Make 6.4% Off This TV Channel Going Private

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Temecula, California-based Outdoor Channel Holdings (NASDAQ: OUTD) is currently slated to merge with newly-formed sports media outfit InterMedia Outdoor Holdings. Known as "IMOH," InterMedia Outdoor is a wholly-owned subsidiary of New York-based InterMedia Group that will be re-formed as a new company once the deal has been finalized. Although multiple potential lawsuits threaten to delay or derail the deal, it is currently expected to close in January of 2013. 

As a result of the proposed transaction, Outdoor Channel shareholders may elect to receive either $8 in cash per common share or one common share of the new company. The deal has a total value of slightly more than $200 million. Its terms assume that roughly 60 percent of Outdoor Channel shareholders will elect to take the cash offer. These terms were first made public in a press release issued on Nov. 15, 2012.

The $8-per-share offering price represents an 11 percent premium to Outdoor Channel's Nov. 12 closing price of $7.19 per share. The price of the stock has since appreciated to about $7.52, so the return if bought today would be 6.4%. The sizable spread between the current stock price and the offering price is indicative of the uncertainty surrounding the pending legal actions that may yet derail the merger. Once the deal has closed, IMOH is likely to receive a listing on the NASDAQ exchange under the ticker symbol "IMOH."

The proposed merger also involved a special dividend of $0.25 per share. The dividend was paid out on Dec. 7, 2012 to all shareholders of record on the second-to-last trading day of November. After factoring in this one-time payment, the total premium on the deal for pre-announcement shareholders is roughly 15 percent.

The deal is being financed by an investment consortium that includes CIT Communications. It is expected that individual retail stockholders will own slightly less than 33 percent of the combined company. The bulk of the rest will remain in the hands of its executive team, as well as several institutional shareholders that currently have interests in InterMedia Group.

Outdoor Channel Holdings is a niche media company that provides outdoor sports programming and aerial camera services. It contracts with cable and satellite television providers to show programming for its proprietary Outdoor Channel. 

It also operates two wholly-owned subsidiaries. One of these is responsible for creating much of the original programming that appears on the Outdoor Channel. The other operates aerial camera arrays for its Outdoor Channel programming as well as regional sporting events in the West Coast region. Together, the three components of Outdoor Channel Holdings employ about 180 people. In 2011, the company earned $2.1 million on gross revenues of $75 million.

The Outdoor Channel competes with other sports and adventure media companies such as Discovery Communications (NASDAQ: DISCA).  Discovery runs nine network channels, including the Discovery Channel, Animal Planet, and TLC.  Discovery’s numbers are far superior to the Outdoor Channel’s numbers, especially when you look at their return on assets.  Discovery returns about 9.5%, while the Outdoor Channel returns about 3%.  Discovery looks a lot more like other large network television producers like Viacom (NASDAQ: VIA).  Viacom produces channels such as MTV, VH1, and Comedy Central.  Discovery definitely beat these companies in the market, though, with a 50%+ return for 2012.

InterMedia Outdoors is a more diversified media company that owns over a dozen magazine properties, the Sportsman Channel, the popular In-Fisherman radio show, and a budding digital media array. Its magazine properties include Florida Sportsman, Guns & Ammo, and North American Whitetail. Its digital assets include an e-store and multiple apps designed to appeal to serious outdoor sports enthusiasts.

The pending deal will cause a significant management shakeup at both companies. The Outdoor Channel's current CEO and CFO will assume their respective positions at the helm of the newly-formed company. Meanwhile, the Sportsman Channel's CEO will become head of InterMedia Outdoor Holdings's broadcast division. InterMedia Group's current CEO will head the new company's digital media, publishing and branding operations.

Widespread concerns about the deal have made it somewhat unattractive for average investors. Several different law firms have launched preliminary investigations into allegedly collusive activities between the management teams of Outdoor Channel and InterMedia Group. The organization of a formal class for further legal action may soon follow. 

The root of the dispute is the InterMedia's perceived undervaluing of Outdoor Channel. Several financial analysts have set price targets for Outdoor Channel at more than $8 per share. In particular, the firms heading the investigation allege that Outdoor Channel failed to confer with a range of interested buyers before agreeing to be taken over by InterMedia Group. Although such action is fairly common after unexpected merger announcements, it does appear that Outdoor Channel accepted a relatively low offer without publicly courting other suitors.

The disruptive potential of these legal rumblings remains unclear. If the threat of legal action causes CIT to withdraw its support for the deal, the merger's financing could be in serious jeopardy. At the very least, this would delay the deal until new financing could be procured. At this time, it is unclear whether Outdoor Channel has other interested buyers.


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