Gemstar is stuck in a waiting game
By Jon Friedman, CBS MarketWatch
Last Update: 6:22 AM ET Jun 9, 2000 NewsWatch
PASADENA, Calif. -- (CBS.MW) -- Investing in Gemstar International is one big waiting game these days.
Gemstar (GMST: news, msgs), which last Oct. 4 agreed to take over TV Guide in a deal valued at $9.2 billion, is anxiously waiting for the Department of Justice to approve the deal.
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Updated:
6/9/2000 8:37:16 AM ET
Gemstar Chairman Henry Yuen says the addition of TV Guide, whose flagship weekly magazine reaches some 33 million people a week, will transform his company by providing content to advance its interactive communications business.
"TV Guide has everything we want," said Yuen, 52, in a telephone interview. "We are saying we want to reach all of the people who are serious about watching TV."
Analysts say that by 2005, perhaps 80 million American households will have some kind of electronic program guide, accounting for $23 billion in advertising revenue and $13 billion in commerce.
That's an opportunity the company expects to cash in on with its acquisition.
"TV Guide can increase Gemstar's revenue by a staggering amount," said John Corcoran, analyst at CIBC Oppenheimer. He said TV Guide could add revenue of $1.2 billion a year. Corcoran has placed a $63 target price on Gemstar's stock for the next 12 months.
But first there's that pesky Justice Department review to get through.
Yuen, an enthusiastic, congenial speaker, said he has "100-percent confidence" that the deal will go through and be a success.
Not everyone is so enthusiastic.
Josh Bernoff, an analyst at Forrester Research in Cambridge, Mass., is not a big fan of the Gemstar-TV Guide deal because the combination creates "a monopoly, in essence." The combined company "could stop anybody that gets in its way" because it holds so many patents, he added.
That's likely one of the issues under review by Justice Department which has yet to indicate when it might rule.
Trading around 54, Gemstar is well off its 52-week high of 107 7/16 set March 10. Like many other tech related companies, the stock was punished in the April selloff.
Last Oct. 4, when the deal was announced, TV Guide's stock was trading at around 40, while Gemstar was trading at around 80.
Big prospects
Gemstar develops, markets and licenses proprietary technology and systems directed at making technology user-friendly for consumers. Its VCR-plus + instant programming system is now a standard for VCR programming because of its simplicity -- it allows consumers to record a TV program by entering a code number printed in a TV program guide.
In the eyes of Gemstar, TV Guide is attractive because it offers a wide circulation, a large sales force and complementary products tailor-made for cross-selling and the proliferation of an interactive program guide.Gemstar produced the lion's share of its $166 million revenue a year ago from royalties on the VCR-oriented technology it licenses to television set manufacturers.
Gemstar and TV Guide were caught in this spring's tech collapse.
"With 11 million subscribers, it reaches a very large group of Americans," said Yuen, a mathematician by training. He noted that TV Guide also has 50 million homes who view its program listings crossing their screens.. Gemstar has a portfolio containing dozens of patents encompassing the interactive revolution.
TV Guide has 3.5 million subscribers to its interactive services, which are available on cable lines passing 40 million homes.
Yuen sees TV Guide expanding from mere listings of programs to a full-blown "entertainment vehicle," as a way to compete directly against the Sunday newspapers across the country which offer, for free, detailed television-program guides.
"We will focus on the editorial content," Yuen said. "The key to TV Guide's survival is to be a content-driven entertainment magazine."
Kick start
Joe Arsenio, analyst at Chase H&Q, said he's confident the deal will go through. He said he expects to get a "definitive statement" from the Justice Dept. by the end of this month. "We have been bullish on this stock on the way down and now that's it back on the way up," he said.
Gemstar's Yuen is banking on having the addition of TV Guide to kick-start his company's stock market momentum.
Angela Auchey, analyst with Federated Investors which owns shares in TV Guide (TVGIA: news, msgs) noted that Yuen said on April 12 that he expected the deal to close during this quarter.
Yuen back-peddled from that kind of gung-ho stance when he said this week that "the timing of the closing is tricky" to predict and that "any guess is prone to error,"
Earnings boost
Wall Street seems inclined to giving Gemstar the benefit of the doubt. When Gemstar reported better-than-expected fiscal fourth quarter earnings on June 1, investors snapped up the stock. Gemstar shares rose about $10 on June 1 and June 2, underlining Wall Street's support for its results and strategy.
Gemstar said its net income rose to $43 million, or 17 cents a share, topping a First Call projection of 14 cents based on analysts' predictions. Further, its revenue increased to $84 million from a restated total of $55 million from the year-before period.
While it seems unlikely at this point that Gemstar and TV Guide won't consummate their big deal, analysts continue to favor Gemstar. Even if by some chance, the deal falls apart or remains in limbo for much longer, "Gemstar is still in a strong position," Chase H&Q's Arsenio said.
Unpopular
But Gemstar isn't popular with every media company. Time Warner last April told its cable systems in California, Maine and North Carolina to block the program-listing information of Gemstar after the two sides failed to reach a fee accord.
Set-top box maker Scientific-Atlanta (SFA: news, msgs) has charged in court that Gemstar has methodically gobbled up companies that have competing patents. The lawsuit charged that Gemstar exploited its clout to make Scientific-Atlanta buy licenses it doesn't want as a way to get the ones it does need. Gemstar denies the allegations.
Even with that controversy, Gemstar does appear to be sitting in a good position. It has command of the technology and a slew of patents. Soon it will have TV Guide, too. The question is: how soon? Wall Street appears to be happy to give Gemstar the benefit of the doubt, for now.
Still, as Yuen knows well, investors and securities analysts have also been known to lose patience -- and interest -- in a company very quickly. He had better hope that the Justice Department, fresh from its bloodless victory over Microsoft (MSFT: news, msgs) in court, isn't looking for any fresh meat.
Good Luck
Don
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