor at Radio & Records.