Operating traditional radio stations doesn't make for exciting board meetings. There's the satellite radio threat to stew over, maybe ad revenue trends, but nothing too outlandish. These rules don't apply to Emmis Communications (NASDAQ:EMMS), however. The company went public in 1994 and has been on an acquisition binge ever since. Today, it has a market cap of just more than $990 million and holds a massive $1.2 billion in debt.
Management kicked off Monday's first-quarter report with a bang: It plans to repurchase more than 35% of the company's outstanding shares. This move comes from the same company that said this in a press release in 2001: "Emmis announces 10% employee salary cut to be matched with 10% Emmis stock award." Being that the stock traded higher back then, maybe this was a sound decision. I wouldn't say the stock screams value at the current price, and this seems like a bold move considering the company's debt.
Another item on Emmis' agenda is selling its 16 television stations. These affiliates were acquired beginning in 1998 and accounted for 43% of the company's revenues in fiscal 2005. The company is already working with the Blackstone Group to contact potential buyers, so a deal shouldn't be far off.
Of the two moves -- buying back shares and leaving television -- CEO Jeff Smulyan said: "(they) are designed to give Emmis more flexibility to grow as opportunities become available in our core areas." I hope that by opportunities he doesn't mean acquisitions. Management needs to learn from others in the industry such as ClearChannel (NYSE:CCU), Cumulus (NASDAQ:CMLS), and Entercom (NYSE:ETM). These companies keep their acquiring tendencies in check and hold manageable debt levels. Cox Radio (NYSE:CXR) would be an even better role model. It hasn't made any big acquisitions since 2001 and uses excess cash to pay down debt.
If Emmis adopted this strategy, investors would be more apt to tune in. The company's 25 radio stations generate solid cash flow and have been growing at a steady clip. First-quarter radio revenues were up 13% over last year's Q1, and that's excluding acquisitions. With satellite radio providers XMSatellite (NASDAQ:XMSR) and SiriusSatellite (NASDAQ:SIRI) constantly stealing listeners, Emmis needs to focus on shoring up its core business. By avoiding acquisitions, paying down debt, and eventually returning excess cash to shareholders, Emmis could end up creating permanent value. If not, turn the dial fast, because this stock has a steep downside.
Don't touch that dial. More good radio lies ahead:
- Traditional radio does have a fighting chance.
- Or maybe it doesn't.
- Either way, satellite radio is doing well.
Fool contributor Matt Thurmond has no financial interest in any company mentioned in this article, meaning he doesn't own stock and isn't shorting shares.
