In workouts and special situations, the goal is to invest in ‘sure-things,’ where all or most of the conditions for the transaction are satisfied, but yet the market still offers an attractive spread.

In the case of the EMMS going private transaction, it appears I jumped the gun with my initial investment, as recent news has substantially changed the details of this investment.

Shareholder Approval

The deal is subject to both common and preferred shareholder approval. The common share vote is assured, as the Company’s Chairman & CEO, Jeff Smulyan, already owns 60% of outstanding shares.

For the preferred vote, a 2/3 majority was needed. Since Alden Capital Management, the company providing the financing for the transaction, owned 41% of preferred shares, I thought that preferred vote was likely as well.

Turns out I was wrong.

Preferred Shareholder Lockout

On July 9, a group of preferred shareholders led by Geoffrey Raynor and Daniel Loeb filed a lock-out agreement to vote against the proposal. In total, the group holds more than 33% of outstanding shares, effectively blocking the transaction.

Under the current agreement, preferred shareholders are being offered new bonds at a 60% discount to the face value of $50 per share.

Based on the 13-D filings, Loeb and other investors recently picked up preferred shares around $20 – from my reading, they do have upside under the current offer already.

Although the purpose of the lockout has not been disclosed, it seems that the group of investors sees additional upside in the preferred shares, and will likely lobby for Smulyan to sweeten the conversion ratio.

The lockout is expected to expire on September 30 unless an agreement is reached.

Common Shareholder Lawsuits

Also troubling, is that an Indiana court judge still needs to rule on the common shareholder lawsuits that have been filed regarding the transaction. On Monday July 19, the judge heard arguments for a preliminary injunction to block the transaction. According to the plaintiff’s lawyers:

“We’re not arguing the price. What we’re saying is that people should have the right to make a fully informed decision on whether they like the price.”

On the other side, EMMS’s lawyers argued that Indiana state law prohibits common shareholders from blocking these type of transactions.

The judge expects to make a ruling by the end of this week.

Another lawsuit suggests that the Company, despite several amendments to the proxy filing, still hasn’t fully disclosed all material information about the transaction.

Lessons Learned

From an investing standpoint, one big lesson is to be aware of shareholder lawsuits. The legal world can be tough to understand, and it brings along a great deal of uncertainty and roadblocks to any transaction.

These types of lawsuits seem to pop up at the beginning of every merger, but are usually quickly settled – in this case, the transaction has continued to linger.

Although it would be difficult to anticipate the preferred lockout, lawsuit problems can be avoided by just waiting for the final ruling before making an investment.


In reality, if common shareholders are forbidden to block these types of transactions under Indiana law, the lawsuit doesn’t seem to have much merit, and should hopefully be dismissed this week – although some risk certainly remains.

Positive Spin

I don’t think Loeb and the other preferred investors are trying to block the transaction outright, as it appears like EMMS has few other options for restructuring or unlocking value.

In addition, Smulyan has a heavy financial interest (since he owns 60% of common shares) in this merger, and has already tried and failed to take the Company public back in 2006 – meaning he has a vested interest in seeing this merger go through.

Negative Spin

The Indiana judge could rule that common shareholders are allowed to block the transaction (a setback, even though the preferred lockout has accomplished pretty much the same task).

Preferred shareholders demand the higher payout, but Smulyan cannot get approval from Alden Capital to raise the price.

With the deep decline in other radio stocks over the last few months, Smulyan might decide the price is too high and walk away from the transaction – again.


-Do you think the transaction will go through by August 3?  At all?

-What outcome are the preferred shareholders hoping for?

-Sell or hold?

At the time of this writing, I still hold a small position in EMMS.  I will be closely monitoring the results of the shareholder lawsuits, along with the negotiations with the preferred shareholders – if there is a substantial change on either front, I’ll have to sell at a loss.


Lockout Agreement

Jeff Smulyan Facing Emmis Options

Judge Hears Arguments Challenging Emmis Sale

Another Lawsuit over Emmis

*Update – 7/27/10

The Indianapolis Star is reporting that the honorable Judge Robyn Moberly has decided to deny the petition from common shareholders to block the proposed going private transaction.

Smulyan still faces a class action lawsuit in NY and must work out a deal with the preferred shareholder lockout group, but this is a definite step in the right direction.

*Update – 08/04/10

The EMMS tender offer was supposed to wrap up yesterday.  With no news from management as it neared the deadline, the market grew increasingly concerned, with the stock dropping more than 15% on Monday and Tuesday.

However, EMMS jumped more than 30% today on news that the tender offer would be extended until close of business on Friday, August 6.

Smulyan and the preferred shareholder group are still negotiating a deal to end the lockout, including a possible alternative structure:

“that would still allow a tender offer for the Class A Common Stock to proceed without any changes to the terms of the Preferred Stock and without an offer by Emmis to exchange the New Notes for the Preferred Stock”

This looks to be extremely positive news for Common shareholders.  If an alternative structure is approved, the common offer can proceed as planned, while also removing the risk of having to refinance the deal due to increased financial consideration.

Also, a two day extension seems to indicate that the negotiations are close to completion.  It would be a little embarrassing for Smulyan to postpone the date again after only two days, especially since the outside date for the transaction is set for Sept 24.

I think it’s highly likely that shareholders will receive a decision on Friday.



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5 Responses so far

  1. Jae Jun says:

    I hope for the best with EMMS but Im not a fan of these hard to predict mergers. Judges usually dont block a transaction so it really is up to a boxing match between the lockout group and smulyan.

    • asues says:

      Agreed. My strategy for investing in these situations is to look for ‘sure-things’ but where a decent spread remains because Mr. Market is not understanding the situation correctly.

      The preferred lockout was hard to predict, but I think there is a good chance that they come to an agreement with Smulyan.

      Smulyan has a vested interest in seeing this through, and has tried before – I think human nature wins out where he can’t let the opportunity go.

      I’m okay with sitting on the sidelines and waiting it out – if it was a larger position, I would have sold immediately and (potentially) rebought after a deal had been reached.

  2. Jae Jun says:

    Yea that’s a idea.
    One other reason why I sold because I’ve been in the radio sector for 1 year now and as of late, the industry is still struggling and it’s bringing everything down.

    Because EMMS had the buyout going, the price didn’t collapse like the rest, but if the merger doesn’t go through, I fully expect it to just slam down.

    I had a big position as well which is why I had to sell anyways.

  3. jm says:

    now what?
    second delay in 3 days til Aug. 13…what do you think and how long can this go on?
    how will the stock respond Monday

    • asues says:

      According to the IBJ, the transaction was delayed again. The new date is set for August 13.

      I have to say that I’m surprised by the newest development. I think it was a bad business decision by Smulyan to postpone the tender offer by only two days, unless there was a good percentage chance that he could come to terms with the preferred shareholders.

      Based on the language in the IBJ article, it looks like they are working towards a conclusion:

      “We continue to engage in discussions with preferred shareholders,” said Scott Enright, Emmis general counsel. “The tenor of those talks has been encouraging, but we can’t make any assurances at this time.”

      The stock will probably open sharply lower, as I’m sure many investors were hoping for an outcome by this past weekend.

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