Analyst negative on Emmis privatization


Bear Stearns analyst Victor Miller says the timing is not right for CEO Jeff Smulyan to try again to take Emmis Communications private. Therefore, Miller has downgraded the stock to "underperform."

The analyst spelled out his arguments against a buyout in a detailed research note, but summed it all up on the front page: "We think Emmis has eight 'going private' hurdles that are not likely to be overcome; 1) investors are not likely going to permit Mr. Smulyan to purchase the company while the assets' cash flow generation has been badly impaired, 2) with declining cash flow trends, Emmis is difficult to lever, 3) Emmis' Special Committee is unlikely to change its 'sum-of-the-parts' view of valuation, 4) a possible sale of WQCD-FM in NYC may only bolster a 'sum-of-the-parts' valuation of Emmis, 5) Emmis will not likely be able to offer an attractive-enough premium, 6) Emmis will not likely be able to handle the leverage required by any premium bid, 7) Emmis has already set a precedent with its 19.75 May 2005 tender and 16.80 privatization bid [not adjusting for 4.00 Special dividend] and 8) Emmis still has ratings issues in its top three markets and PPM has not been kind to urban formatted radio stations."

Having concluded that Emmis is not likely to go private anytime soon, Miller says the stock should trade at 6.75-8.50, which implies a 35% downside risk from current levels. "The stock would be worth 18 if Mr. Smulyan sought strategic options for Emmis. But this seems unlikely now," Miller added.

RBR observation: This is, of course, 180 degrees from the view of CL King analyst Jim Boyle, who is urging clients to buy the stock because he sees the sale of WQCD coming soon and then a buyout – or at least another big stock buyback (5/16/07 RBR #96). Who is right? We wait to find out.