"Poison Pills" Make Comeback at Hollywood Firms Bracing for Hostile Takeovers

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Rides sit idle at Six Flags Discovery Kingdom on April 15, 2020, in Vallejo, California.

Theme parks operator Six Flags, audio giant iHeartMedia and in-flight entertainment firm Global Eagle have added defensive measures against unwanted takeovers.

Stockholder rights plans, also known as "poison pills," have made a comeback amid the novel coronavirus pandemic as companies devise defenses against hostile takeover attempts from investors looking to take advantage of weakened stock prices.

Radio and streaming audio giant iHeartMedia unveiled one on May 6, joining other companies in the broader entertainment space such as theme park operator Six Flags Entertainment and in-flight entertainment provider Global Eagle Entertainment.

"Poison pills" are a defensive measure that gives existing shareholders the right to buy added stock at a discount, making a takeover attempt more expensive and difficult. The stock trading volatility that has come with the pandemic has been seen as a potential breeding ground for hostile takeover attempts when a stock is hit hard.

No surprise, then, that these options have been unveiled in record numbers. Deal Point Data says 17 companies announced traditional poison pills in March, followed by 19 in April, the highest number since it started tracking this data in 2017.

"Many lawyers and other outside advisers are advising boards, particularly in the U.S. but in other markets also, to consider adopting poison pills or other defensive measures to protect against any threat of opportunistic bidders in the wake of recent stock price shocks," shareholder advisory firm ISS noted in an April 8 report.

iHeartMedia chairman and CEO Bob Pittman and president, COO and CFO Rich Bressler on a May 7 earnings conference call didn't get any analyst questions about the poison pill. But Bressler said: "Our board of directors adopted a short-term stockholder rights plan in order to protect the best interest of all iHeartMedia stockholders during the current period of high equity market volatility and price disruption." He also emphasized, "The rights plan is similar to rights plans adopted by other publicly traded companies."

Importantly, it has a duration of just less than one year, expiring on May 5, 2021. And it kicks in when, in a transaction not approved by the iHeartMedia board, "a person or group acquires beneficial ownership of 10 percent or more of the company’s Class A common stock (or 20 percent in the case of certain passive investors)." 

Global Eagle Entertainment on March 19 unveiled a similar stockholder protection, saying that it was "intended to promote the fair and equal treatment of all Global Eagle stockholders and ensure that no person or group can gain control of Global Eagle through open market accumulation or other tactics without paying a control premium and potentially disadvantaging the interest of all stockholders."

And Six Flags in its March 31 stockholder rights plan unveiling said: "The rights plan applies equally to all current and future stockholders and is not intended to deter offers that are fair and otherwise in the best interest of the company’s stockholders."

Shareholder advisory firms have often spoken out against poison pills unless they are temporary and introduced for good reasons. "ISS’ existing policy approach is already appropriately flexible to take account for the adoption of poison pills in the face of genuine, short-term potential threat situations, such as during the current pandemic," the firm said in its report. "A severe stock price decline as a result of the COVID-19 pandemic is likely to be considered valid justification in most cases for adopting a pill of less than one year in duration; however, boards should provide detailed disclosure regarding their choice of duration, or on any decisions to delay or avoid putting plans to a shareholder vote beyond that period."

And shareholder advisory firm Glass Lewis in an April 9 report echoed that notion. “Glass Lewis generally opposes the adoption of poison pills, as these provisions carry the potential to reduce management accountability by substantially limiting opportunities for corporate takeovers," it explained, but highlighted, "We consider companies that are impacted by coronavirus and the related economic crisis as reasonable context for adopting a poison pill under the following conditions: the duration of the pill is limited to one year or less; and the company discloses a sound rationale for adoption of the pill as a result of coronavirus."

While more firms may introduce poison pills amid the pandemic and resulting recession, Wall Street observers don't expect most big media and entertainment companies to unveil similar measures given their size. "Lots of media companies already have controlling shareholders," highlights Wells Fargo analyst Steven Cahall.

"Poison pills are not normally implemented unless management is afraid of being taken over at what management perceives as being a low, undervalued price," Hal Vogel, CEO of Vogel Capital Management and a former entertainment industry analyst, tells The Hollywood Reporter. "This applies mostly to smaller cap companies. I don't think big entertainment companies will, by and large, do such pills at this point, or at least as long as the market holds up."

Tuna Amobi, analyst at CFRA Research, agrees. "We do not foresee a rush by the larger entertainment companies to implement 'poison pills' despite the significant sell-off in many of these stocks over the past few months with the onset of the COVID-19 pandemic," he says. "For starters, some of those companies that would seem potentially vulnerable (e.g. ViacomCBS) already have multiple classes of shares that bequeath voting control to family structures, which would naturally repel any hostile takeover attempts."

What about firms without families with controlling stakes? "Other companies without such deterrents, e.g. Disney, may feel less compelled to institute such measures given ample liquidity and flexibility to navigate the pandemic, with their boards and shareholders [likely also] reticent to a sub-optimal deal under the current market conditions," says Amobi.  

The pandemic has left observers wondering what its longer-term impact will be on dealmaking. "Not to suggest that there aren’t potential buyers or investors out there sniffing around, though it is doubtful we’ll see a flurry of takeover deals in the current environment of clouded visibility, at least in the near term," Amobi says.

Some big names have come out and publicly said they were putting existing sales processes for certain assets on hold amid the virus crisis. Among Hollywood giants, ViacomCBS on March 18 postponed the sales process for CBS office building Black Rock in New York, citing the pandemic, but signaled it expects a deal to close this year. The company was understood to have been eyeing a price tag of more than $1 billion. In early March, the company also unveiled plans to sell book publisher Simon & Schuster, with CEO Bob Bakish signaling that the process would only kick into high gear after things settle down in terms of the pandemic. 

John Malone and his Liberty companies, known for being ready to jump in with deal offers for struggling companies in need of a line life, have been mentioned by some analysts as possible buyers in a volatile market affected by the pandemic. The company, for example, first got a stake in audio entertainment giant SiriusXM in 2009 when it made an investment that saved the latter from bankruptcy. Noted one media investor: "I'd keep an eye on Malone" as a potential white knight or investor in any businesses hit by the virus crisis.