Smulyan buyout plan could take Emmis full circle

Jeff Smulyan sure has seemed eager to take Emmis Communications Corp. private, a move that eliminates the need to answer
to pesky shareholders who always seem to be second-guessing him.

In a new regulatory filing, the 63-year-old Smulyan said he’d been trying to line up financing for a buyout for a year
before he finally got it in late April. In that span, he held preliminary talks with 20 hedge funds, private-equity funds
and other investors.

But here’s an interesting twist. The going-private deal he ultimately worked out—with New York-based Alden Global
Capital—could take him right back where he started.

The avalanche of paperwork Emmis filed with the Securities and Exchange Commission late last month includes a disclosure
that after five years Alden would have the right to register Emmis for an initial public offering.

The disclosure says Smulyan also has the right to launch an initial public offering. He could do so any time after the buyout
closes as long as proceeds go toward paying off or refinancing debt.

Emmis spokeswoman Kate Snedeker declined to speculate on the likelihood of an IPO, saying it is premature to focus on a public
offering “or any other future liquidity event.”

IPOs have the potential to be wildly lucrative for existing investors. When Emmis went public in 1994, for instance, new
investors bought in at $15.50 a share—seven times the average price paid by Smulyan and other prior shareholders.

An IPO also would offer Alden an exit strategy. It already owns 43 percent of Emmis’ $140 million in preferred stock.
And by agreeing to finance Smulyan’s $90 million buyout bid, it’s upping the ante.

Here are the nuts and bolts of the complicated transaction, which is wending its way through the approval process:

• Smulyan would buy out other stockholders for $2.40 a share. That’s just a 10-cent premium to the closing price
on the last day of trading before the deal was announced. But the stock had been on a tear. The price represents a more impressive
74-percent premium to the average closing price for the prior 30 days.

• For the deal to go forward, holders of at least two-thirds of the preferred stock must consent to trade in those securities
for bonds due in 2017—a threshold analysts believe the company will easily achieve.

For the preferred investors, the transaction is a mixed bag. They would get bonds representing just 60 percent of the face
value of the preferred stock. On the other hand, the bonds would pay a hefty 12-percent interest. That’s nearly double
the rate Emmis was paying on its preferred stock before it decided to suspend payments in late 2008 because of financial struggles.

• Alden agreed to finance the buyout by purchasing $97 million of a new class of preferred stock, a deal that also gives
it warrants to buy Emmis shares at a nominal price.

• Alden already is a major Emmis shareholder, and under the buyout deal it eventually could end up owning the majority
of the stock. But Smulyan would own all the voting stock and thus remain in control.

Smulyan initially would own 68 percent of the private company. Alden would own 24 percent, and a group of about two dozen
current executives, current employees, directors, former employees, and friends and family would own the remaining 8 percent.

By wading deeper into Emmis, Alden is taking a big risk. The broadcasting-and-publishing company is loaded down with more
than $340 million in debt, and has been awash in red ink. Including noncash charges, operating losses over the last two fiscal
years totaled more than $500 million.

Yet those circumstances—along with the tight credit markets and the perception that radio is a passé medium—also
meant Alden had the leverage to negotiate itself a sweet deal.

Emmis’ regulatory filings say that even though Smulyan formed a holding company to take the company private way back
in May 2009, he didn’t receive a single firm financing offer until Alden came to the table.

The Alden talks unfolded in whirlwind fashion. Smulyan and Alden began discussions April 11. Detailed negotiations began
Thursday, April 22, and continued through that weekend, culminating in the announcement of a letter of intent before markets
opened Monday, April 26.

Alden worked in plenty of upside. The definitive agreement, struck May 25, stipulates that Alden’s ownership stake
will automatically increase five to 10 percentage points a year from the second through seventh anniversaries of the deal.
Smulyan can buy out Alden along the way. But if after seven years it owns more than 50 percent, it gets to fill four of seven
board seats.•