A Media Bidding War Gets Exciting

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

An expected merger deal between Outdoor Channel Holdings (NASDAQ: OUTD) and privately-held InterMedia Outdoor Holdings may have been scuttled by a last-minute counteroffer from sports entertainment magnate Stan Kroenke's Kroenke Sports & Entertainment. Kroenke's offer represents a 75-cent-per-share premium over InterMedia's widely-panned $8-per-share buyout proposal, and may serve as the final word in this old-fashioned bidding war. While InterMedia technically has the right to put forward a more competitive offer, it is unclear if the company has the inclination to do so. In addition, both Outdoor Channel Holdings's shareholders and board of directors have thrown their support behind the Kroenke buyout. Barring any last-minute complications, this deal may be completed by the end of the third quarter of 2013.

About Outdoor Channel Holdings, InterMedia Group and Kroenke Sports & Entertainment

California-based Outdoor Channel Holdings is a holding company that produces and distributes television and multimedia content related to outdoor sports like hunting, fishing and boating. The company licenses its flagship Outdoor Channel cable television property to various cable networks across the United States. It also engages in the production of aerial camera footage for other sports networks using an array of elevated or mounted cameras. Finally, Outdoor Channel Holdings produces some original sports-related programming for third-party networks and production companies. The company earned $2.1 million on $75.5 million in 2012 revenues.

The Outdoor Channel has competitors in the sports and adventure media space, such as Discovery Communications (NASDAQ: DISCA).  Discovery owns a series of channels, which include the Discovery Channel, Animal Planet, and TLC.  Outdoor Channel is not nearly as profitable as Discovery with a 2% profit margin, compared to Discovery’s 21%.  Outdoor Channel’s profit margin is also smaller than bigger players such as Time Warner (NYSE: TWX).  In terms of return on equity, Outdoor is also inferior to Time Warner.  Time Warner has a ROE of 10%, which is about 6 times Outdoor’s ROE.  Potential inquirers are certainly betting on growth and synergies for this channel.  

InterMedia Outdoor Holdings is a privately-held media company that produces outdoors-related content in a variety of forms, including magazines, television and online content. It owns such notable magazine properties as Guns & Ammo and Florida Sportsman, as well as broadcast shows like Guns & Ammo Television and Personal Defense TV.

Denver-based Kroenke Sports & Entertainment is a diversified, privately-held sports-related holding company that engages in the production and distribution of multimedia and original content for paying subscribers and viewers. It also owns a number of valuable sports-related properties, including the Colorado Rapids MLS team, the Denver Nuggets NBA team, the Colorado Avalanche NHL team, and Denver's Pepsi Center arena.

The Original InterMedia Proposal

Under the terms of the original $208 million proposal, InterMedia would have issued cash payments of $8 per share to Outdoor Channel shareholders as of Jan. 25, 2013. In lieu of these payments, shareholders could instead elect to receive one share of InterMedia's privately-traded stock. From the get-go, the deal was criticized as opaque and undervalued. Shareholders' widespread disillusionment with InterMedia's proposal was likely instrumental in spurring Kroenke to make his counteroffer.

The New Kroenke Sports & Entertainment Proposal

First issued on March 1, the Kroenke proposal offers all Outdoor Channel shareholders straight cash payments of $8.75 per share. This new proposal values the company at nearly $230 million and represents an increase of more than 9 percent from InterMedia's offer.

Outdoor Channel has indicated that it prefers this proposal to InterMedia's. It has also postponed the shareholder vote on the InterMedia deal until March 22, 2013 in order to ensure that shareholders have enough time to review the terms of the proposals on hand. Obviously, it is highly unlikely that shareholders will vote to approve the InterMedia deal without some last-minute intervention from Outdoor Channel's board of directors or another powerful actor.

What Happens Now

Under the terms of the original agreement, InterMedia faces a tight response deadline of March 12. If the company is unwilling or unable to broker a new deal, the Kroenke proposal will take effect by default. If this occurs, the deal will face a significantly increased likelihood of completion. From an investing standpoint, March 12 may also mark the date on which Outdoor Channel settles into a predictable trading pattern and ceases to offer a meaningful premium to late-coming investors.

Given this tight time frame, it appears unlikely that InterMedia will be able to come forward with a superior proposal. However, this does not foreclose the possibility that another investor will step in at the last minute to offer a better deal. Should this occur, investors may be able to earn a significant premium on targeted purchases of Outdoor Channel's stock.

Currently, Outdoor Channel trades at around $8.85 per share. Relative to Kroenke's offering price of $8.75 per share, this represents a discount of just over 1 percent. Relative to its pre-Kroenke share price of around $8 per share, this represents a premium of nearly 10 percent.

Long-Term Outlook

At this point, current Outdoor Channel investors and potential buyers should position themselves for the eventual acceptance of the Kroenke deal. Given the diversity and character of Kroenke's other holdings, Outdoor Channel would probably not represent a core component of the man's business. However, it could be used as a platform for certain out-of-market Nuggets, Avalanche or Rapids games. As such, it might have intrinsic value and could prove attractive as a long-term component of Kroenke's portfolio. In this case, its utility to investors would be limited.

On the other hand, Kroenke could make some targeted investments in Outdoor Channel and then choose to execute a partial or full spin-off of the company. Alternatively, he could elect to sell it to another public or private media company. In either case, the newly-polished property could become an attractive play for investors down the road. Since it could offer multiple entry points for keen-eyed investors, a partial spin-off would be particularly attractive.

In sum, the Outdoor Channel bidding war may not provide an immediate return for arbitrage-minded investors. However, the property could significantly increase in value as part of Stan Kroenke's sports-media empire. If it becomes a vehicle for his three Colorado-based sports teams, this increase could be dramatic. As such, it bears watching over the long term and is on our arbideas.com watchlist.


mthiessen has a long position in OUTD. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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