Comments on GMST from yesterday's 2020 Insight column:
2020insight.com
All AboutGemstar . . . Gemstar Chairman and CEO Henry Yuen.
Dr. Yuen indicated that the merger with TV Guide is on track for a
second quarter close and that discussions with distributors were
progressing more or less as expected. Gemstar is a DCF story and that,
in the current market environment, companies deriving the majority of
their asset value from the out-years of a valuation model are being harshly
punished by investors. However, the company's strong patent position
and the IPG is seen as boasting one of the more visibly attractive
businesses for the long-term foreseeable future. Gemstar will be the
leading player in the IPG area. While the stock is likely to remain volatile
in the near term, closing of the TV Guide merger should eliminate some of
the current uncertainty in the market and lift both stocks. With regard to
timing of merger completion, Gemstar and TV Guide have substantially
complied with the second request for information from the DOJ, clearing
the way for the merger to close by the end of the second quarter. At this
point, do not anticipate any material obstacles to merger completion.
Moreover, over the next six months, expect Gemstar/TV Guide to gain
long-term distribution commitments from some cable and DBS operators,
which should also help the stock.
Undoubtedly, some of the stock's weakness reflects growing concerns
related to potential competitive alternatives. Cable MSOs have been
quite outspoken in recent months regarding their desire to seek
alternatives to Gemstar/TV Guide and this has clearly impacted the
stock. To be clear, expect certain operators to go their own way,
electing to take their chances with potential litigation and most operators
will simply try to hold out for better terms. This ongoing posturing
contributes a significant amount of perceived uncertainty to the Gemstar
story. Our expectation is that significant distribution commitments will be
made within as little as one to six months. All distributors are awaiting the
close of the merger.
The interactive program guide market is indeed a crowded field, with
competition provided by Scientific Atlanta, TiVo, Source Media,
Microsoft, AOL, among others. Despite the substantial number of
competitors that exist in this space, we continue to regard TV
Guide/Gemstar as the best-positioned player in this market. The
company is particularly well positioned with AT&T; CE manufacturers;
AOL/TWX; and Microsoft.
TVGIA has a ten-year exclusive contract with AT&T, which could put
TV Guide/Gemstar in 15.5 million AT&T digital cable homes over time.
With regard to AOL, assuming Gemstar's license agreement is broadened
to include Time Warner Cable, TV Guide/Gemstar could pick up another
12.6 million subscribers. Gemstar has already licensed its guide to AOL
TV. Under typical exclusive license arrangements, a subsidiary is required
to comply with the parent company's license agreement.
Moreover, Gemstar's license agreement with Microsoft should put the
guide in a substantial number of international cable homes in coming
years. In the CE market, with a significant number of manufacturers
having licensed the Gemstar Guide technology, expect the guide to ship in
over 50% of TV sets within three to four years.
Although agreements have yet to be signed with DirecTV and Echostar,
expect both DBS operators to ultimately license the Gemstar IPG within
the next year. Thomson currently provides Direct TV with its IPG and,
Thomson has a license to make and sell the Gemstar IPG. However,
DirecTV does not have a license to "use" the Gemstar IPG and expect
DirecTV and Gemstar to reach a friendly resolution over time.
Since peaking out on March 9, at $101 per share, Gemstar shares have
retreated 2/3 or 67%, substantially in excess of the overall market decline
and the 36% drop-off in the tech laden Nasdaq. Moreover, the nascent
ITV sector has been clobbered during this time period, with astounding
66% correction in the group. Under a bear case scenario, assuming no
additional cable distribution outside of AT&T and no international
distribution, highly unlikely scenarios, you can arrive at an IPG valuation
which exceeds $14 billion, suggesting a price objective of $49 per share,
roughly 40% above current levels. |
