Jeff Smulyan, the founder, chairman & CEO of Emmis Communications Corp., caught a couple of well-earned breaks this past year.
A local marketing agreement he cut in April with ESPN Radio for the use of an Emmis FM station in New York looks exceedingly smart when compared with CBS Radio's purchase this month of another New York FM outlet. The Emmis deal will deliver about $10 million a year through 2014 for ESPN's use of 98.7 FM -- generating a total in excess of $120 million while leaving station ownership with Emmis -- whereas CBS Radio paid only $75 million for the outright acquisition of 101.9 FM.
Also, after closing on the sale of Los Angeles station 93.9 FM in August and committing the net proceeds of $79.6 million to repay debt, Emmis moved Moody's Investors Service to put the radio broadcaster's credit ratings on review for an upgrade. This, mind you, is the same Indianapolis-based company on the verge of being delisted by Nasdaq as recently as May.
These and other events all contributed to what Smulyan, speaking during Emmis' Oct. 12 earnings call, called "the transformation of the company." Success even extended to matters of litigation, the CEO said, when a federal court in Indiana denied a group of preferred shareholders a preliminary injunction to ban a vote on a host of amendments to Emmis' articles of incorporation.
Smulyan went so far as to call the Aug. 31 denial by U.S. District Judge Sarah Evans Barker "a resounding victory." But fewer and fewer will agree with this assessment the more familiar they become with the particulars of this very peculiar case. And that's exactly what Emmis' preferred-shareholder plaintiffs had in mind, no doubt, on filing their second amended complaint on Oct. 15.
The updated complaint isn't as colorful as its predecessors -- gone, for example, are references to "zombie shares that exist solely for controlling the vote of the preferred stock" -- but it's more to the point: Whether or not Emmis can strip security owners of the rights imbedded in their certificates when, in 1999, it issued 2.875 million preferred shares for $50 apiece.
Express terms of this $144 million offering included a 6.25% annual dividend, which would accumulate when not paid, a repurchase price of $50 per share and the requirement of a two-thirds affirmative vote of preferred shares on such issues as mergers, share exchanges and asset sales.
All went according to plan until a cash-strapped Emmis stopped paying dividends in October 2008, eventually setting up the right of preferred shareholders to elect two directors to the board when, six quarters later, those and all subsequent dividends still weren't paid. It didn't help, of course, that the two-thirds affirmative vote accorded preferred shareholders also managed to derail take-private efforts at Emmis in 2006 and 2010.
Equally unnerving to management was its becoming $26.1 million in arrears on preferred-share dividends by April 2012. This, in turn, had the unfortunate effect of boosting the value of the preferred stock's take-private put to $170 million in a company with a market cap of only $80 million.
Small wonder Smulyan sought an exit. But there's no way the spirit of the law tolerates the "three prongs" the second amended complaint attributes to Emmis' strategy for uprooting the rights of preferred shareholders: "(1) the repurchase of shares that Emmis would keep alive, artificially, solely for voting purposes; (2) the conduct of a modified 'Dutch Auction' tender offer without making necessary and proper disclosures; and (3) the dumping of repurchased shares into a sham trust controlled by Emmis."
Space doesn't allow for a thorough accounting of egregious efforts by Emmis to gain control of two-thirds of its preferred shares so that, on Sept. 4, it could effectively vote rights entrenched in those shares out of existence. But all one really needs to know is that, after prongs one and two failed to deliver the necessary vote, Emmis created an "employee retention plan" to which it issued -- wait for it -- 400,000 preferred shares.
Never mind that Emmis already had several employee benefit plans in place, including one capable of granting up to 2.2 million shares of common stock to worthy workers. The new plan, with Smulyan the designated trustee, had the singular advantage of putting Emmis over the top in its quest to marshal the mandatory preferred-share vote to eliminate preferred-share rights. And so it did, sending the price of its preferred shares down 40%, to $8.66 per share, in next-day trading.
When asked about preferred-share litigation during the earnings call, Smulyan acknowledged that a full trial is slated for next September and said, "We feel very strongly we'll prevail." But should he catch a break on this one, as he has been doing in other undertakings of late, he will have undermined the implicit and some explicit tenets of capital formation.