Genius Products is a Strong Buy!!!
Another DVD Distributor, Image Entertainment, Being Acquired for 300% Premium; Proves Distribution Revenues are Valuable
Image Entertainment being acquired for a 300% premium. Image Entertainment (DISK $0.69; Not Rated) announced it had entered into a definitive merger agreement with Nyx Acquisitions (a wholly-owned subsidiary of Q Black LLC) to sell the company in a transaction valued at roughly $100M (including the assumption of debt). With this acquisition price, DISK shareholders will receive $2.75 per share in cash, which represents a 300% premium to the $0.69 closing share price for DISK.
Second acquisition attempt demonstrates sector demand. Back in March 2007, Image Entertainment also announced a definitive agreement to sell the company for a valuation of approximately $132M – an acquisition that ultimately fell apart and resulted in litigation between the two parties. Nevertheless, we believe this helps to demonstrate the demand to acquire companies with solid distribution agreements in place, where those revenues can be integrated into a more streamlined operation to drive profitability. In addition, the demand for home video distribution companies also aligns with our thesis of increased demand for entertainment options “closer to home” in this tough economic environment (Please see our September 2008 industry report titled “Tough Economy Brings Entertainment Closer to Home” for more information).
What is the acquisition multiple for Image Entertainment? With Image Entertainment not generating profits on a trailing 12-month basis (and no comparable forward estimates for the company), we used trailing 12-month net revenues. This proposed acquisition would value Image Entertainment’s trailing 12-month net revenues of $118M at about a 0.85x multiple. Even though Image Entertainment was on the path towards near-term sustainable profitability, we believe any acquisition would be geared towards streamlining those operations further based on the sustainable distribution revenue stream – so that is where we are focusing our valuation efforts.
And what is the comparable acquisition value for Genius Products? Through the June quarter, Genius Products LLC (the distribution company) generated trailing 12-month net revenues of $451M. Adjusting for the debt and payables on Genius Products LLC’s balance sheet and the 30% ownership stake of the publicly-held Genius Products, Inc. (GNPI), we estimate a comparable acquisition price for the outstanding shares of $0.94 – or a share price that is almost 19x higher than yesterday’s closing price. While some investors may choose to discount any acquisition multiple applied to Genius Products for a lack of profitability, recent restatements and issues with The Weinstein Company, we have to admit there is a large gap between yesterday’s $0.05 closing price and those $0.94 assumed valuation per share.
Potential near-term removal of Weinstein overhang. In our opinion, the main reason for the drop in GNPI shares over the past year has been caused by concerns about the financial situation of The Weinstein Company (TWC). With TWC effectively owning 140M shares of GNPI (or a 70% stake), the thought of TWC needing to unload those shares to improve their financial footing created a significant overhang on GNPI shares. On October 23, TWC filed with the SEC that they were exploring various alternatives with its stake, including the possible disposition of those shares. Should this happen near-term, not only would we view this as a positive in the removal of an overhang, but it would also free up Genius Products for a potential sale similar to what we are seeing with Image Entertainment.
