United Video Satellite Group Inc. made another move to
dominate the electronic-program-guide business last week, launching a semihostile bid to
buy longtime rival Gemstar International Group for $2.8 billion.
UVSG -- controlled by Tele-Communications Inc., which will
share control with News Corp. after UVSG's $2 billion buyout of TV Guide
closes -- made its $45-per-share cash offer public last Monday, after Gemstar management
rebuffed private offers over the past few months.
UVSG claims that it has the backing of shareholders
controlling 39 percent of Gemstar, so it doesn't consider its bid hostile. But it
made the bid public to put pressure on balking shareholders.
Gemstar bought StarSight Telecast Inc. last year, and UVSG
and StarSight have patent-infringement legal disputes that date back to 1993. Their
lawsuits finally came to trial last week, in federal court in Tulsa, Okla., where UVSG is
based. The judge in the case wrapped up the trial last Tuesday, and he said he expected to
issue a ruling in November, according to UVSG.
Gemstar also has patent lawsuits pending against General
Instrument Corp. and TV Data Technologies Inc., and it could sue UVSG again after the
current lawsuit is resolved, according to analysts.
The litigation overhang makes it harder for both companies
to make headway in getting their interactive guides into advanced set-tops, although UVSG
claims that its Prevue Interactive is available to 13.5 million cable homes (mostly
TCI's).
UVSG thought that it wiped out the litigation in January,
after agreeing to an interactive-guide joint-venture arrangement with Gemstar. But that
deal collapsed in March, shortly after UVSG made a $40-per-share offer to buy Gemstar.
UVSG raised its bid to $45 July 2.
Analysts had been speculating about a UVSG run on Gemstar
at least since the joint venture collapsed. UVSG has been paring away assets not related
to its Prevue Networks Inc. guide businesses, while bolstering that core with the TV
Guide deal, which will cost UVSG $800 million in cash and $1.2 billion in stock.
"We've been talking about the strategic benefits
of this deal for a long time," said analyst Murray Arenson of Hoak Breedlove Wesneski
& Co. "I think that the desirability and the need to go forward with this and to
cement the business and get the litigation out of the way -- that's the way to go.
And the price here is the cost of doing business."
Media Research Group analyst Mark Riely said the deal
further emphasizes what analysts have seen as the real value in UVSG -- Prevue Networks,
including analog-distributed The Prevue Channel and digital-box-navigator Prevue
Interactive.
"I think [that UVSG sees] tremendous potential in the
on-screen guide as the primary navigator in the box," he said, generating revenue
from subscriber fees and advertising.
The navigator could also act as the in-home link to
electronic commerce and Internet-based data retrieval. "It's their portal,"
Riely said, using the Internet buzzword for consumer-entry sites that are currently
coveted by big media companies.
Even after the TV Guide deal, UVSG would have only
$650 million in debt -- a small amount for a taxpaying company that is poised to generate
$325 million in cash flow per year. "We don't like an inefficient balance sheet,
and the debt capacity and possibilities are virtually limitless," UVSG president
Peter C. Boylan III said in discussing the TV Guide deal last month.
Boylan claimed that the offer for Gemstar is rich by
several measures. It works out to 24 times Gemstar's yearly cash flow, 55 times its
earnings and 22 times its revenue, he said.
"It is a huge price. Obviously, many of our
shareholders think that it's too big of a price, as evidenced with our stock,"
Boylan said last week.
From its July 2 close of $40.63 per share, thinly traded
UVSG's share price fell to $34.75 last Wednesday, a 14 percent drop. UVSG would have
to assume about $2.7 billion in goodwill, representing the difference between
Gemstar's asset value and the purchase price, and absorbing that would wipe out
earnings per share over the next two years, Boylan and analysts said.
But Boylan said UVSG felt that the deal would add to cash
flow in the longer term, adding that if TCI chairman and CEO John Malone and News Corp.
chairman Rupert Murdoch didn't think that UVSG stock was undervalued, they
wouldn't have signed off on a cash bid for Gemstar.
UVSG claims the support of Gemstar's biggest
institutional holders and of chairman Thomas H. Lau, who alone owns 23.9 percent of
Gemstar equity, according to the company's annual report. Viacom Inc., which owns 5.9
percent of Gemstar stock, backed UVSG's move, and UVSG claimed that Thomson
Multimedia S.A., which controls 7.9 percent of Gemstar, was in its camp, as well.
Including UVSG's own stake, that's about 39
percent support for an offer that would require 50.1 percent shareholder approval.
Unfortunately for UVSG, Gemstar CEO and director Henry
Yuen, who controls about 12.4 percent of Gemstar's stock, and other Gemstar managers
on the board oppose the deal, Boylan said.
Yuen and four other Gemstar managers make up one-half of
Gemstar's board, Boylan complained, and they aren't likely to keep their jobs if
the company gets sold.
Yuen has declined to comment. Last week, Gemstar's
only official comment was a press release Tuesday stating that the board would consider
UVSG's offer, with advice from Lazard Freres & Co. LLC.
The release said Gemstar had several "concerns"
about the bid. Gemstar said it was worried about UVSG's "financial ability"
to close the deal; potential antitrust problems, especially after UVSG buys TV Guide;
the future of Gemstar's "neutral-licensing policy" if it is owned by TCI
and News; and the adequacy of UVSG's bid.
UVSG replied that it was prepared to prove its financial
ability to close the deal "at the proper time"; that other TV-listings outlets,
including newspapers, minimized antitrust problems; that UVSG has its own
neutral-licensing policy; and that UVSG's bid was a 16 percent premium over
Gemstar's July 2 closing price of $38.88 per share.
UVSG also took Gemstar to task for granting options for 7.1
million shares to Yuen and other managers over the past several months -- options that
dilute the value of the UVSG offer to other shareholders.
Boylan said if UVSG's bid for Gemstar falls short, it
could go ahead and fight over patents in court. While UVSG was confident that it would
prevail, analysts said the timing of the buyout offer could be a sign that UVSG's
case isn't as strong as it claims.
"We're still building a business," Boylan
said, "but it's a drain of management time and a waste of legal fees for naught.
And our big customers have been after us for a long time to make peace in some form with
Gemstar, because the last thing that a big cable operator wants to do is to have to
negotiate two separate deals to get the patent protection that they're looking
for."
UVSG has also held talks with Microsoft Corp., which signed
a licensing deal with Gemstar that, analysts said, could give UVSG access to
Gemstar's technology and patents. "Microsoft looms in the background,"
Riely said.
That possible end-around maneuver, plus the support from
big Gemstar holders, is among the factors that appear to give UVSG a strong hand in its
Gemstar bid, Arenson said.
If the buyout falls through, Gemstar's stock price --
up 6 percent since before the offer was announced -- would probably drop, Arenson said.
And any other buyer would have to deal with the patent disputes, making it unlikely that
anyone else would pay as much, he added.
