The Emmis Rent-a-Station

Did you see what Emmis did late last week?

They gave up on their Not Movin' format to enter into a deal with Grupo Radio Centro out of Mexico City to turn over the KMVN-FM 93.9 frequency so Grupo can operate a Mexican station in LA.

I love this.

And there are lots of repercussions for radio -- most of them good -- if we'll allow them to be.

More on that in a second.

Here's the Emmis deal that outsources a good radio facility to Mexico.

It's a long-term LMA (Local Marketing Agreement) with a powerful Mexican broadcaster. The LMA starts April 15th. Emmis gets $7 million a year for seven years slapped right to their bottom line.

Hey, can Rick Dees speak Spanish? (And that's beautiful because Emmis is now out of the expense business on that station -- talent is Grupo Radio Centro's responsibility).

But there's more.

At any time during that seven-year period Grupo Radio Centro has the right to purchase the station for $110 million -- of course, if the U.S. government allows such a purchase. Hey, take the $110 million if you can get it. With financial experts saying it will be at least 2013 before radio's revenue decline may ebb, station multiples will not exactly be going up.

It gets better.

Emmis has the right to require Grupo Radio Centro to purchase the station for $110 million at the end of the seven years -- if legal by then. If not, Grupo has agreed to find a buyer for that price who meets FCC and legal ownership requirements.

Leave it to a USC Trojan to come up with this no-lose plan.

Yes, I've always been a big fan of the way Emmis CEO Jeff Smulyan has run his company -- and that's in good times as well as bad. He was smart enough to be the first to want to go private until some wingnut shareholders prevented it.

As it turns out, Smulyan was right then and now.

Rick Cummings is an outstanding person and radio man and Emmis people are the kind who would have made consolidation work if Emmis had turned out to be the one that owned 1,100 stations. Not the abortion that we're still witnessing with Clear Channel.

Okay, so beyond my appreciation of competent people who treat their employees well -- look to the possibilities of this LMA hybrid.

Of course, we all know LMAs have just been a three letter term for "I've sold the station, now you run it until I can get the sale approved".

Today, nothing is selling.

Multiples are under six -- and that's a guess since so few stations have been sold for quite a while now.

Emmis is a small company with a handful of huge stations in very large markets -- markets that are prone to real recessionary pressures. If they can't go private and can't sell their laggard station to an American company at a decent multiple, why not pick up almost $50 million while an outside company worries about how to buy it?

Not only that -- how to buy a station that has largely failed since it dumped its country format -- at a damn good price.

Now here's how radio consolidators can hitchhike on the Emmis idea:

1. I'd like to see other radio operators do LMAs. Most consolidators have proven one thing beyond any reasonable doubt -- that they can't run radio stations in good or bad times. Previously I mentioned the strategy of doing long-term LMAs with people who can run them. But to do so these operators don't have the benefit of banks, investment buyout companies or cozy financial relationships. Nonetheless, get your assets in the hands of people who can run them. Charge them a fair rate and give them buying options along the way. That's one way to perk up a consolidator's bottom line.

2. A fair rate? What's that? Low to start. Higher as the operators profit. Always giving them a chance to buy the property or properties for a percentage agreed upon in advance. That's what Smulyan was smart enough to do. In fact, he is insisting the station be sold in seven years and he's dictated his way of doing it.

3. Small market stations should go to locals who are happy to run that one station or certainly no more than a few regional properties. After all, in spite of consolidators' denial that local defines radio, that is the best way to keep getting paid for stations they can't operate.

4. Renting stations to qualified local people (another difference from traditional LMAs) guarantees that there will be local revenue from which to collect their monthly rent.

5. Thus, consolidation morphs into a retail management scenario not unlike the mall management concept I covered a few months back. Consolidators can do this. First they have to acknowledge what the rest of us -- shareholders, banks, listeners, employees -- already know. That they don't have the ability or expertise to run the assets that they purchased in a monopoly. So, let them play landlord.

Would I rather have owners like Jeff Smulyan actually running stations instead of renting them out? You bet I would.

But consolidation has killed the radio show. And, there are extenuating circumstances that will prevent radio from ever being a growth industry again (Gen Y, iPods, music file sharing, social networking, podcasting, Internet streaming, etc). So, it is sensible to play to your strengths not weaknesses.

And frankly, I think Fagreed Suleman is highly qualified to collect rent -- he just can't make money. His whole tenure at Citadel backs me up on this assertion.

John Hogan is qualified to collect rent. His bosses, Lee & Bain, apparently know that they have installed a deer in the headlights to run their number one group of stations so now they are hiring yield managers, new CFOs, using formulas to figure out who to fire.

Hey, I'll show you your yield manager -- the person who collects a check from someone renting one of those stations you're currently ruining.

Hats off to Jeff Smulyan for this deal that makes sense for his company and bodes well for the rest of the industry if only they had the guts to admit that things have changed and managing the assets is the business they need to be in -- not running the stations.

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