Is RealD Getting Anywhere Near Enough in Its Acquisition?

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Some buyouts and mergers come with a big premium for shareholders. Others, not so much. The latter case seems to be the scenario for RealD Inc. (NYSE: RLD). The company announced a loss for its fiscal second quarter, and it also announced that the private equity firm Rizvi Traverse Management will acquire the company. RealD’s board of directors approved the agreement and is recommending that all RealD shareholders vote in favor of this transaction. The big question is whether shareholders should go along with this merger — and some long-term shareholders most certainly will not be happy here.

Rizvi Traverse has a focus on media, entertainment and technology, so it is a fit. The problem is for RealD shareholders. They are receiving a mere $11.00 per share in the buyout. It is a cash buyout as well, so those who own under the buyout price get a forced capital gain and those who own shares higher will take a forced capital loss.

The transaction is valued at roughly $551 million, if you include the net debt. RealD went out at $10.57 on Friday, and its market cap was listed as about $538 million. As of September 30, 2015, cash and cash equivalents were $76.9 million and total debt was $38.0 million. Terms of the deal said:

Under the terms of the agreement, RealD shareholders will receive $11.00 in cash for each share of RealD’s common stock. This represents a premium of approximately 19% to RealD’s closing stock price on October 1, 2014, the last unaffected trading day prior to the announcement from Starboard Value LP of its non-binding indication of interest to purchase all outstanding shares of RealD’s common stock.

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Again, it was noted that RealD faced a loss in the quarter. Total revenue was $38.5 million (license revenue of $25.2 million and product and other revenue of $13.3 million) versus $47.8 million a year earlier (on license revenue of $32.2 million and product and other revenue of $15.6 million). Michael V. Lewis, chairman and chief executive officer of RealD, said in the quarterly earnings release:

The second quarter of 2016 faced difficult box office comparison, with two fewer 3D films released across RealD’s platform. In domestic markets, despite challenging comparisons, 3D percentages remained consistent year-over-year, reflecting the continued success of our platform optimization program. Looking ahead, the second half of fiscal 2016 rounds out a solid 2016 3D film slate. We look forward to leveraging RealD’s platform of over 27,000 worldwide screens to optimize the 3D performance of these films.

As far as the $11.00 buyout price, this just feels really low for many long-term holders. The $10.57 and the 52-week range of $8.66 to $13.53 are one issue for a low premium. The larger issue is that in 2011 RealD shares were north of $30, and they traded at $15.00 in parts of 2012 and 2013. The stock has been range-bound since.

In connection with the merger agreement, Lewis intends to reinvest his equity into the transaction. He also has signed customary support agreements to vote his shares in favor of the merger, and he will continue to serve in the role of chairman and CEO of RealD. This transaction is structured as a one-step merger with RealD as the surviving corporation, and the deal closure will require a majority of the outstanding shares to vote in favor of the stock. A special meeting of RealD’s shareholders is expected to be held in February 2016. The transaction is currently expected to close in the company’s fourth quarter of fiscal 2016 or shortly thereafter.

As of mid-summer, Lewis was listed as the largest individual non-institution shareholder, with some 5.34 million shares. Starboard Value also held a 9.7% stake that was listed as 4.95 million shares. Bares Capital Management, a fund management group that takes concentrated portfolio selections, was listed as the largest holder with 7.88 million shares, for a 15.5% stake.

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We have three quotes from RealD and Rizvi Traverse on the merger. None of them are apologetic, but you can decide if this is really at a big enough premium:

Frank J. Biondi Jr., lead independent director of RealD:

Over the past year, the RealD Board of Directors, in consultation with its advisors, has engaged in a comprehensive review of strategic alternatives to enhance value for shareholders. This transaction with Rizvi Traverse concludes that review and provides immediate and substantial cash value to RealD shareholders at a significant premium to the Company’s unaffected share price.

CEO Michael Lewis:

Since founding RealD in 2003, we have built the Company into the world’s leading 3D cinema platform, with over 27,000 worldwide screens. I am excited about the future of RealD, where in partnership with Rizvi Traverse, we can continue to maximize the value inherent in RealD’s cinema platform and leading IP portfolio. As a private company, RealD will have the flexibility and resources to further invest in our continued cinema leadership and visual technology innovation.

Ben Kohn, managing partner of Rizvi Traverse:

RealD is the market leading 3D cinema platform with a history of innovation and strong growth prospects. We are honored that the Board of Directors of RealD has selected Rizvi Traverse to partner in their future growth. We are excited to partner with Michael Lewis and the current management team in this new chapter for RealD.

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