23% Stock Gain If the Deal Goes Through

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In mid-December of 2012, New York-based television ratings arbiter Nielsen Holdings (NYSE: NLSN) made a formal offer to purchase leading radio-marketing firm Arbitron (NYSE: ARB) in an all-cash deal valued at nearly $1.3 billion. If the deal is approved, the television company will extend cash payments of $48 per share to existing Arbitron shareholders. According to sources within the Nielsen organization, the merger will be funded entirely with cash that the company already has on hand. 

Given the sensitive nature of the media markets in which it is occurring, it is likely that this deal will be subject to rigorous examination by the Federal Trade Commission as well as the Federal Communications Commission. Since 1993, Nielsen has enjoyed an effective monopoly over large-scale market research on the habits of the television-watching public. Meanwhile, Arbitron has enjoyed a similar competitive advantage in radio-based market research. The combined TV-radio hybrid company presents obvious antitrust issues that are deserving of closer examination.

Nevertheless, independent analysts suspect that a deal is relatively likely. In order to win favor with regulators, the two companies will need to find a buyer for a joint venture known as Scarborough Research. This jointly-operated division studies print advertising and is the de facto pricing mechanism in many print-media markets around the country. It is unlikely that regulators would permit the newly-merged company to enjoy such dominance over the print media market as well as the radio and television markets.

The $48-per-share Nielsen offer represents a sizable premium for Arbitron. On the trading day before Nielsen's announcement, Arbitron closed at $38.04 per share. As of January 8, the company's share price was just below $47. This represents a premium of more than 23 percent.

Nielsen Holdings is known primarily as the issuer of the ubiquitous TV "ratings" that effectively determine the prices that advertisers must pay for certain time slots. While this is the core of its business, it also conducts market research for a wide range of consumer-focused companies. Nielsen operates an online buying-habits survey and crafts detailed reports of its findings for its clients. The company also operates a subsidiary that hosts trade shows and expositions in the United States.

Columbia, Maryland-based Arbitron measures radio audiences and administers a ratings system similar to Nielsen's TV-specific metrics. It also conducts extensive market research and culls demographic and income information about the audiences of its radio station clients. The company reports its findings through comprehensive paper reports as well as computer software programs that deliver results in real time. Along with hundreds of major radio advertisers, a majority of privately-held American radio stations use Arbitron's services.

Although this deal is effectively on hold pending regulatory approval, many companies that stand to be affected by it have already contributed to the buzz that surrounds it. Radio advertising giant Clear Channel Communications (NYSE: CCO) has expressed approval for the deal. In recent comments, the company's executives suggested that the Nielsen acquisition would further quicken and streamline the delivery of marketing metrics to the advertisers that rely on them. As one of North America's largest outdoor advertisers, San Antonio-based Clear Channel may also benefit from the combined media-research company's dominance of the consumer market. Indeed, large advertisers appear to welcome the deal's potential to eliminate the redundancies inherent in doing business with two competing market-research firms.

The deal may indirectly enrich other interested parties as well. Nielsen is partially owned by private-equity investing group Kohlberg Kravis Roberts & Company (NYSE: KKR). With 2011 earnings of $510 million on $8.8 billion in revenue, the company is a major force in the private equity markets. Nevertheless, the Arbitron deal would represent one of the largest buyouts in which KKR has ever participated. If the deal bears fruit, the company stands to add hundreds of millions of dollars per year to its bottom line. In fact, the company may attempt to keep the Scarborough property in the Nielsen-Arbitron ecosystem by purchasing the joint venture outright.

In addition to the sizable regulatory hurdles that it faces, the Nielsen-Arbitron deal is subject to a vote by Arbitron's shareholders and board of directors. Since Arbitron is unlikely to attract another interested buyer without a further weakening of its financial position, the deal probably represents the best chance for long-term Arbitron shareholders to unlock some of the company's inherent value. As such, it appears likely to earn approval from the appropriate parties. If a buyer can be found for the Scarborough property, the deal may close as early as the second quarter of 2013.

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