Playboy Bidding War: Heff's Financing Versus A Penthouse Raid (PLA)

Playboy Enterprises, Inc. (NYSE: PLA) saw its shares hit a 52-week high today, although long-term shareholders who were in before the last two years are still finding themselves in the ‘long and wrong’ camp.  Playboy’s board of directors has received a proposal from founder Hugh Hefner to take the company private at $5.50 per share in cash.  A fresh headline hit the tape late this morning from the WSJ that Penthouse Magazine’s owner plans to make an offer for Playboy, which would mean that FriendFinder Networks is ready to take a look at Playboy.

Hefner owns 69.5% of PEI’s Class A common stock and 27.7% of PEI’s Class B common stock.  The Hugh Hefner proposal is for Heff to acquire all the outstanding Class A and Class B shares of common stock at $5.50 per share in cash.  It depends upon how you interpret this language in the release over how certain this deal from Hefner is.  For whatever it is worth, it should also be noted that FriendFinder has twice tried to come public, and both efforts were thwarted due to market conditions.  That being said, there could be two deals on the table, both with questions remaining about they could be financed.  There are no assurances on either coming to fruition.  FriendFinder may make an offer, and it would seem that the board might be reluctant to let a direct competitor in to see Playboy’s books without some strict assurances.

The press release from Playboy notes that the proposal letter discloses that Hugh Hefner has had discussions with Rizvi Traverse Management LLC as the group that Hefner has expressed an intention to partner with in connection with the transaction.  Also stated was as follows:

• “The proposal letter also states that Rizvi Traverse informed Hefner that it had contacted major lenders regarding potential financing and that Rizvi Traverse is highly confident ample financial resources will be available to complete the transaction.  The proposal letter states that Hefner and Rizvi Traverse contemplate that the definitive agreements would not contain a financing contingency.  In the proposal letter, Hefner advises the board of directors that out of Hefner’s concerns for, amongst other matters, the PEI brand, the editorial direction of the magazine and PEI’s legacy, Hefner is not interested in any sale or merger of PEI, selling Hefner’s shares to any third party or entering into discussions with any other financial sponsor for a transaction of the nature proposed in the letter.”

Rizvi Traverse describes itself this way: “While adhering to an underlying value-oriented style, Rizvi Traverse Management seeks opportunities across the investment spectrum that offer the most favorable risk/reward profile at that point in time. The Rizvi Opportunistic Equity Fund and Newbridge Film Capital are the first strategies we have launched and are an extension of the decade-long track record of our team.”

Here is where and why the extreme cautions comes into play…. The board of directors said that it cautions Playboy shareholders and others considering trading in its securities that it has only received the proposal and that no decisions have been made by the board of directors with respect to PEI’s response to the proposal.  The board further noted that there are no assurance that any definitive offer will be made, nor that any agreement will be executed, nor that this transaction will be approved or consummated.

To show how tentative the deal is, the board said it will form a special committee of independent directors to consider the proposal “if the proposal moves forward.”  It last notes that the committee would retain independent financial advisors and legal counsel to assist it in its work.  Considering that Heff owns a huge portion of the stock, this exception and contingency language from the board does not sound like a very solid internal commitment.

More detail from the WSJ is now out and you will have to determine on your own whether you think FriendFinder can actually make a deal happen.

If you recall, Playboy has tried to sell itself before.  That effort fell apart, even when the stock was at lower prices.  $5.50 may sound great to anyone who got into this stock over the last 18-months from $1.00 to $4.00.  It also seems like an odd situation where after the prior reviews did not yield a firm buyer at lower prices that a higher bid would step in ahead of Hugh Hefner’s $5.50 price.  It is possible, but it seems unlikely.  If the Hefner bid disappears, if the board determines that Hefner is not capable of running the show with Rizvi Traverse, or if FriendFinder cannot come to the table, then this stock price will head south.

Playboy’s troubles have gone on for years.  There is an endless flow of free porn on the internet that has eaten Playboy’s lunch for years.  Advertising revenues have never come back to the heyday rates of when Big Media was in charge.  Policing merchandise logo theft and copyright theft is a rampant corporate challenge that has yet to be overcome and Playboy has not at all been immune from that.  The licensing for movies, casinos, and other partnerships has so far not been able to stop the dwindling sales.  Sales in 2009 were $240.3 million. 2007 sales were $339.8 million.  Revenues were $331.142 million in 2006, were $338.153 million in 2005, were $329.376 million in 2004 and were $315.844 million in 2003.  The trajectory is a downward one, and one where a stable or improving economy might not matter.  It was just at the end of June that Playboy said it would have to cut more jobs and restructure its organization.

Hefner was born in 1926, so it is not exactly as if he is a spring chicken here.  There are several things that could go wrong here, from Heff’s health to the money behind the deal.  Heff also has an implied controlling stake in the company.  There are probably also going to be “investigative law firm announcements” coming today and this week about law firms looking into whether this represents a fair price for shareholders.  In fact, we have already seen a headline reading “Rigrodsky & Long, P.A. Investigates Playboy Enterprises, Inc. Going Private Offer” cross the wires this morning.

With a share price of $5.30 this morning after a 34%+ gain, waiting around for that $5.50 price or a higher bid from another questionable company would seem to be a silly notion based upon careless greed.  The best strategy for a prudent investor who got in at lower prices in “the new normal” would be to take what is on the table from the NYSE specialist (direct market maker) and run.  At a minimum, dumping your cost basis in the shares already held and letting the rest ride assures a return of better than break-even.

JON C. OGG