If, in the end, they should be able to buy in roughly, say, 70% of the preferred, at about $16, that would result in roughly an $88 million reduction in the preferred claim (including accrued dividends), that comes ahead of the common stock.
That makes the common stock dramatically more attractive ($88 million is the equivalent of over $2 a share in "added value" to the common!)....and it also makes the company more attractive to Mr. Smulyan, in any potential going private transaction, since the original way he was going to deal with the preferred, to refinance it, was going to involve a significantly higher cost (more than double) than what they are current buying the preferred at.
Sometimes, the Street is just blind.
The sell-off to as low as 78 cents today is just absurd. I'm not complaining. I'm not worried. I expect, in due time, to make an outsized return here. I see management making all the right moves for the common holders. Whether that involves this continuing on, as an independent operating entity, or involves an impending going private transaction, I really don't care. (I prefer the latter by far.) It's worth signifcantly more than 80 cents.
I can't wait until this tender offer expires, to see if they can get to the "magical" 66.67% control of the preferred. Because it will be incredibly intriguing to see what their next move is, at that point.
I believe the common holders have the refuge of seeking court based appraisal for their shares, in any going private transaction. I don't know, but it is possible the preferred holders would have that option as well, if they were compelled to convert to some other instrument. It's confusing, because in the going private proposal from last year, preferred holders who didn't take the exchange offer, of new debt for old, were going to end up being "converted," and then paid like $5.80 a share for their preferred. You need to keep in mind that there are conversion clauses in the original indenture for the preferred, that were written when Emmis's stock was trading at like $60 a share. That indenture is now extremely disadvantageous to the preferred holders. And that's really the issue we are dealing with here. If the legal language of the indenture allows Emmis to eliminate the preferred at the lowest cost possible, doesn't it have an obligation to its common shareholders, both moral and fiduciarily, to seek to do that....while obviously remaining within the law of the preferred indenture? That's why I say there's an inherent conflict of interest between the preferred and common holders. No doubt about it. But I guess that is probably true, in theory, ALL the time, between debt and equity holders. It's just that the indenture for the preferred, as written, allows for a whole host of things to be done, that one wouldn't normally expect to be done...if 2/3 of the preferred shareholders get together and go for it.
I can't imagine that the original people putting the legal documents together didn't figure that Emmis could, in the future, tender for the preferred, and effectively be in a position to "retire" it, if they got control of, and or the support of, say, 2/3 of the preferred holders.
I could be wrong, but I think this is likely to be an "orphan" or "dying" security. Which is, like you, why I sold out last week. But shares that are "sold out" are not going to help Emmis, unless they are going into "friendly" hands. I'm personally surprised there isn't a higher "top price" in the tender offer. I think they're pussyfooting around here, and adding an uncomfortable level of risk that they don't achieve what they are seeking. As it stands now, the market appears to be saying that it is willing to step ahead of management and "suck up" any shares of preferred that are available.
When you say, "continuing on, as an independent operating entity", do you expect Emmis to accrue (or pay) 22% interest on the $35MM that it borrowed from the Zell fund?
My thinking goes like this: If they wanted to continue operating as is, they could have borrowed from Zell and simply bought Alden's preferred shares and all the preferreds they could get in the open market. Instead, they are engaging in this total return swap with the holder agreeing to vote according to Emmis' instructions.
What the %$#@ are they voting on?
Smulyan knows he can find a fund or company to take Emmis private or merge it with another media company if the "ugly" preferred blocking vote is taken care of.
My guess is - a partnership or merger announcement is forthcoming.
I agree with your take. That's just my gut sense. The CEO tried to take it private in 2006. He tried to take it private last year. If they get to the point where they can get the vote on 66.67% of the preferred (almost certainly, the delay of getting that 66.67%, last year, is what killed the going private transaction back then!) and control the outcome, largely, on what happens to the rest of the preferred, that would make it all the more enticing for Jeff to come in and make a bid...ESPECIALLY if the stock is still trading at these absurdly low levels.
I'm extraordinarily surprised the market hasn't priced in a higher possibility of a revisting of a going private transaction, in the coming months, and the stock isn't trading for at least $1.00-1.10, at this point. Simply for the reason that, even if we do NOT see that (a proposed transaction), with the elimination of so much of the preferred, "on the cheap," the value of what remains for Emmis's common holders is so dramatically much higher....should it remain as a going concern.