Going private is in the public eye

Street observers learn a few things from Hearst deal

Takeover prices might have been somewhat deflated by the recent credit crunch, at least when the buyer is unopposed, and relaxations of media-ownership rules seem unlikely in the foreseeable future.

These are two lessons that Wall Street observers are drawing from Friday's announcement by the Hearst Corp. that it plans a $600 million buyout of TV group Hearst-Argyle Television, which it already controls. The deal is the latest going-private transaction in the media and entertainment space.

Bear Stearns analyst Victor Miller suggested in a report Monday that the $23.50 per share in cash that Hearst is offering is lower than that of comparable recent deals. It is a 15% premium over Thursday's closing price and the stock's average price for the previous four weeks.

"Typical take-out values have been in a premium range of 22%-26% above historical closing prices, which would suggest a price range of $25 to $25.75," Miller wrote. "The real issue is whether investors believe there is a significant change in the industry take-out multiples given the disruption in the credit markets."

Some observers of late have signaled that they expect acquisition prices to come down amid the recent market turmoil, while others have suggested prices wouldn't change much.

According to Street observers, the hope at least by some for a sweetened bid from Hearst in that higher range likely is what drove Hearst-Argyle shares to a close of $25.22 and another 0.6% gain to $25.36 on Monday. The last time that the TV station operator's stock traded above $25 was in the early spring, but it had since declined and dipped below $20.

"It is always possible that Hearst could raise its bid," Barrington Research analyst James Goss argued in a note to investors Monday. "However, the incentives are likely lacking relative to some other deals since Hearst owns controlling interest in all ways, so there would not be any serious potential for a competing bid."

He cut his price target on the stock from "outperform" to "underperform," arguing that there is little room for upside.

Deutsche Bank Securities analyst James Dix also calculated that based on similar deals, Hearst-Argyle could fetch $24-$29 per share, and he raised his price target to $27. However, he cut his rating from "buy" to "hold," also warning that "there is certainly a risk that instead Hearst refuses to raise its offer" — be it because of a lack of counterbids or the debt market crunch.

Dix and Goss also said that the buyout by Hearst is a clear signal that there is little room for M&A activity in the broadcast space that requires stock as a takeover currency.

"One minor negative inference we draw from the Hearst offer is that regulatory catalysts for further TV consolidation appear dead for the foreseeable future," Dix wrote.

Indeed, Hearst in a letter to the Hearst-Argyle board, published Friday, said that the media landscape has changed, and stock for acquisitions isn't key (HR 8/27).

"We view this as a reference not simply to declines in public market TV valuations but also to the reduced prospect for meaningful relaxation of the FCC's ownership rules," Dix said. "Given the current stage of the 2008 presidential election cycle, and the real possibility of Democratic control of the executive branch starting in 2009, Hearst's move on Friday appears to be just another sign, if another were needed, that positive regulatory catalysts for the TV station broadcasters are out of sight."

Goss also alluded to a lack of consolidation opportunities for Hearst-Argyle. "We suspect that stagnation in the price of the stock, continuing pressure on traditional media business models — at least in terms of growth profiles — and an absence of the motivating factors behind the initial public ownership all likely played a role in this decision by Hearst," he said.

Could the Hearst buyout at least encourage more going-private deals in the broadcasting space, as some have suggested this year?

Miller, who this year predicted that 2007 would become the "year of the buyout" for broadcast stocks, still believes so.

He said Cox Enterprises could follow suit and buy in publicly traded radio group Cox Radio, which it controls and has long been a going-private candidate in the eyes of analysts.

But Dix disagreed, saying, "We see Hearst's bid as an affirmation of asset value support for broadcasting stocks but not a green light for renewed takeout speculation across the sector." He also called the Hearst proposal "an opportunistic move to capitalize on the recent, unwarranted selloff in Hearst-Argyle shares," which in late July had prompted him to upgrade the shares to a "buy."

Hearst-Argyle said Monday that the buyout proposal will be considered by a special committee of independent members of its board. Once Hearst launches a tender offer for its shares, Hearst-Argyle will have 10 days to make its position on the proposal known.
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