Outdoor Channel

At the beginning of each calendar year, there seems to be a spike in merger activity. This year even more so than usual because the fiscal cliff was resolved, financing continues to be cheap, cash piles are up and earnings are strong.

Today I’d like to review the recently proposed merger between Outdoor Channel and InterMedia Outdoor Holdings. The important facts are as follows –

Terms: $8 cash for one share of OUTD, or a share in the NewCo (vs. $7.51 current price, ~$7.20 when announced)
Closing/effective time: forecasted to be March 31 (effectively 47.6% annualized)
Financing: $140MM term loan from CIT

One thing that stands out is how sweet the deal is for the management of OUTD. Management controls 41% of OUTD and plans to tender it in a 60-40 cash-stock ratio. The Management team also continues on to fill key roles in the NewCo (CEO, CFO, etc.), but still somehow still reaps large change-of-control bonuses.

In short, they get to cash out their equity, they get a large one-time bonus and they still get to keep control of their jobs/company. This reminds me of the book I’m reading on Ross Johnson’s bid for RJR Nabisco, Barbarians at the Gate.

Now not surprisingly, management has been accused of doing very little shopping. As a result, there may be some legal concern over “fair value” lawsuits. From a merger arb perspective, I don’t think this is a warning sign not to invest in the deal. If the lawsuits pry open the door for other bids, the stock likely goes up right? Also, the very small premium that was given to the stock by the bid (~11%) means that there’s little room to fall and this fall would be cushioned by a $6MM reverse breakup fee.

The primary risk that I see is not getting cash due to an oversubscription and being forced to take a share in the highly levered NewCo (roughly $300M EV, $40M EBITDA and $150M debt). However, the combined NewCo seems to have the right ownership incentives to become a winner – IMOH would not be buying (and having their MPs stick around) unless they thought they could unlock a lot of value here. In short, IMOH is buying OUTD on the cheap and OUTD management is allowing it due to a unique structure. So getting stuck with the NewCo would not be the worst thing in the world.

Conviction: Buy.



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