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Turned off by Emmis TV

With the TV industry in distress, Emmis Communications plans to spin off its newly enlarged TV group, probably into a tracking stock, says Chairman Jeffrey Smulyan.

On May 8, Emmis more than doubled the size of its TV holdings, paying $562.5 million for eight Big Three affiliates and seven satellite stations owned by Lee Enterprises. Lee will sell its Telemundo affiliate KMAZ(TV) El Paso to someone else, which will put the newspaper publisher out of the TV business.

"We see value in television; we understand that others may be concerned," Smulyan said last Monday during a conference call. "Television ... is lower than it's ever been, and there's good reason for that."

Among those concerned is Emmis investor Liberty Media, which, after Smulyan, is Emmis' largest shareholder. "Liberty was one of the people who suggested so strongly that we have two different operating entities," one for TV stations and the other for the booming radio stations, Smulyan said.

In what appears to be an effort to protect the value of Emmis' more profitable portfolio of 15 radio stations, Smulyan said he is considering taking Emmis' TV holdings private or trading them as a tracking stock. He added that he might put more of his own money into the TV side. "The private value of television operations is higher than the public value. That will be reversed" as investors realize the value that digital spectrum will provide, Smulyan predicted. Meanwhile, "the radio business is on fire."

Liberty, itself a tracking stock of AT & T, comes down on the side of creating a tracking stock, Smulyan said. A tracking stock creates a separate market valuation for a parent company's business unit, while the parent continues to control the assets of the business (and the revenue). A decision is expected within 120 days.

That the TV business isn't the best investment these days was underscored by Wall Street's reaction to Emmis' news: The Indianapolis-based company's stock price dove 23.1%, to close last Monday at $33.50 per share. It continued to tumble Tuesday, when it dropped another 10.3%. It closed at $29 last Wednesday, down 3.5% from Tuesday's close and close to its 52-week low of $27.25 on March 7.

Indeed, there is a "generally negative view toward TV stations unless they are major-market stations with greater franchise value and market clout for national advertisers," which Lee's are not, analysts Edward Hatch and Peter Mirsky of SG Cowen wrote last Monday. Spinning off the TV stations is a good idea "as investors do not seem to want to own hybrid' companies," added the analysts, who lowered their Emmis price target from $58 to $49.

Wall Street was caught off guard by Emmis' TV deal, which was reported to be in the works in the May 1 edition of Broadcasting & Cable. Traditionally slow-to-acquire, Emmis consistently has proclaimed itself a radio company and has been promising to spend $1 billion over the course of the year to buy radio stations. Emmis is "in the very final stages of [making] several" radio deals, Smulyan said.

Smulyan also has been promising to announce an Internet portal partnership since last fall (B & C, Sept. 6).

The Lee deal works out to about 14 times current broadcast cash flow, but is accretive, giving Emmis TV enough "critical mass to be put into a separate entity." By adding Lee's stations to its seven, mostly FOX, network affiliates, Emmis nearly doubles its reach to 6.84% of TV households. Under the FCC's method of accounting, which discounts 50% for UHF stations, a combined Emmis/Lee reaches 6.04% of TV households, compared with the Emmis-only percentage of 2.74. Those percentages account for the fact that Emmis will have to sell either its or Lee's station in Honolulu because of the FCC's duopoly rules.

The deal is subject to FCC and Justice Department approval.n