Martha Stewart Deal Price Is a Shock to Shareholders: Real M&A

Bloomberg, June 23, 2015

Martha Stewart Living Omnimedia Inc. finally agreed to sell itself. The agreed-upon price left shareholders disappointed.

The company founded by home-decor and lifestyle guru Martha Stewart said on Monday that it’s being bought by Sequential Brands Group Inc. for $6.15 a share, or about $300 million after subtracting net cash. For that price -- a fraction of the company’s peak market value more than a decade ago -- Sequential Brands gains access to a media and merchandising enterprise with a brand recognizable to millions.

“It’s an interesting valuation,” said Elizabeth Lilly, a portfolio manager at Gamco Investors Inc., which manages about $47 billion including Martha Stewart Living shares. “People obviously thought it was worth more.”

Robert Routh of FBN Securities had projected a bid of at least $8 or $9 a share would be necessary to avoid some pretty ticked-off investors. The stock had already jumped above $7 in intraday trading on June 19 amid speculation a deal was imminent. They fell Monday, closing below the offer price at $6.12.

Sequential Brands is paying about 7.5 times projected 2015 earnings before interest, taxes, depreciation and amortization for Martha Stewart Living’s merchandising business, Gamco’s Lilly said. That’s about half of Sequential Brands’ own valuation, she said.

“The price is too low,” said Michael Kupinski, an analyst at Noble Financial Capital Markets. “Shareholders are going to voice their concerns. Ultimately, it is a public company and you have to get the best value.”
Expecting More

Shareholders likely expected more from a sale after improvements under Chief Executive Officer Daniel Dienst, a turnaround specialist and former metals executive. Most notably, he set Martha Stewart Living up for better profitability by handing over production and advertising for its magazines to Meredith Corp. and doubling down on merchandising.

Dienst’s efforts offered the possibility of a final payoff for shareholders that had suffered through Martha Stewart’s time in prison over a 2001 stock sale, slumping advertising sales and TV show cancellations. Sequential Brands’ offer of $6.15 wasn’t what they had in mind.

“It’s a fizzle-out end for what was once a consumer empire,” Erik Gordon, a professor at University of Michigan’s Ross School of Business, wrote in an e-mail. “Martha was a good entrepreneur who was blind to her weak spots that cost her and her shareholders dearly.”

The company’s market value, which peaked at almost $2 billion in 1999, fell below $100 million by 2009 before rebounding some in recent years.
Overseas Opportunities

Martha Stewart Living was trading as much as 54 cents above the Sequential Brands offer in April on the prospect of merchandising deals with international retailers. Dienst hinted on a March earnings call those could be coming soon.

Martha Stewart Living probably wouldn’t have been able to expand internationally as swiftly on its own as it now can with the backing of Sequential Brands. But the thinking was that Sequential Brands would need to pay up for that opportunity.

Often when a bid is on the low side, the stock will trade above the offer price. The difference this time is that Martha Stewart controls almost 90 percent of the voting power at her company, and she’s already given her blessing to the Sequential Brands deal. Stewart will be chief creative officer of the Martha Stewart Living brand and take a seat on the board of the combined company.

While that may limit investors’ ability to overrule a deal, the transaction is still subject to a vote by outside shareholders, according to the deal announcement. And other legal options exist as well. Or another bidder could emerge. The merger agreement with Sequential Brands includes a 30-day “go-shop” period designed to solicit other bids.

Iconix Brand Group Inc. and private-equity suitors have been speculated as possibilities.

“There are other companies out there that would have interest,” Kupinski of Noble Financial said.

Read the original article here