DJ TALES OF THE TAPE: Gemstar/TV Guide Duo Could Be Giant
Dow Jones News Service ~ February 24, 2000 ~ 2:00 pm EST
By Anthony Palazzo
LOS ANGELES (Dow Jones)--It wasn't long ago that Gemstar International Inc. ( GMST) was viewed as a quiet little company, churning out innovative technologies from its Pasadena headquarters - like VCR Plus, the system that makes it easy for many people to tape their favorite TV shows. A profitable niche, but unexciting.
That's all changed. In October, Gemstar shocked the world with an agreement to acquire competitor TV Guide Inc. (TVGIA), a company triple its size, for $7.7 billion in stock. Now Gemstar is seen as the biggest pure-play in interactive television. It's also getting into the electronic-books business. And then there's the interactive horse-racing angle.
"This is the mother of all e-commerce names," said Robert A. Kahn, portfolio manager for Financial Management Advisors Inc. in Los Angeles.
This kind of enthusiasm has driven Gemstar's stock price up to around 70 3/8, from a split-adjusted low of 13 7/8 last March. Some analysts think Gemstar shares can go as high as 100.
What Gemstar's got, besides VCR Plus, is the electronic programming guide that was just shipped in about 2 million televisions. That will rise to 5 million after the TV Guide merger is completed.
"We view the program guides as the most attractive of the five killer apps of enhanced TV," said Larry Marcus, an analyst with Deutsche Banc Alex. Brown in San Francisco. The guides allow viewers to first find where they want to go, and then go there, rather than surf for the right channel, Marcus said.
Gemstar wants to sell advertising on its program-guide page, and the addition of TV Guide - with its powerful brand name, advertising infrastructure and links to properties like the print TV Guide and the TV Guide channel - could place the new company in a gatekeeper's role for interactive TV. "This is a Yahoo!-esque opportunity," Marcus said.
The merger also eliminates numerous patent disputes that have prevented the best program-guide technology from reaching the most viewers, Marcus said. The merger is expected to close in the first half, pending antitrust review.
Upside Seen In E-Books
Besides the critical strategic thrust in enhanced television, Gemstar and TV Guide have their hand in a few other projects that could provide significant upside. One is Gemstar's recent foray into electronic books. Earlier this year, Gemstar acquired two companies, NuvoMedia Inc. and Softbook Press Inc., in an attempt to develop a licensing model in e-books that's similar to its VCR Plus franchise.
E-books are a fledgling market. But while this is a dramatic departure from Gemstar's traditional lines of business, it could end up being very lucrative in the long run, said Chase H&Q analyst Joseph T. Arsenio. In a recent research note, Arsenio said the business could materially increase Gemstar's long-term sales and earnings.
Another side bet is TV Guide's involvement with televised horse-racing. TV Guide, based in Tulsa, Okla., is developing an interactive cable channel involving horse racing and wagering, and it's already got exclusive contracts with most of the biggest horse-racing tracks in the U.S.
While this business faces a difficult regulatory environment in the U.S., it could get big play in places like Hong Kong, where horse-racing is immensely popular, said Christopher Dixon, an analyst with PaineWebber who covers TV Guide.
Media baron Rupert Murdoch is said to be keenly interested in this market, and his News Corp. (NWS), along with Liberty Media Group, now a unit of AT&T Corp. ( T), are TV Guide's biggest current shareholders.
Arbs Create Opportunity
Investors who like the Gemstar story may want to consider buying shares of TV Guide instead. That's because TV Guide shares are trading slightly below their current takeout value of $46.25, based on the exchange price of 0.6573 Gemstar shares for each TV Guide share owned.
Dixon, the PaineWebber analyst, said that gap is built by risk-arbitrage traders, who are factoring into TV Guide's price the risk that the deal won't be completed. He thinks it will.
-Anthony Palazzo, Dow Jones Newswires, 323-658-3776; tony.palazzo@dowjones.com
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