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August 22, 2005

SBS Broadcasting Accepts Buyout Offer

SBS Broadcasting confirmed recent market rumors and announced this morning that it was accepting an unsolicited 46 Euro ($56) buyout offer from a European private equity firm. Below please find my comments as I was conducting my analysis beginning with my thoughts prior to the open of trading and finishing up with my conclusions after listening to management discuss the deal on a conference call. The bottom line is that I think there is hope for a higher bid and near-term downside is minimal. Therefore, I plan to hold all client positions for now to see if another bidder emerges....

Pre-Open and Pre-Conference Call Comments:

SBS Broadcasting (SBTV) has agreed to be bought for 46 Euros by European buyout firm Permira and U.S. buyout firm KKR. The transaction is expected to close in November 2005 and is priced in Euros. At today's exchange rate, the deal works out to about $56 per share.

As outlined last week, this is not a surprising development but I think the price is too low. Unfortunately, Liberty Global, which owns about 20% of SBTV shares has agreed to the deal. Ideally, Liberty would have been the agitator for a higher price. I don’t plan to do any selling this morning. I want to review my spreadsheet, talk to my contacts, and think things over. With a deal on the table, it strikes me as possible that other interested parties might step up. News Corporation is the most obvious buyer given the company's interest in Pay TV and Central European broadcasting.

Permira appears to be a major European buyout firm with limited history in media. However, according to their website, they were financial backers for German Pay TV firm Premiere which came public in the past year. Permira and KKR should have no issue financing this deal so I see no significant downside risk as I complete my research.

Post Conference Call Comments:

I just got off the SBS Broadcasting (SBTV) conference call where management discussed the sale of the company to Permira and KKR for 46 Euros per share. Management is saying the deal is for 15 times their 2005 EBITDA guidance of 137 million euros. My own spreadsheet and several sell side analysts feel that management guidance is low by about 5%. 15 times current year EBITDA is a fair price but given double digit growth for the next few years and considerable free cash flow, it strikes me as too low. Most of the questions on the call were along the lines of valuation and virtually everyone agreed.

SBTV has been a great stock over the past several years and most of the shareholders who spoke on the call today had been with the company for entire time. There was a sense of melancholy on the call as shareholders are happy with their investment and pleased to see management rewarded, particularly Chairman of the Board Harry Sloan. However, virtually every caller agreed with my analysis that the company was being sold too cheaply.

Management did not shop SBTV. They received an unsolicited offer from the buyout firms. A special committee was formed and a fairness opinion received from Deutsche Bank. The gist of the questioning was that the company should have put itself up for sale via auction to maximize shareholder value. Of course, there is no guarantee a higher price would have been achieved but at least there would be no lingering question as to value. Several shareholders asked for someone else to step up and bid for SBTV. I still think that is possible so I am going to take the dual risk of currency and time value and risk a few dollars downside to see if another buyer emerges.

Posted by Steve Birenberg at August 22, 2005 02:58 PM in SBTV