Investors Give Static To Sale of Gemstar

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After Macrovision Corp. announced plans to buy Gemstar-TV Guide International Inc. for $2.8 billion, investors last week reacted quickly and firmly, asking: “What’s wrong with this picture?”


Shares of Gemstar, which may be best known for its TV Guide publication but has also moved heavily into onscreen listings for cable and satellite networks, plunged as much as 26 percent on the news. Macrovision shares dropped 28 percent after the announcement of the planned purchase.


Macrovision, a Santa Clara-based company that makes technology to protect video from unlawful copying among other things, said on Dec. 7 it would pay a 6 percent premium for L.A.-based Gemstar to complete the creation of an interactive TV system.


The purchase of Gemstar would mean that Macrovision could add program guides to its repertoire, which already allows consumers to view their online photos, music files, download movies and read movie reviews on their televisions, activities most often associated with home computers.


So why do investors dislike the deal?


Analyst Ross MacMillan at Jefferies & Co. said it was a money loser.


“The combined company’s earnings will be lower than Macrovision’s was previously,” MacMillan said.


Also, the size of the deal was problematic for shareholders in Macrovision, a company that’s half the size of Gemstar.


“The shareholders weren’t expecting such a large acquisition,” said Richard Davis Jr., an analyst with Needham & Co. in Boston.


The cash-and-stock purchase means Macrovision will take on $800 million in debt.


If the sale goes through, some of Gemstar’s L.A. operations may not stay in the Macrovision fold for long.


“Macrovision will likely sell Gemstar-TV Guide’s magazine (TV Guide) and television (TV Guide Channel and TVG) assets following the deal’s close,” David Kestenbaum, an analyst at Morgan Joseph & Co., wrote in an update to investors.


TV Guide now has a circulation of 3.3 million and loses $25 million per year.


Sale of the magazine and the TV operations could cut Macrovision’s debt substantially, Kestenbaum said.


Gemstar’s L.A. operations are focused at its Hollywood Boulevard headquarters, where about 200 of the company’s 1,700 employees work.Another 280 are spread around Los Angeles and 280 are in New York.


Fred Amoroso, Macrovision’s chief executive, said in a conference call that he would need to “learn a lot more about the entertainment side of the business” before deciding on selling off assets.


Other reservations that investors have about the deal stem from the fact that Macrovision management hasn’t effectively communicated its synergies, said Scott Berry, analyst with SMH Capital in Houston.


“People look at Macrovision as just a copyright protection program,” he said. “But they have a number of businesses and products, such as set top boxes, which allow you to move content throughout the home. So you can sit in the living room and use the remote control to draw content from your Internet.”



News Corp. stake


Another element of the deal might be occurring off stage.


Kestenbaum believes the deal was orchestrated by Rupert Murdoch’s News Corp. in order to create an exit opportunity from its investment in Gemstar.


The deal still requires approval by shareholders in both companies, but News Corp. holds a 41 percent stake in Gemstar and has announced it will vote in favor.


News Corp. paid $3.2 billion for TV Guide magazine in 1988 when it had a weekly circulation of 17 million copies. The magazine combined with Gemstar, which originally made technology to help consumers program their VCRs, in a $14 billion transaction in 2000. The new arrangement reduced News Corp.’s stake to near its current level.


Macrovision has made several smaller acquisitions in the past year, including home software developer Mediabolic, and entertainment company All Media Holdings. The Gemstar deal is by far the largest.


Under the proposed sale, each share of Gemstar will convert into cash at $6.35 per share or stock in a new combined company.


Kestenbaum at Morgan said that while the $6.35 per share Macrovision proposes is a 6.2 percent premium over Gemstar’s closing price the day before the announcement, it “represents a 12.8 percent discount to the Oct. 26 high of $7.28.”


Arbitragers, who buy shares based on acquisition news in order to turn quick profits, have not jumped in to buy Gemstar stock.


“That tells you there is a high probability factored into the stock that this deal won’t happen at the price Macrovision proposed,” MacMillan said. He believes Gemstar investors think the company can be sold to a higher bidder.


Upon completion of the sale, scheduled for the second quarter of 2008, Gemstar Chief Executive Rich Battista would leave the company and Amaroso would become CEO of the merged company.


A major issue may be that Gemstar investors just wanted a better deal.


“I think Gemstar investors had hoped that Google would buy them,” said Davis of Needham. “When people say Google would buy them, they automatically equate it with getting rich.”


Sarah Filus, staff reporter, contributed to this article.

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