Over the past several weeks I have been scanning the going private deal of Emmis Communications Corp (EMMS). EMMS is a media conglomerate owning mostly radio stations and some magazines throughout the U.S. and in some Eastern European countries. The going private deal is being led by Jeffrey Smulyan, the founder and CEO of Emmis, and financed by Alden Capital. No new updates have come out since the shares began tendering on June 2nd, and I don’t foresee any news coming out till the tender offer period ends at Midnight June 29th.

So…with a 7% premium and one week to close, I figured this would be a good time to talk about this deal.

The Workout Checklist

This deal seemed pretty straight forward through most of the steps to decide if this was a workout:

1. Due diligence by both parties;
2. Agree on a price, terms, and contingencies (financing, regulator approval);
3. Get preliminary shareholder sentiment (or controlling shareholder approval);
4. Secure financing arrangements (if needed);
5. Obtain regulator (SEC, FCC, any and all) approval;
6. Get final shareholder approval at a meeting called for that purpose;
7. Complete the deal.

The first three steps are usually a given if you are looking at a deal that has been around for a while with no roadblocks. In this case, these steps had been completed.

The Financing

Financing from Alden Capital had been secured, and they had a hand in the way things had been and were going to play out.

Mr. Smulyan is an all-star in the industry and has some political ties as he has represented the U.S. in International telecommunications conferences. In this going private transaction, there is little fear of regulatory disapproval due to it being a buyout by Smulyan and there being no real antitrust issues. I suppose there is a slight possibility of some FCC regulatory approval issues, but regulatory approval from any government body is not an issue I am worried about.

The Problem

Obtaining final shareholder approval is the step that I am hung up on, and I can’t decide if this is a low-risk workout or not. The stock of the company is split up into several different classes and approval of this deal is reliant on two separate votes. The first class of votes is guaranteed due to the fact that Smulyan has majority voting rights with all of the common stock votes and a simple majority of votes is needed to make the deal go through.

The second class of shares that needs to vote for approval is that of the of 6.25% Series A Preferred Stock. In order for this deal to go through, 2/3 of the preferred shares need to vote for certain provisions to be amended and for the deal to go through. Alden currently holds 41.4% of the preferred stock and will vote in favor for the transaction to go through. That means another 25.2% of all preferred shares outstanding needs to vote in favor of the transaction or 43% of the remaining 58.6% of votes not attributable to Alden.

Scratching My Head

The problem with this is it’s not certain if preferred shareholders will agree to what they’re getting out of the deal. Currently, dividends have not been paid since October 15, 2008 for a total of $11.3 million dollars in arrears. They will either be converted into 2.44 shares for $5.856 in cash or will be converted into 12% PIK Senior Subordinated Notes due 2017 at a rate of $30.00 principal amount of New Notes for each $50.00 liquidation preference of Existing Preferred Stock. Dividends in arrears would not be paid and would be wiped out.

Since so many more shares are necessary for approval besides those of Alden, it is not certain if this deal will go through and so far I have shied away from investing in it. Have you looked at this one? Any thoughts?