CORPORATE FOCUS–Gemstar Int’l Group Ltd.: Static Over TV Guide Deal Blurring Picture at Gemstar

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By all accounts, shares of Gemstar International Group Ltd. should be among the hottest on Wall Street.

All eight of the analysts who track the company’s stock recommend it as a “strong buy,” the highest possible rating, largely because the company is the key player in one of the fastest-growing spaces: interactive television. As such, it’s expected to see strong earnings growth in the coming years.

Nevertheless, Gemstar’s share price dropped from a high of $101.38 on March 9 to around $38 as of last week amid the continuing downturn of tech stocks.

Part of the trouble is, of course, the Nasdaq sell-off. But there’s more. Analysts point out that there has been an increased perception on Wall Street, justified or not, that Gemstar’s pending $9.2 billion purchase of TV Guide Inc., announced last October, may fall through.

“There was some indication by management that the deal would be closed by April,” said John Corcoran, an analyst with investment bank CIBC World Markets. “That clearly did not happen, and now they say it will close by the end of July. But time is running out, because they still have to announce the final 20-day review period.”

Executives at Gemstar have been silent on developments pertaining to the TV Guide deal. The only comment from the company on rumored problems with the takeover was a statement issued on April 13, stating that the deal was on track and would be completed by the end of July.

“The company is trying to get approval from the Department of Justice for the merger, and is trying to keep quiet,” said Alan Gould, an analyst with investment bank Gerard Klauer Mattision & Co Inc. “This is probably not a good time for them to start discussing the strength of their portfolio of intellectual property.”

The U.S. Justice Department is investigating whether the combination of Gemstar and TV Guide would create a monopoly for interactive program guide services and, as such, violate antitrust laws. This is an extremely time-consuming process, given that Justice has to review, among other things, Gemstar’s extended history of litigation with cable operators over licensing fees.

Still, industry observers are, on the whole, optimistic that the acquisition of TV Guide will be approved and closed by the end of July. If and when that happens, Gemstar is poised to be a global leader in interactive television, an industry where annual revenues are projected to grow to more than $100 billion by 2008.

“If you fast-forward to six months from now, it will be entirely different story,” said Corcoran. “They are a dot-com-like company, but they’re definitely not a dot-com. Their interactive TV guide is going to be the prime interface between television and the Internet, but they’re already wildly profitable they have no debt, and they have huge cash reserves and low operating costs.”

Although Gemstar has not yet reported the financial results of its latest fiscal year, which ended March 31, analysts are expecting strong earnings growth.

For the third fiscal quarter ended Dec. 31, 1999, Gemstar reported net income of $31.98 million (13 cents per diluted share), compared with $18.8 million (8 cents) for the year-earlier period. For fiscal 2000, the consensus estimate, according to Zacks Investment Research, is for earnings per share of 45 cents, and for 2001, 54 cents per share.

The main source of revenues and profits for Gemstar thus far has been its VCR Plus+ technology, which allows consumers to record television programs by simply typing in a number. That technology has become a global standard and is installed on almost all new televisions and VCRs.

The next wave, however, is the electronic program guide, or EPG, which will allow viewers to receive customized program information on their TV sets and program their VCRs to record shows with one click. As Microsoft Corp. and America Online, among others, develop interactive TV services, Gemstar licenses them its EPG technology.

Meanwhile, Gemstar also acquired two electronic book developers, NuvoMedia Inc. and SoftBook Press Inc., earlier this year for a combined total of $564 million in stock. Analysts have speculated that these acquisitions were in large part motivated by a desire to obtain their proprietary technology, which could be used to transmit electronic editions of TV Guide.

“The market has been willing to let (Chairman) Henry Yuen gamble 2.5 to 3 percent of the company on e-books,” said Corcoran. “He has a very good track record of recognizing opportunities long before anybody else does and for acquiring and protecting intellectual property. If it works out, it will be his third home run.”

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