Hard Lessons From Emmis

Emmis Communications shareholders are in for a difficult lesson about the downside of investing in a company where a single shareholder really runs the show.

The shareholder in question is Jeff Smulyan, CEO of what was a radio and TV company. Over the past year, he rallied the TV-station market by auctioning off 15 of his 16 stations at prices far better than expected.

However, Wall Street turned sour on Emmis’ stock last spring, fearing the outlook for its 21 big-market radio stations and a questionable bid for a piece of Major League Baseball’s Washington Nationals. Smulyan responded by bidding to take the Indianapolis-based company private, offering to buy the 83% of shares he doesn’t already own in a deal valuing the company at around $1 billion.

Last week, a special committee of independent directors hired two sets of investment bankers to evaluate the fairness of the bid to public shareholders. One was Morgan Stanley—no surprise given that two of the directors are former Emmis executives. The other was Lazard Freres & Co., which served a similar role in Citadel Broadcasting’s recent $2.7 billion acquisition of ABC Radio.

What will the bankers find? If Emmis were put on the auction block, the company would probably be worth quite a bit more than the $15.25 per share Smulyan is offering.

Last summer, the company was buying back its own stock at $19.50 per share. In September, the company’s shares traded for $25 each. With station clusters in the biggest markets—New York, Los Angeles and Chicago—even given recent operating problems, shareholders could see something close to that price again in a vigorous auction.

Ah, but Smulyan won’t let Emmis hit the auction block. It’s his baby. Even though he owns just 17% of the stock, it’s in super-voting Class B shares, which carry 10 votes each, giving him a total of 67% of shareholder votes. He openly vows to use his power to reject any competing offer that might come in. Class A shareholders don’t get to call the shots.

The structure is very common among media companies; shareholders at Liberty Media, Cablevision Systems, EchoStar and Comcast face similar situations. It’s rarely a major issue in normal operations, but when it comes to selling the company, the insider holding the control premium has a big advantage.

So while the buyout proposal will doubtless get some other media and private-equity players sniffing around, they won’t be able to trigger a spirited bidding contest that would give Emmis investors maximum value.

Smulyan wouldn’t comment. But it’s clear he still needs to coax approval from outside shareholders, and the special committee will doubtless raise his bid at least a couple of bucks a share.

But the deal carries a lesson that, while a company’s stock certificates may bear a stamp that says Class A, investors who actually own them are sometimes second-class citizens.