Inside Wall Street: With Playboy in Play, How High Could the Bidding Go?

Octogenarian Hugh Hefner is facing a problem. One would think that Hefner's offer to buy all of Playboy Enterprises (PLA) and take it private would be a slam-dunk because he already owns 69.5% of its voting shares and 33.7% of the total outstanding shares. Not so.

Hefner's bid of $5.50 a share for the remaining shares he doesn't now own works out to about $123 million. But several large shareholders are up in arms, protesting that Hefner's bid is cheap and way below Playboy's intrinsic value of as much as about $10 a share. The stock hit a high of $36 a share in 1999. But it had gone downhill since then, to a low of $1 in 2008 after hitting a high that same year of $9.20. Playboy was trading at $3.94 before Hefner made his offer and closed on July 15 at $5.60.

Once Hefner put Playboy in play, some shareholders expected other media groups to join the fray and top his offer. And indeed, FriendFinder, which publishes rival Penthouse magazine, has made a higher alternative bid worth $210 million. Several lawsuits have been filed as well against Hefner and Playboy's board of directors, asserting that Hefner's offer would be detrimental to shareholders' interest. Hefner is partnering with private equity firm Rizvi Traverse Management in his buyout bid.

Turnaround in Progress

"We are definitely opposing Hefner's bid of $5.50," says Mark Boyar, president of Boyar Asset Management, which owns nearly 500,000 shares, or about 1% of the stock. He figures it's worth much more -- now that new management led by CEO Scott Flanders has been working tenaciously to turn the company around and restore it as a viable global entertainment company. Playboy has been losing money since 2008 as revenues tumbled from $339.89 million in 2007 to $240.4 million in 2009.

But Boyer isn't thrilled with FriendFinder's pitch, either. "The higher offer from FriendFinder is inadequate and still below intrinsic value of Playboy. For long-term shareholders, the best is for Playboy to remain independent as it changes its business model to a high-margin, licensing-driven company." Playboy is now going in the right direction, Boyar says, and he figures that in two to three years, the stock will be valued much higher -- closer to $10 a share.

For the first time, Playboy is being run "with shareholder value in mind," says Boyar. He notes that early restructuring moves, including slashing the workforce by 30% and shutting down its New York headquarters as part of a long-term cost reduction program, are positive for Playboy.

A Mansion in Macau

Boyar figures that based on the company's intrinsic value on a sum-of-the-parts analysis, the stock is worth $6.40 a share -- and worth about $10 a share based on the projected transformation of Playboy as envisioned by its new management, including beefing up the licensing of the underutilized Playboy brand. "The real growth prospects for Playboy lie in the licensing business," says Boyar.

After years of false starts, he says, Playboy is "finally beginning to make progress in monetizing its brand equity." He notes that management is trying to energize and increase the company's sales and earnings from its three major segments -- entertainment, print-digital publishing, and licensing. Playboy magazine is now running breakeven and could be profitable in 2011, says Boyar.

Playboy expects to ink joint agreements on high-margin businesses, such as a Sands China Playboy Club and a Macau Playboy Mansion that's scheduled to open by 2012. Boyar also sees a potential for a Playboy mansion and hotel-casino in Las Vegas at some point.

"This is a transformative time for this global multimedia entertainment company -- one of the most recognized brands in the world -- for what we believe will emerge a new Playboy franchise," says Boyar. So, a Hefner takeover at the price he's offering would greatly undercut and harm management's new vision and objective, he argues. The same applies to FriendFinder's bid.

"Somewhat Odd" Concerns

David Bank, analyst at RBC Capital Markets, believes Hefner has likely created a floor under the stock, regardless of what the board's decision would be about his bid. A rejection would imply, he says, that the board thinks the offer is inadequate. Bank says Hefner's stated concern that he was worried about the brand and the magazine's editorial direction "is somewhat odd, given that he is the editor-in-chief and maintains full editorial control." Hefner was also instrumental in recruiting Flanders, who took over as chief executive in 2009.

So, Bank says it's hard to understand Hefner's dissatisfaction with the brand's management. "It appears more likely that Hefner sees an undervalued asset and may be unwilling to wait for the market to recognize the value he perceives," says the analyst, who hasn't published any formal one-year profit forecast because it's still relatively early in Playboy's turnaround story.

But he figures that the licensing business could produce revenues of $70 million in 2012. Based on that projection, that segment alone would be worth $5 a share in present-value terms, Bank figures. In 2009, licensing revenues totaled $36.8 million, he notes.

If Boyar and Bank are in the ballpark in their configurations, Playboy shares are, indeed, undervalued. And now that a higher offer is on the table, chances are good that Playboy will fetch more than $5.50 a share.