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August 17, 2005

More Takeover Rumors for SBS Broadcasting

SBS Broadcasting (SBTV) shares jumped about 8% on Monday after a website reported that the company had held "informal discussions" with an unnamed suitor. The story said that a spokesman for SBS had no comment on rumors or speculation.

I think a takeover of SBTV is plausible and while the primary reason behind my bullish view of SBTV being has been based on fundamentals, I have noted that a sale of the company was possible. Rumors of a possible sale of SBTV first surfaced a month ago when a European analyst noted in a research report local media reports about takeover speculation. Here is what I posted on the blog at that time....

Interestingly, a research report out of Europe today references other news stories that say SBTV held discussions with de Mol and powerhouse European broadcaster RTL Group. RTL management is quoted as saying that they think SBTV is too small to survive but that they aren't interested in acquiring SBTV since their acquisition of CMore. The story mentions De Mol prominently as a potential suitor....

RTL is controlled by Bertlesman and is the largest broadcaster in Europe. De Mol refers to John De Mol, an independent TV producer who has made millions in reality TV and just launched a new TV channel is the Netherlands, SBTVs largest market. Two weeks ago Germany's other major broadcaster, ProSieben, was sold to Axel Springer AG which is the dominant print media company in Germany. ProSieben was controlled by Haim Saban and private equity investors who saved the company from financial difficulties several years ago.
Besides, de Mol and RTL, Saban and private equity folks are potential bidders for SBTV. Rupert Murdoch's News Corporation might also be interested, particularly following SBTV's expansion into Pay TV in Scandinavia. John Malone also could stir the pot as his Liberty Media International (LBTYA) owns about 20% of SBTV and has publicly stated it is open to a variety of options concerning the stake including just hanging on to it. Another possible bidder is Modern Times Group, SBTV's primary competitor in Scandinavia. Finally, many companies could be interested in certain assets of SBTV such as the Hungarian TV business that is likely on the radar screen of Central European Media Enterprises.

Insider ownership at SBTV is low and there is only one class stock. The company was founded and built by Harry Sloan, a U.S. citizen. Sloan is now Chairman of the Board. Some investors feel that after more than ten years at the helm Sloan would be open to a deal and he has never denied the attractiveness of SBTV as a takeover candidate when analysts questioned him about the Liberty stake. According to the company's 2004 annual report, management and directors controlled only 13.6% of SBTV shares, with Sloan himself representing 10.9%. The only other significant insider is Markus Tellenbach, President and CEO of SBTV, who owns 1.4%. At year end 2004, besides Liberty, other major shareholders included Fidelity (9.7%), Reed Conner and Birdwell (7.3%), Capital Research and Management (6.1%) and Janus (11.7% total split between two funds).

I am sitting tight with SBTV and not selling into takeover rumor related strength. First, I think the shares can reach the $60s on fundamentals alone in 2006. Second, I think the company could be sold at any time and recent M&A activity in European media markets increases the chances something happens sooner rather than later.

Looking out to 2006, assuming SBTV's EBITDA grows 11%, adding $70 million in free cash flow to the company's 6/30/05 balance sheet, and using a takeout multiple of 12 times EBITDA, I get a private market value of $63. I'd expect that to be the minimum price in any deal. With fundamental and takeover value both supporting a price 20% above the latest quote, I see no reason to take profits yet.

Posted by Steve Birenberg at August 17, 2005 01:28 PM in SBTV