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September 08, 2005

Anatomy of SBS Broadcasting Buyout -- Why I Hope For A Higher Offer

I received the circular on the buyout of SBS Broadcasting (SBTV) earlier this week and based on my reading I am continuing to hold the shares owned by clients hoping for another bidder to emerge. As a reminder, SBTV has agreed to a buyout offer from private equity investors led by European group Permira and supported by KKR. The buyout is structured as an asset sale and will pay SBTV shareholders €46. The price is in euros so exchange rate fluctuations impact the stock price on a daily basis. As of this morning, the euro is at $1.2419 equating to a buyout price of $57.13 per SBTV share. SBTV closed yesterday at $57.85, a premium of slightly over 1% indicating that investors either believe a sweetened bid could be in the future or that they are betting on a stronger Euro. The shareholder vote is October 3rd and with 25-30% of the shares lined up behind the deal (Liberty Global and management insiders) passage is assured. The breakup fee is €50 million against a deal value of about €2 billion. Management insiders, excluding SBS founder Harry Sloan, will get about 3% of the equity in the new SBS entity. I don’t think this small amount will raise the ire of institutional shareholders....

....According to the circular, SBS was approached by several industry participants over the course of 2004 but no firm proposal was made. Offer prices discussed at that time were lower than other offers that followed in 2005. Permira initially approached SBS in late 2004 about a transaction that involved two other companies and was designed "to create a large integrated European media company." SBS considered this proposal but decided not to pursue it. I believe any number of European companies could have been involved with the most likely suspects being German Pan-European broadcaster RTL, Scandinavian based Modern Times Group, and Liberty Global controlled United Globalcom. Other possible players might have included Central European Media Enterprises and Dutch company Talpa controlled by TV mogul John DeMol.

In March 2005, SBS management received an overture from an industry participant and expected a formal offer to be forthcoming. About the same time another private equity investor (not Permira) approached SBS and discussions ultimately led SBS management to believe a formal offer was forthcoming. SBS entered into a confidentiality agreement with this potential acquirer.

By May 2005, discussions with the unidentified private equity investor had advanced and on May 25th, the investor submitted financial projections and a model which were discussed with SBS management on June 2nd. While these discussions were ongoing, on May 31st, SBS CEO Markus Tellenbach met with Permira and informed them if they would need to sign a confidentiality agreement. At the same time, Harry Sloan was contacted by the strategic investor who indicated a bid above $50 was likely but could not confirm higher levels and regulatory obstacles needed to be overcome.

During June, Permira indicated it would make an offer at $55 per share while the other private investor indicated it might pay $50 to $55 per share. There is no further information in the circular about the strategic investor. The Board of SBS created a special committee to consider the various proposals and ultimately the deal for €46 was agreed to with Permira.

I recap all this information because I believe it shows that there is broad interest in acquiring SBS among numerous potential acquirers. The circular clearly stresses that other entities were hesitant to pay above the price that Permira ultimately agreed to. However, now that a deal price has been established and the breakup fee is modest, I think the possibility of a higher bid is real. The Permira deal appears to be well financed and on fast rack for approval. Therefore, the only downside I see relates to the Euro-U.S. dollar exchange rate. With a premium of only 1% at current prices, I think SBTV shares are a low risk speculation on a higher bid emerging.

On 2005 estimates, the deal price appears full at 15 times EBITDA but 2006 is projected to be a big growth year for the company and the multiple falls to around 12 times which I think is too cheap. I won’t be disappointed if a higher bid does not emerge as SBTV has been a big winner in 2005. However, if a new bid is out there, it should be known within the next couple of weeks, so I plan to hold the shares for now.

Posted by Steve Birenberg at September 8, 2005 10:56 AM in SBTV