Investors Slam Hearst-Argyle’s Offer

Less than a week after Hearst Corp. launched a $600 million cash tender offer for the remaining 27% of Hearst-Argyle Television it doesn’t already own, some investors are urging Hearst-Argyle to reject the deal.

Hearst already owns 52% of the outstanding stock of Hearst-Argyle, and with its 100% ownership of its super-voting Class-B shares, controls about 73% of Hearst-Argyle’s equity and general voting power. The $23.50-per-share offer represents a 15% premium to Hearst-Argyle’s Aug. 23 share price of $20.46 each. If the deal is completed, Hearst-Argyle would become a wholly-owned subsidiary of Hearst Corp.

Last Tuesday, Marathon Partners, a New York investment company that owns about 90,000 shares of Hearst-Argyle, sent a lengthy letter to the television-station owner’s board of directors, outlining the inadequacy of the Hearst Corp. offer.

“It is absolutely clear that the current offer does not fairly compensate the shareholders of HTV for the unique and valuable assets the company controls,” Marathon Partners managing member Mario Cibelli wrote in the letter. “I strongly urge you to reject the $23.50 offer outright. From my viewpoint, this is a highly opportunistic move by Hearst Corp. that offers no compelling call to action for HTV owners. It is obvious to me that any true fiduciary would find Hearst Corp.’s offer unacceptably low.”

Cibelli noted that Hearst-Argyle’s own management has said in past earnings conference calls that the company is “greatly undervalued.” And he wrote that Hearst Corp. has paid much higher prices for HTV stock in the past.

Cibelli wrote that since the second quarter of 2004, Hearst has purchased 8.1 million shares of HTV stock on the open market. In 2004 and 2005, the media giant paid as much as $25.80 and $25.72 per share for HTV stock. In 2006, Hearst paid as much as $24 per share for HTV stock.

“As a sophisticated and knowledgeable insider, Hearst Corp. clearly would have an advantaged position from which to assess HTV’s intrinsic value,” Cibelli wrote. “In all likelihood, Hearst Corp. made the investments because it believed, as I did, that it was acquiring the HTV shares at prices below fair value.”

Cibelli also pointed to HTV’s rising revenue from retransmission consent as a boon to its future value. He noted that retransmission revenue from cable operators and satellite companies has risen from $6.8 million in 2005 to $18 million in 2006 and is projected to reach between $18 million and $20 million in 2007.

“In 2008, 2009 and 2010, HTV has indicated it will enter the 'next round’ of retransmission negotiations with its 'most significant distributors,’ ” Cibelli wrote. “While the company has not provided any estimates beyond 2007, industry trends suggest that the company is well positioned to monetize its content to a much greater degree upon the expiration of its agreements at the end of 2008.”

Cibelli was not alone in thinking the Hearst Corp. offer was too low. In a research report last week, JP Morgan television analyst John Blackledge wrote that the Hearst offer values HTV at about 10.7 times estimated 2007 and 2008 average cash flow. He noted that recent deals in the broadcast sector sported cash-flow multiples of 12 times to 13 times.

“We believe that the tender offer may be too low for shareholders based on recent broadcasting M&A deals,” Blackledge wrote. He added that the Hearst offer would need to be raised 15% to 20% (to between $27 and $28.20 per share) “just to reach parity with recent and historic M&A multiples.”

The market also seems to agree. HTV shares soared well above the offer price on Aug. 24 — the day Hearst made its bid public — ending the day at $25.22 per share, up $4.76 per share, or 18.9%. The stock closed at $25.60 each on Aug. 29, up 19 cents each from the previous day.

Hearst-Argyle owns about 29 TV stations across the country and has been a vocal proponent of receiving cash from cable and satellite operators for retransmission consent.

In the second quarter, Hearst-Argyle said it received about $5.4 million in retransmission consent revenue, a 35% increase over last year.

Hearst Corp., one of the largest newspaper and magazine publishers in the country, also owns stakes in several cable networks, including Lifetime, A&E Network, The History Channel and ESPN.

In the past, Hearst has used the muscle of the Hearst-Argyle TV stations to secure carriage for some of its lesser-known cable channels, like Lifetime Movie Network.

Hearst said it expected to commence the tender offer in early September. Lazard Freres & Co. is acting as financial adviser to Hearst Corp. in the transaction.

Hearst-Argyle said in a statement that the offer will be considered by a special committee of independent members of its board of directors: David Pulver, an HTV director since 1994 and president of Cornerstone Capital, a private investment firm; and Caroline Williams, an HTV director since 1994 and director of shareholder activities for The Nathan Cummings Foundation.

HTV said in the statement that if Hearst does start a tender offer for the shares, HTV will notify its shareholders of its position on the matter within 10 days from the commencement of the tender offering.