What really should be labeled a reverse takeover of content protection business Macrovision, by EPG and US TV guide business, Gemstar TV Guide, was touted as a $2.8 billion takeover by the smaller of the two companies. That’s because the idea is the brainchild of Fred Amoroso, CEO of Macrovision, in a deal which takes two fat, well heeled licensing businesses in entertainment and throws them together, as one big cash cow.
There was a lot of strategic logic discussed by Amoroso at the announcement, but few publications reported on it, instead they were all aghast at a deal which defies understanding by their shareholders. Investors trashed both stocks with Macrovision losing $400 million in value to reach a market capitalization of just $1 billion, and Gemstar losing $700 million in value, to $1.9 billion virtually on the day of the announcement.
This much shareholder disapproval is likely to scupper a deal which requires 66% of Gemstar shareholders to vote for it, and 50% of Macrovision holders, except for the fact that one major voting block, a 40% share in Gemstar held by News Corp has made it clear it likes the deal. That voting block, along with management shares may be enough to make the merger happen.
The real reason for this being dressed as a Macrovision takeover, and not a Gemstar deal is that the surviving company will lose all that bad blood attached to Gemstar’s financials when in 2002 an SEC investigation revealed fictional revenue which resulted in charges and management wide ranging changes.
It is also a way of getting a ton of cash out of the company to shareholders, and at the same time, a way for News Corp to refill its coffers, by cashing in its 40%, to ease cash concerns following its successful bid for Dow Jones and the Wall Street Journal.
Another reason for structuring the deal the way it is, is so that it appears reasonable for Macrovision to pay a 29% premium for the Gemstar shares, again something that will please News Corp, but effectively it means that a discount is being offered by way of excessive dilution, to Macrovision shareholders.
Gemstar has been on the block since July this year when the company said that it was seeking strategic alternatives which may include a sale of the Company.
The similarities between the two companies may however mean that in operations and technology terms there is a fit. Both use repeatable license revenues as a major income stream, and both target entertainment businesses such as satellite, cable and IPTV operators and their suppliers, as a source of these payments.
Macrovision was on track for revenues of around $270 million, with $77 million last quarter, and $199 million for the past nine months, while Gemstar was on track for something over $600 million, with $159 million last quarter, and $471 million for nine months. Both are profitable, but Gemstar especially so, gaining a $111 million tax gain on the last quarter.
The cash we were talking about is almost $1 billion in the two companies with Gemstar having $546 million in liquid assets, and Macrovision $412 million. The company has agreed to pay either $6.35 for each Gemstar share, funded out of this cash plus borrowings lined up of $800 million, or shareholders can opt to take 0.255 shares of Macrovision stock. The maximum cash outlay can be $1.55 billion, leaving the combined company around $250 million left to live on.
The merger creates a company on track for almost $900 million revenues for the full year, operating income of around $100 million and a reasonable valuation would be under $3 billion after all that cash has gone, which is why the combined share prices have suddenly fallen by over $1 billion to around that level.
When market arbitragers think this through, they will pile into the Gemstar stock. Either the deal will go ahead and the current $4.40 price will yield a $2 premium, or the deal will be off, and the companies will drift back to the previous, cash rich valuations.
The combined company will be run by the Macrovision management, and Macrovision has already announced two small acquisitions recently buying All Media Guide (AMG) and Mediabolic. CEO Fred Amoroso says he plans to deliver Gemstar’s TV Guide content and AMG’s searchable music, video and games database through Mediabolic’s middleware using Macrovision’s content-protection features to give consumers a full content listing for any device connected via a set top, and, he suggests, even on a cellular handset. Amoroso also said that this type of platform can also be used to enable addressable and interactive advertising.
The truth is that Gemstar and Macrovision have their own revenue streams, and they have some cross over leverage in some key accounts. There is no real need to merge the business offerings, though perhaps some individual sales and admin units would be merged. Gemstar, while it has a reasonable patent hoard around the TV interface, faces the challenge that many of its customers are looking to move away from the standard EPG, and while mobile TV and the handset is looking to create new ESG (electronic services guides) which may owe something to Gemstar technology, most of these are going through a standards process, which will reduce the upside for an intellectual property company like Gemstar, to something that is fair, reasonable and non-discriminatory. Gemstar has got where it is today by suing potential clients in patent actions, and those with long memories will be keen not to be caught twice. In fact that’s how News Corporation ended up as a shareholder, in a settlement for one such action.
Macrovision really gets much of its revenue from the music and film community, as well as the software industry, with some minor revenues coming from broadcasters and pay TV operators and their equipment suppliers, so the overlap is not quite as large perhaps as it first appears.
Amoroso himself came to fame turning around middleware software house CrossWorlds and selling it off to IBM, then popped up at technology assessment company The Meta Group, and after some pulling and pushing with the board there ended up driving it into the hands of rival Gartner Group for s decent price. As such he has become more of a turnaround and sell CEO, than a turnaround and continue to run the business CEO. So perhaps he’s just building an empire for someone else, and the whole shooting match could be acquired down the road.
Just before the deal, Gemstar announced its first ever licensing deal for its EPG technology and patents, in China, with the Changzhou Broadcast and TV Information Network, a cable operator with one million subscribers, which shows that the market for traditional Gemstar licensing is far from exhausted.